Shopify succeeds with customers first, then venture capitalists

By Bruce Firestone | Uncategorized

Apr 26
[Here’s an old article I wrote about Shopify a few years ago. I thought it was worthwhile to repost it…]

Aurélien Leftick, Director of Customer
Success, and Harley Finkelstein, General Counsel of Ottawa’s fastest growing
tech company, Shopify.com, recently gave one of the best University of Ottawa Magic
from a Hat lectures
yet. You could hear a pin drop as the audience listened to the two young
brainiacs from Shopify.com.

I know how hard they work; I built my own
Shopify store on their platform in less than ten minutes and, when I was having
a problem understanding their back end customization system, I sent an email to
them at 5:50 pm on a Saturday night. My wife and I were going out for dinner at
6. At 5:57, I got an answer from one of their ‘gurus’, made the change and was
ready at the door by 6.

Most young people (the age range at Shopify is
22 to maybe 32) on a Saturday night want to party. Shopify folks were still
working.

So they have made customer service one of
their ’secret weapons’ in their success. They currently have thousands of
stores using their platform ranging from the invisibly small like mine–it’s an
IP Store to much bigger ones likehttp://www.dodocase.com/ which single-handedly resurrected the
handmade book binding business in San
 Francisco. This was an old craft with a long history
in SF that had almost gone extinct before aptly named Dodo Case built their
Shopify store and won a $100,000 prize from them for being the fastest growing
business on the platform over a 6-month period.

Although the competition had a face value
cost of $100,000, they acquired 1,300 new stores during the 6-months that it
ran (½ of which are still with them) and, with marginal revenues of $86,000,
their out-of-pocket costs were just $14,000 which has to qualify as great
Guerrilla Marketing given the fabulous earned media they garnered in the New
York Times and Wall Street Journal amongst others. Plus each new store became a
brand evangelist for them so it tends to compound.

Shopify closed a $7 million (Series A) round
with Bessemer Ventures, the third largest and oldest VC in the US, in December
2010. The Bessemer
deal was straight equity– they bought Preferred shares and the Founders did not
lose control of the business.

The reason they got this sweet deal was
because Shopify didn’t need the money: they were cashflow positive from their
first twelve months on and thus they had some leverage in their negotiations
with the VCs. If more startups first focused on acquiring real clients and
building real cashflow, they would be much better off in every way.

Established by Tobi Lutke and Scott Lake
in 2005, Shopify’s original mission was basically to fund the guys’ interest in
snowboarding. They wanted to have their own snowboard shop and sell boards
online.

Unhappy with then e-commerce offerings, Tobi,
who was a sophisticated developer originally from Germany, built a better mousetrap
using Ruby on Rails. RoR* is an open-source web framework that is “optimized
for programmer happiness and sustainable productivity” meaning that just about
anyone can learn it and use it competently in a relatively short period of
time. It was an inspired choice–coding was no longer an indecipherable, exclusive
priesthood.

(* Things have come a long way since I was
programming in assembler (near machine language coding required) and using
punch cards.)

It wasn’t long before friends started asking
them if they could build online shops for them, after which the two fellows
began to realize what business they were actually in. This is so typical–I
have yet to see one business plan or model introduced into RL (Real Life) that
doesn’t transmogrify into something quite different when it greets its first
customers which is why I put so much stress on getting launch clients in my
teaching, writing and mentoring. Pre-launch or launch clients will not only
help you with things like your credibility, confidence and cashflow, they will
help you redesign your business model which probably is the most valuable thing
anyone can do.

Shopify took Bessemer’s money because they
found that every dollar invested in marketing, sales and their ‘guru’ program
(more about this later) returned four and it made sense to ’suivez l’argent’.

It also doesn’t hurt that Bessemer Ventures is
superbly well connected in Silicon Valley.
This makes Biz Dev at Shopify a lot easier when they can get first hand
introductions to tech titans like Twitter, Facebook
and Google.

They also opened up their platform using an
API to best-of-breed providers of services of, for example, email marketing
(Mail Chimp) and accounting software (Intuit and Quick Books). They found that
their clients wanted to integrate these services into their e-stores and
Shopify accommodated them while at the same time greatly expanding their reach.
Powerful companies like Intuit now have a strong incentive to integrate Shopify
into their offerings too.

Shopify’s business model is based on SAS,
Software as a Service, and it has brought them to the promised land of tech
companies–a place where they have CMRR, Committed Monthly Recurring Revenues.
With a COGS (Cost of Goods Sold) of approximately zero, top line growth powers
profits because gross margins are so high due to the fact that, basically, the
platform is built. In other words, each new customer they acquire is gravy.

