TikTok, Shopify, and the Democratization of E-Commerce
I’ve been an avid user of TikTok since quarantine began, and as a former skeptic, I now admit I was wrong to have doubted. It’s everything that people claim it is: Vine, but better, YouTube, but better, the future of social media, now. Not only has it provided me with endless hours of entertainment, it’s also given me the urge — and ability — to actually create content for TikTok, an urge I have not had with any other platform. This is a distinct urge from curating the best version of myself for Instagram or posting my life’s most interesting moments on Snapchat: this time, I want to share with the entire world, not just my peers.
At the beginning of this millennium, and for decades prior, popular media was dominated by television and movie studios. These were the only institutions with the scale and credibility to acquire distributors — television networks, movie theaters — for their programs, not to mention the other capital requirements involved in a sophisticated production. Only major entertainment production companies could afford these costs.
In 2021, anyone with a phone can record content and post with the intent of reaching a global audience. Media creation and monetization are no longer gatekept by cable networks, but rather, available to anyone with creativity and vision. Entry barriers continued to drop as the tech got more advanced. To be successful on YouTube in its earlier days, you needed a film camera, a computer, and editing software. After smartphones, we’ve seen platforms like Instagram and Snapchat take advantage of the camera in everyone’s pockets to innovate new formats like the daily story.
TikTok not only embeds sophisticated video editing capabilities into its own platform, but makes it even easier to create content through features like duets, stitches, and text-to-voice. It, along with its older rivals Instagram and Snapchat, have democratized entertainment creation and distribution, and they did so by devolving access to capabilities that previously required scale. We can attribute this to the fact that TikTok is the present culmination of all of the revolutionary forces of the past two decades: digitization, the internet, and smartphones.
Of course, media is not the only industry to have been profoundly impacted by these three forces. We see a narrative with similar themes playing out in the transformation of retail and the birth of ecommerce.
Software is eating the world, but traditional retail has often struggled to keep up, particularly in the context of ecommerce. The pandemic has only made this reality more stark: the winners and losers in a post-pandemic world will be dictated by their ecommerce strategy. Unfortunately, traditional retailers often lack the resources or technical ability to fully take advantage of all that is possible with digitization and the internet.
In the absence of serious competition, aggregators like Amazon have captured much of the available growth opportunity. Amazon built the world’s largest marketplace with aggressive capital investments, selling every product category one can imagine and implementing revolutionary services like 2-day delivery. Until recently, no other brand or retailer has even attempted to offer a service that could compete with Amazon, maybe because they could not afford to do so, or maybe because they did not see the strategic value. By the time competitors like Walmart and Target tried, it was pretty much too late.
It’s unfortunate that the path Amazon took has resulted in negative effects for both sellers and buyers.
- Amazon leverages the huge demand it controls against merchants to drive prices down, sometimes to the point where it’s not even profitable. Merchants are forced to accept these terms because the alternative is to be cut off from a major revenue source.
- Fierce price competition necessitates extreme cost cutting, which leads to problems with quality control, not to mention scams and false advertising.
As an aggregator, Amazon’s incentives are misaligned against both its sellers and its buyers. It doesn’t care if its sellers can’t make a profit as long as that purchase is happening through Amazon. It’s willing to sacrifice some amount of customer satisfaction in overlooking quality control issues, since it knows that its low prices and convenience will lure customers back anyway.
Of course, Amazon acting in this way is nothing new, and honestly, I would expect nothing less. But it begs the question: how can individual retailers keep up?
Shopify has often been described as the anti-Amazon. Whereas Amazon is the world’s largest internet marketplace, Shopify isn’t a marketplace at all. Merchants use Shopify to create online shopfronts. Shopify’s subscription service includes the cashier, the sales associate, and the inventory manager as features of a complete ecommerce management platform. Its value add lies in 1) taking the friction out of managing an online business and 2) ensuring a flawless shopping experience once a customer has found the website. For most of Shopify’s existence, the onus was on the business itself to create a sales and marketing funnel which lead customers to its store.
Shopify’s basic business model is “Platform as a Service,” with two types of revenue: subscription (Ecommerce Solutions) and services (Shopify Payments). It’s been interesting to see how Shopify has explored new avenues for growth after perfecting its core functions. See the following three services that it has launched within the past couple of years:
- Announced in 2019, the Shopify Fulfillment Network (SFN) is a distribution and logistics service that merchants can use to fulfill orders.
- Announced this past May, Shopify Balance utilizes Stripe Treasury, a Banking as a Service API, to embed a full suite of banking services in its platform.
- Announced this past October was a partnership with TikTok: users can now manage their business’s TikTok presence within the Shopify dashboard.
Each of these developments are compelling strategic moves on their own, but together, they constitute a clear trend: Shopify is integrating across the ecommerce value chain by adding them as features of its core service. There’s a lot of value to this sort of vertical integration, especially in terms of customer retention — they increase the costs to switching from Shopify’s integrated system to a fractured web of third party vendors. But Shopify’s featurization of ecommerce infrastructure is more interesting in that it democratizes capabilities previously only available to companies of a certain scale.
