A week and a half ago, Shopify released its Q2 Earning's report and shares sank 14% on the day after the company announced it plans to lay off 10% of its global workforce (~1,000 employees). CEO Tobi Lutke acknowledged that he and his executive team had overestimated the long-standing success that e-commerce would have in a post-pandemic world, and that the mix of online spend versus in-store would "permanently leap ahead by 5 or even 10 years." Unsurprisingly, consumer behavior is returning to the new-normal -- which is a healthy mix of in-store shopping and e-commerce that is attributing to the 9.1% increase to CPI over the last 12 months (brutal).

The changing marketing dynamics have attributed to the slowdown in GMV growth for the company YoY. Q2'22 GMV was $46.9 billion, which represents an 11% increase relative to Q2'21 GMV. Yet Q2'21 GMV relative to the prior year (Q2'20) was 40% higher at $42.2 billion. This is a significant reduction in YoY growth and has altered some of Shopify's plans to continue building an e-commerce platform behemoth that generates strong returns for its stakeholders.

So what's next? Organizations, especially DTC merchants, are becoming increasingly data driven because of brand competition, saturated ad channels, and rising CAC that’s hurting margin. And to piggyback on these changing market dynamics, Shopify is now doubling down on its merchant solutions to 1) become more vertically integrated across their client’s technology stack and 2) capture as much GMV on platform via new channels to counteract the slow-down in e-commerce growth that organically helped Shopify boost revenue in prior years.

Unfortunately for this article at least, I can’t say the classic twitter phrase “all thoughts are my own” lol. But in the below, I summarize, paraphrase, and copy the key topics that Shopify executives discussed in their Q2 2022 Earnings Call regarding product updates to the platform. Hopefully the below is a bit more digestible than reading the transcript in full 😊.

Social Commerce

• What is social commerce? In simple terms, its enabling consumers to purchase goods and services anywhere across the web, not just on a traditional website with large catalogues across multiple pages. It makes buying through social media platforms, Google PLAs, livestreams, podcasts, and more possible with just a few clicks of a button. That's what Shop Pay has gotten so good at overtime -- frictionless checkout.
• A big opportunity exists with consumers looking to connect with brands and purchase goods across digital services. Although it is still a relatively small percentage of overall GMV, GMV through key partner services, including the native checkout integrations on Facebook, Google and Instagram, grew 5x over Q2 last year. GMV through these integrations will likely continue to grow as more channels integrate with Shopify to make their platforms stickier while enabling SHOP merchants to show up where their buyers are.
• In late June, Shopify announced Twitter Shopping in late June and two weeks ago announced the Youtube Integration. The new YouTube channel allows merchants to add a store tab to their YouTube channel that has their entire product selection and show a curated list of products below on-demand videos and to tag products during a live stream with picture in picture, so viewers can check out while still watching the live stream AND checkout quickly with Shop Pay.
• There are a handful of social commerce tools being built today that want to be the Universal API for seamless checkout. Many are having great success, but Shopify’s end goal is to always push people back to their platform where they are the merchant of record. If, they (Shopify) end up being successful here versus these tools is still an open question.

Audience Creation and Attribution

• I spoke about the issue of rising customer acquisition costs in a previous blog post that you can find here, with the premise being that changing consumer privacy laws have made it hard for media platforms like Facebook to cost effectively retarget consumers on behalf of their clients (especially DTC brands).
• Many tools are being built that help brands properly understand marketing efficiency across their multiple channels of spend while also helping to predict how to allocate future spend for optimal profitability. These tools are partners in the Shopify ecosystem and have been very successful for the merchant base – but of course Shopify is making attempts at doing this in house to funnel more dollars directly to their bottom line.
• For Shopify Plus merchants, there is the Shopify Audiences tool to enhance top of funnel acquisition. It's essentially a 3-step process. A Shopify Plus merchant selects the product they want to sell more of. Machine learning algorithms build an audience of high-intent buyers tailored for that product, and the audience list is directly and securely exported to the merchant's ad network of choice, which they are launching first with Facebook and Instagram.
• Per President Harley Finkelstein, merchants are "seeing a meaningful increase in conversation rates and ROAS. It’s off to a promising start and we're excited to see what it will do for merchants, especially ahead of the holiday selling season."
• From a few examples they mention in the transcript, Harley is not wrong:
  • Blender Bottle has seen its return on ad spend increasing as high as 6x. Another fast-growing merchant, L'AMARUE, saw a 48% uptick in its click-through rates, a 2.5x return on ad spend on its targeted campaign, and 73% of revenue from paid acquisition attributed to Shopify Audiences.
  • Plus anyone who is using audiences has seen an average CAC decline of 26%. (I wonder how much is really attributed to Shopify though).