They are also using a subscription model with
a clever pricing strategy– the price each store pays for the service per month
is (roughly) proportional to bandwidth use with a minimum charge for the
smallest stores (under $30 monthly). Traffic on the site could come from people
doing some window shopping or people actually making transactions, Shopify
doesn’t care.

From their client’s point of view, they’re not
giving up a percentage of each transaction to Shopify so there is an incentive
to pump up the average of all sales. The latter increases profitability and
efficiency for the e-tailer– it is much more effective, as Amazon found out a
few years ago, to sell each customer a couple of DVDs, books, CDs rather than
just one. So the question that Amazon asks each customer before check-out:
‘Would you like to see what others who bought this book/CD/DVD also bought?’ is
hugely important to Amazon and also useful, it turns out, to customers. On
Shopify’s platform, there is no penalty for ‘doubling up’.

Shopify is adding new stores at a prodigious
rate (in the hundreds and hundreds per month) and currently employs 45 people,
about half of them developers and will go to about 60 this year. They have
funky offices in the Byward Market (a cool downtown part of Ottawa) and every Friday afternoon, they
expect their developers to work on projects not related to their work, ones of
their own choosing.

The stores on their platform currently have an
annual run rate of $135 million and it’s increasing fast. They were No. 7 on
Canadian Business’ List of Canada’s Fastest Growing Businesses.

They have done something else remarkable–everyone has a secret, private dream that they don’t share with others (or at
least very few) and then there is their workaday world, the one they trudge to
every day to make a living.

I’ll tell you mine if you promise not to tell
anyone, OK? I want to be a full time writer. That is what I am most passionate
about. But apart from the $150 that Ottawa Business Journal kindly donates to
our not-for-profit organization, Exploriem.org, for each column I write for
them, that’s it, that’s all in terms of revenues. Kind of hard to support my
wife and our five kids on $150.

At Shopify, they have brought together
everyone’s secret heart’s desire and their commitment to their day-to-day work
lives into one searing, passionate cauldron of ambition to make Shopify the
‘democratic engine of e-commerce on the web.’ If the people you work with are
passionate about what they (and you) do, your chances of success just rocketed
skyward. We had that same passion amongst our group during and after the Bring
Back the (Ottawa)
Senators campaign and it worked for us.

If you want to work at Shopify, you have to
bring passion and commitment. They feel they can teach you everything else but
not those. They’ll ask you the question: “What’s the first thing you think
about each morning in the shower?” If it’s not what cool and unexpected stuff you
are going to do that day at work, don’t bother applying.

People want to feel that they belong to
something bigger than themselves; this is what creates real joy in life. At
Shopify they don’t talk about work-life balance; that’s bogus especially when you
bring both halves of yourself together–the private person and the public
person.

As Harper Lee said in To
Kill a Mockingbird
 about
her hero, lawyer Atticus Finch, the highest compliment you can pay a person is
to say that he or she is the same in their private life as they are in public,
i.e., they are authentic and not a phony.

Before Shopify, you could get a Yahoo store or
have a developer build you one at a cost of tens or hundreds of thousands of
dollars and it would probably take them months to launch it and another year or
two to get the bugs out.

Now, if you are the lucky lady who gets the
call on a Thursday that you are going to be on ABC’s morning show on Monday and
you realize this is your big chance and you also realize you don’t have an
online store, your designer can build you one on the Shopify platform from
Thursday to Monday and you can do $2 million in watch sales over the next two
weeks. (Good story, huh? Better too since it’s also true.)

At one point, Leftick said that one of
Shopify’s innovations was to create a class of people (Shopify Gurus) who,
although they have technical training, are neither in technical support nor
sales. Instead, their gurus are in the business of helping Shopify’s clients
develop their business and not just when they open their stores. They follow
them and coach them during the life of each store. Their job is to make sure
that their clients do well on the Shopify platform. Their belief is that if
their clients do well, Shopify will too.

At this time, Shopify does 80% of their
business in the US, 8% in Canada and 2% in New
Zealand, Australia
and the UK.
They would like to change that. Interestingly, their clients sell into 62
countries so their global footprint is probably bigger than it might first
appear.

Perhaps they will follow Facebook’s example and get their user base to
translate their site into other languages. Facebook
was able to roll out new language services in weeks and, in some cases, days as
their user base translated their site into the local lingo.

There are seven things that the Shopify Gurus
keep in mind when they are helping clients with their biz dev:

1. Don’t try to out-Amazon, Amazon, basically,
sell what Amazon doesn’t*. Amazon has fabulous selection, incredible pricing
and fantastic delivery. Dodo Case sells hand bound covers for the iPad that
they choose not to make available on Amazon.