The SFN integrates Shopify into distribution logistics services. Amazon Prime’s 2-day delivery promise has presented a difficult choice for merchants: take advantage of Amazon fulfillment in exchange for free advertising for Amazon (they are forced to use Amazon Prime packaging), or lose some percentage of business due to slower delivery speeds. The SFN offers a white label alternative. Unlike Amazon fulfillment, SFN allows its merchants to keep brand equity by not requiring special packing tape — as far as the end customer is concerned, that package came from the merchant itself, with no third-party involvement.
The immediate benefit to Shopify merchants is obvious. Most retailers do not have access to a logistics network capable of 2-day delivery at low costs, and in fact, no individual retailer could build their own unless they had access to the same level of capital as Amazon. Shopify, though, has achieved a size large enough to bear the upfront costs required to build such a national logistics network, a benefit which is then disseminated to all of its merchants. It’s important to note that such a service could not exist without digitization or the internet — managing such a network and all of its relationships and human touch points would be impossible without systematic automation and near-instantaneous information transfer.
It’s also useful to zero in on that Amazon vs. white label distinction. Why does this difference exist at all? It’s another symptom of the philosophical difference between the two firms. When Amazon provides fulfillment to a merchant, it’s usually not just a logistics provider, but also a competitor, in the sense that it likely offers its own version of the same product. The highly visible packaging nudges customers towards Amazon for future purchases. This is another example of the negative impact of Amazon — merchants on Amazon must sacrifice their long term prospects in order to access Amazon’s advanced capabilities in the short term. Amazon is incentivized to use its scale to take market share from its own merchants because it is indifferent to the success or failure of individual merchants.
Shopify, on the other hand, can be a true partner to its merchants because it’s not actively competing against its own merchants for market share; Shopify succeeds when its merchants succeed, so it’s incentivized to help them build more prosperous businesses. The white label approach with SFN, then, is calculated to help merchants with customer retention, not to mention the convenience of 2-day delivery.
Shopify Balance is similar, but within the world of banking services.
Balance uses the Stripe Treasury API to embed banking directly within a Shopify account. Before the internet, banking was an incredibly manual process, from setting up a bank account, to obtaining loans, to managing finances. Even today, online banking contains numerous inefficiencies, some owing to the fact that these banking services are disconnected from other parts of managing a business. Stripe Treasury aims to solve these problems by functioning as a more efficient interface between a business and underlying financial institutions.
However, most merchants do not have the technical sophistication to implement something like Stripe Treasury directly, nor do they have the scale to take full advantage of it. Shopify, on the other hand, does have the scale, resources, and know-how to develop a well-designed and easy-to-understand integration of Stripe Treasury. It also intimately understands what its user’s needs are, allowing it to integrate Stripe Treasury in a way that makes sense for merchants on its platform. Shopify could even leverage its position as a representative of all of the merchants on its platform to negotiate more favorable terms with the banks that Treasury sits on top of. Once again, Shopify disseminates the benefits of its scale to its merchants.
Contrast this with Amazon’s approach, or the lack thereof. Amazon would never offer an analogous service to Balance because a merchant’s banking setup has no direct impact on closing a sale. We most likely won’t see Amazon implementing Stripe Treasury as a feature of a merchant’s Amazon account — in fact, if Amazon were to move into commercial banking, it would probably be to compete against existing banks like Citibank or Bank of America.
Finally, we have the TikTok integration. To understand why this is valuable, think about it from the perspective of a business owner: here’s yet another social media platform that needs to be managed and strategized for. If you’re on TikTok, you’ve probably seen how a few viral TikToks can be a highly effective sales funnel for a small business. The opportunity is enormous, but it takes time to learn the platform and understand how it fits into a broader social media strategy. This Shopify integration makes managing that process easier.
In all three cases, we see Shopify striving for a better merchant experience. It may not be as clear why this is beneficial for the customer. Since no individual merchant has the same power and breadth as Amazon, customers who have a bad experience with one merchant would easily drop that merchant in favor of another one (and this could mean going to Amazon). This means that Shopify is also highly incentivized to perfect the customer experience — it only succeeds if its merchants do, which is impossible if they cannot compete effectively.
Just as TikTok lowers barriers to entertainment creation for the common user, Shopify lowers the barriers to ecommerce for the common merchant. This is what makes Shopify such an exciting company to track, despite the fact that its products are not especially flashy: Shopify is building the infrastructure that makes the technological advancements of the past two decades more accessible than ever. In a post-pandemic world, it will be a crucial competitor to Amazon. Its 2020 Q3 earnings report notes:
“Despite the heightened uncertainty surrounding the macro environment, Shopify remains uniquely positioned to level the playing field for entrepreneurs during this period of rapid change in the retail landscape. … [As] a leading global commerce operating system that can help merchants of all sizes adapt their businesses to this new reality, Shopify expects to continue to attract more independent voices to commerce, and will continue investing to innovate on their behalf.”
Amazon was motivated to innovate its technology and logistics network with the goal of becoming the ecommerce behemoth it is today, at the cost of merchants, customers, and even its own employees. Shopify strives towards a different ideal of capitalism and competition: give ambitious entrepreneurs the tools and infrastructure they need to build a successful business, and they can focus on innovating and pushing boundaries.