Customization Capabilities

• Shopify Functions make it easy to do more backend customizations for discounts, shipping, and payment methods. And the goal overtime is to add support for shipping rates, checkout, cart validations, return validations and order routing soon. The idea here is to offer more flexibility to engineers around merchant development and limiting the need for larger merchants to go towards headless solutions.
• Headless has been a big discussion point for many large merchants who want better speed, performance, and flexibility of their e-commerce websites to drive more productivity and revenue growth. So of course, Shopify wants to help their merchants do the same to prevent graduation risk, keeping as much GMV from large merchants on platform.
• Customization is becoming increasingly important for larger merchants and those who do B2B. It is allowing Shopify to penetrate their merchant base more deeply and make sure they capture more volume (in a new market almost) of merchants who conduct B2B transactions only.
• Shopify estimates that more than half of Shopify plus merchants could become B2B sellers as well and more and more sellers are graduating to plus accounts or coming directly to plus from other platforms. So the customizations (functions) aspect must be somewhat appealing to larger merchants--as it was a sticking point for larger brands like ASICS and Ashley Home Furniture to come on as Shopify Plus customers in recent months.

POS Tooling

• In this earnings reports, Tobi reiterates that he severely over-estimated the movement to e-commerce versus brick and mortar. Yet to ensure they are still monetizing on the "move back to IRL shopping", Shopify has given all their Plus clients the ability to implement the "Point of sale pro" solution for their in-store locations.
  • This makes a ton of sense – if there is offline GMV they must at least try and capture it. Plus, it gives merchants a single source of truth for all their transaction data associated with their brand.
• During the second quarter, top-tier brands, including Beyond Yoga, [ Our Place ] and James Perse implemented the point-of-sale Pro solution for their locations. June was the best month ever for merchants adding Pro, and Q2 offline GMV grew 47% year-over-year as Shopify continues to take market share here. This growth is even more remarkable, considering it was achieved off of a 266% year-over-year growth in online GMV in Q2 of last year as the world began reopening after the COVID lockdowns.

Fulfillment

• This is likely Shopify's biggest area of investment in the last year. This summer, Shopify finalized its acquisition of Deliverr to begin offering an end-to-end logistics platforms for all merchants to have plug & play fulfillment. The company is making a push to be the vertically integrated toolkit for a merchant across all systems.
• The Shopify Fulfillment Network is being built to simplify supply chain issues across 3 Stages that are notoriously disparate and difficult for independent businesses: freight, distribution, and fulfillment.
  • With freight, inbound inventory from suppliers (especially cross border) is a process that is manual and fractured even with a freight forwarder since its mostly designed for large volume businesses. To help with this, the Shopify Fulfillment Network (SFN) has launched a pilot program with Flexport so merchants can more easily and cost effectively inbound freight. It enables merchants to ship inventory at the pallet level versus container level and have just-in-time access to prebook containers that deliver goods directly to an SFN hub. This prevents tying up merchants' excess capital and inventory and allows them to remain nimble to changing buyer trends. Early pilot runs have shown that SFN merchants can expect service from origin ports up to 50% faster, with cost per pallet much less expensive than average.
  • With distribution, routing inventory across channels is hard but the Deliverr acquisition should simplify it. Using software and machine learning, these SFN hubs, leveraging Deliverr's capabilities, will unpack, scan and inspect all inventory, then compare against metadata in Shopify's back office throughout the goods to merchants' various distribution channels as well as forward position inventory into SFN's spoke direct-to-consumer fulfillment centers based on expected buyer demand. With this software-based approach, Deliverr is helping expand 2-day delivery across SFN. This 2-day delivery costs extra and is a tool in the beta phase called Shop Promise that promises quick delivery for online storefronts and channels like Google, FB and Instagram.
  • Finally, the third and most critical step is 2-day fulfillment and delivery. Affordable and timely fulfillment has been nearly impossible for independent businesses to do on their own, but it is important. “Just getting buyers' confidence that an order will arrive when promised, even if it's 3 or 4 days, is enough to increase conversion.” Most of this is still done by leverage 3P solutions like ShipBob and Shipstation but becoming more vertically integrated is their goal.

Shopify today is about 10% of all e-commerce sales in the United States. And e-commerce sales are still only 15% of total retail in the U.S. But internationally, there is stronger growth in e-commerce and its far stickier. That is what they are aiming to do. In the words of President Harley Finkelstein, " what we are trying to do is make it so when you come to Shopify, you never have to think about where to sell because you're able to sell across every single service area where you may have customers, and that is important. That is not something you see at other companies."

I personally am unsure today if more people will use the merchant solutions like Shop payments, installments, capitals, markets and others to make their whole software stack and channel revenue sit directly on top of Shopify versus using more third-party providers or platforms. Only time will tell to see if the decoupling of Shopify is really happening – but of course, they must try and prevent it. If you are building tools in these areas or have thoughts on what the future of e-commerce tooling looks like, what are the best tools people should use, and more – feel free to give me a shout. I’m sure a ton of people reading this have a much more informed view than me!

P.S. – The services listed in this post are the most notable product updates on Shopify. They also release a semi-annual product showcase called Shopify Editions that features new launches and improvements across the entire platform. It’s worth checking out.