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Shopify Is Turning Another Competitor Into a Partner

Shopify (NYSE: SHOP) sells a software package that helps small businesses open online storefronts. At that most basic level, it competes with eBay (NASDAQ: EBAY) and Amazon (NASDAQ: AMZN), which also help small businesses sell stuff online.

Shopify has come a long way since it first started. Two years ago, it partnered with Amazon to allow its merchants to sell items through its third-party marketplace. It's made similar agreements with burgeoning marketplaces on several social networks. Now, Shopify is entering partnership with eBay to allow merchants to sell items on its platform, which it expects to roll out this fall.

eBay becomes yet another place on the internet for Shopify merchants to reach new customers, turning it into a partner instead of a competitor.

Image source: Shopify.

More than just online stores

Shopify started as an easy way to set up an online store at a hosted domain, but it has quickly expanded into a centralized hub for online merchants to manage their inventory, customer service, and fulfillment across various marketplaces.

Shopify's integration with eBay won't require merchants to use eBay's website very much at all. Customer questions and requests will all get forwarded to Shopify's dashboard. Orders will be imported into Shopify for fulfillment, and inventory will automatically get updated on eBay. Shopify's integration with Amazon works in a similar fashion.

This is great for Shopify merchants. With just a few mouse clicks, they'll instantly have access to millions of eBay shoppers, potentially expanding the merchants' reach.

This is becoming one of the biggest strengths of Shopify. It attracts customers with nice front-end tools for developing a web store, but it's able to retain them by supporting sales all over the web. Shopify generates nearly half of its revenue from subscriptions, but subscriptions generate significantly higher gross margin (about 80% versus 30%) than its merchant solutions segment. Retaining merchants is essential to Shopify's bottom line, and helping merchants expand to more marketplaces is exactly what will keep them paying month after month.

Supporting Merchant Solutions

The goal of the eBay partnership (and all of Shopify's similar partnerships) is to help merchants grow sales. Increasing merchandise volume on Shopify's platform ought to correspond to increases in merchant solutions revenue.

Shopify's merchant solutions include everything not included in its subscription. Shopify Payments makes up the bulk of the segment, but Shopify also earns revenue from shipping and its business loan arm, Shopify Capital. If Shopify's partnerships help merchants grow sales, they may have greater needs for those services, thus supporting the Merchant Solutions segment as well.

A growing market

E-commerce is still growing at a double-digit rate in the United States year after year. With American consumers set to spend over $400 billion online this year, there's a lot of money to be made in e-commerce.

Amazon and eBay are at the forefront of the trend, and several other sizable retailers are making efforts to catch up and make up for flagging physical store sales. Shopify, meanwhile, presents a company that's capitalizing on the long-tail of small retailers cropping up online to compete with brick-and-mortar stores, and it continues to invest heavily in its growth. With roughly 400,000 merchants on its platform, it already presents a formidable force in retail.

Of course, Shopify isn't the only competitor in the market for small online merchants. BigCommerce is probably its biggest competitor, and it even beat Shopify to the punch with eBay integration. That said, every step Shopify takes to integrate more platforms into its service will help it retain subscribers and grow its merchant solutions business by taking advantage of the secular trend in e-commerce.

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Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, eBay, and Shopify. The Motley Fool has a disclosure policy.