(* They borrowed this from Seth Godin’s story
that even mighty Wal-Mart has signs up around their HQ that say: ‘You can’t
out-Amazon, Amazon’.)

2. Demonstrate awesome customer service.
Melondipity.com, which sells baby hats, allows mothers to text for customer
support since many of them are not allowed to use the telephone at work or
their PCs for personal use, so they text for help instead.

3. Pick a group and interact with it. Don’t
try to sell to the world. GoodAsGold.co.nz sells wacky clothes to unique
individuals and they have more than 8,000 fans on Facebook.
They interact heavily with them using their Facebook
account.

4. Articulate your value proposition and your
mission. Acts of Random Kindess sells t-shirts but their mission statement is
that, every time you wear one of their shirts, you must perform one act of
random kindness, a beautiful thought.

5. Entertain your customers. LooseButton.com lowers the price of a product if you can get
more people to ‘Like’ it on Facebook.
Every ‘Like’ is worth (approximately) a negative 16 cents. That means that they
are paying $160 per thousand pairs of eyeballs (their CPM*) but it’s worth it
to them since this is also their magic marketing button. Every ‘Like’ has the
chance to go viral too since it appears in your news feed and if you too ‘Like’
it, then all your FB friends see it as well. This is smart pricing. Even Profs
today are in the infotainment business.

6. Curate* your site. Curating is an old
profession and one that is making a big comeback in the 21st Century. Even
old-line department stores get it; they are reducing the number of items they
stock in favour of fewer, more interesting combinations that a consumer would
be hard pressed to find on their own. Shop.Holstee.com, for example, stocks fewer,
impossible-to-find-anywhere-else items like super strong, long lasting belts
made from…old firehoses.

7. Lastly, believe in something. The founders
of Dodo Case and Holstee share their core beliefs with their audience and they
interact with them every day. Holstee publishes their manifesto on their site
and it is one of the most often seen images anywhere on the Shopify platform.

As I was listening to Aurélien and Harley, I
thought about my Shopify store and remembered my time in Sanata Cruz, circa
1969. As young, naive Canuk from a small town, SC and Berkley in the late 1960s were a revelation.
One night, having got the munchies, my girlfriend took me to a donut shop she
knew in downtown Santa Cruz
(basically a few blocks in those days, not that it has changed all that much
since).

The owner was in the back of the shop,
naturally enough making donuts. Customers would help themselves to coffee and
donuts. But what blew me away was, when they were finished, each of them would
calculate the amount they owed and then go to an open cash drawer and put in
the cash.

The owner, a long haired fellow, would just wave
to them.

So I thought maybe I’ll go back to my IP Store
and change the pricing policy to: just pay what you can afford.

Professor
Bruce M. Firestone is Entrepreneur-in-Residence of the University of Ottawa’s
Telfer School of Management; Founder of the Ottawa Senators; Executive Director
of Exploriem.org; Broker at Century 21 Explorer Realty.

Postscript: It’s interesting that about 30% of
Shopify’s revenues come from designers who embed the platform in their
offerings, in effect, becoming Shopify resellers. It wouldn’t surprise me to be
told a year from now that this is the fastest growing part of their business.

I built my Shopify store in ten minutes and it
costs me less than $30 per month to maintain. Designers can do much more with
the Shopify platform than I can and they can charge much more which means that
the markup they can make on their Shopify monthly expense can be huge.

What Shopify realized early on is that they
exist in a business ecosystem that has at least two dimensions on the client side
of their business model: customers who want to set up e-commerce enabled stores
on the web and designers who create stores for customers who want to
participate but can’t self serve. It would be interesting to look into the
third level– what do the customers of designer built e-stores want?

In The Complete Business Model, I go into the idea that businesses need to look at their complete ecosystems
(on both the supply side and the revenue side) to discover new opportunities in
the inter-relationships in the supply chain, in the revenue chain and then
examine possible links between parties on the revenue side and parties in their
supply chain. It’s in this way that you can sometimes discover then unlock
enormous new value from your business model.

It’s my view that: “You can think your way to
success a lot faster than you can work your way there.”

Postscript 2: Shopify is in a strong position
to use Negative Cost Selling with both their direct customers and the design
community. For the latter, as a kind of reseller, the cost of using Shopify’s
platform to them is likely to be a lot less than what they can charge for a
custom e-store so demonstrating that buying from Shopiy is, in fact, a negative
cost for them is easy.

For direct customers, Shopify has to be able
to prove that the cost of running each e-store is less than the margins each
client is realizing from their sales. In other words, they have to understand
their customers’ businesses almost as well as they do themselves which is what
makes the Shopify Guru strategy so frigging brilliant.

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