Today we’re going into the world of Shopify Apps. It’s a shorter issue; one that was inspired by recent some big news from Shopify. I went down a rabbit hole, and it turns out I found some interesting stuff.
Let’s explore ????
Why Shopify apps?
As an asset class, Shopify & WordPress plugins are interesting.
While lots of people think about buying Shopify stores, fewer people consider buying Shopify apps. A quick glance through the major marketplaces for “Shopify app” or “Shopify plugin” yields results that are much thinner than expected.
Heck, even Shopify’s own Exchange Marketplace (which they haven’t promoted very heavily at all) doesn’t even seem to even have a filter for Shopify apps!
But this all might be changing soon.
Today, Shopify announced that it will no longer take a cut of revenue for apps inside the Shopify app store, up to the first $1M in revenue. This means smaller app developers get to keep 100% of profits from apps they develop. It even resets each year.
Contrary to reporting, this move is not similar to the recent app store fee reductions from Amazon, Apple, Google, and Microsoft. It is on another level completely.
Current app developers were predictably delighted. And can you blame them? After all, this effectively boosted their annual profits by 25%. It was certainly some good news to wake up to!
But why did Shopify do this?
There are a few theories floating around.
Cutting rates will encourage app development
The first theory is that the long tail of apps isn’t very important to their bottom line.
Shopify doesn’t seem to break out app revenue directly in its financial statements, but it has said it “doesn’t expect this impact to be material” because it will encourage greater innovation and development.
So, they’re likely taking a small hit, but are okay with it in the long run.
The app store could be even more lucrative
Another theory is that the long tail of apps is indeed lucrative for them, but it could be even more lucrative. While that’s certainly possible, it seems like a roundabout way of solving the problem. But without seeing the numbers it’s tough to say.
Plus, Shopify has much bigger growth drivers taking up their attention right now, including Shopify Payments, and especially Shopify Capital — their in-house, non-dilutive seller financing alternative to Clearbanc and Yardline (who was recently acquired by Thrasio).
I believe the reason is something different.
Their app marketplace growth is unhealthy/unsustainable
What if Shopify’s app store needs to be bigger in order to serve their growing base of merchants?
As I said on Twitter, Shopify has “hundred-year company” energy. They are building for the long run. CEO Tobi Lutke has made numerous references to this concept, following in the footsteps of Patagonia founder Yvon Chouinard’s 100-year roadmap.
And if you’re thinking long-term, then you don’t care whether or not the take rate on the long tail is profitable, you need the long tail of apps to be as long as possible to support the long-term health of merchants.
To explore this further, perhaps we start by comparing Shopify to a company that has one of the largest third-party ecosystems in the world: WordPress.
Plugin Economics: Shopify vs WordPress
WordPress is like the original no-code solution. Despite all the hype around no-code (for good reason, I’m not knocking it) WordPress already does pretty much everything that most no-code solutions offer, and then some.
At 50-60% market share, it’s also the most widely-used CMS in the world, nothing comes close.
And one of the biggest reasons for WordPress’s success is its rich set of plugins. WordPress’s plugins are such an important part of the WordPress experience, that their app store doesn’t even have a name! (“WordPress Plugin Store?” Maybe? I dunno man…it’s just WordPress plugins.)
Let’s have a look at some WordPress stats:
- There are 64 million active WordPress sites
- There are a whopping 59,000 WordPress plugins
- 17,383 of these have not been updated in the last 2 years. So let’s call it 41,617 active WordPress plugins.
- Close to 100% of WordPress sites use plugins. It is nearly impossible to run a WP site without at least a few plugins.
- There are also 12,000+ WordPress Themes
Interestingly, WordPress plugins have a huge GINI coefficient of success. Just 11 plugins have reached more than 7+ million downloads, and less than 30 plugins have 100k+ downloads (!) That is one insanely long tail.
So, for a WordPress plugin developer, sticking out in this market is extremely tough.
Using a “Sites-to-active-plugins ratio”, with 64 million sites, it looks like there are roughly 1,538 sites per plugin.
However, the Shopify app store is another story.
- There are about 1,000,000 Shopify stores
- As of Q1 2021, there are 6,145 apps in the Shopify app store. Yes, they actually gave it a name. (Side note, thank god Apple lost their ridiculous trademark battle back in ’11)
- 80% of stores use apps, or 800,000 stores
- There are also 1,200 themes
- Merchants have an average of 6 apps installed
Using a similar “Active-stores-to-apps ratio,” with 800,000 active stores using apps, this gives us roughly 130 stores per app
Hmmm. 1,538 sites per plugin, vs 130 stores per app.
So upon first glance, it looks like competition is actually 11.8x higher for Shopify developers than it is for WordPress developers. The means that, relative to WordPress, there is no shortage of Shopify apps. In fact, it would appear the market for Shopify apps is relatively more crowded than the market for WordPress plugins!
Yikes. This doesn’t bode well for my theory. You may be asking, why is Shopify clearly trying to boost the number of apps in the app store? Aren’t there enough apps already? And if they aren’t taking a cut, what difference does it even make?
So the question remains: If cutting their take rate to 0 is meant to encourage developers to build apps, why now?
I think it’s because the number of Shopify apps is growing slower than it should be.
Why Shopify wants more apps
According to Shopify and You, here’s how Shopify’s app store has grown over time.
- 2016: 1,400 apps
- 2017: 1,800 apps
- 2018: 2,400 apps
- 2019: N/A
- 2020: 4,200 apps
- 2021: 6,145 apps
From 2016 to 2021, the number of apps has increased 4.3x. Great, right?!
Well, let’s look at how that compares to the growth of merchants and GMV:
This graph only goes to 2019, but as you can see, during that same time, GMV has risen 24x, and the number of merchants has risen 8x.
That’s right — the number of Shopify merchants is growing much faster than the number of Shopify apps! And since higher disproportionate GMV means more sales per merchant, and more sales means a need for more apps, the problem is compounded.
In other words, the Shopify app store appears to be grossly under-supplied. It may be a smaller market than WordPress, and may even feel more crowded here is a disproportionally low number of apps in the store, compared to how many they should have given their explosive growth.
This is almost certainly why Shopify is cutting their revenue share on apps — they need nearly twice as many apps in the app store to reach merchant equilibrium.
Well then. If now isn’t a great time to be a Shopify app developer or buyer, I don’t know what is.
Why now is the time for Shopify apps
Building a Shopify app
As if cutting the take rate to 0 wasn’t enough reason to develop for the Shopify app store, there’s another reason to consider.
I think the answer lies in the fact that nearly half of Shopify apps are paid, while 87% of WordPress of plugins are free! ???? This makes sense, as Shopify merchants are actual business owners with thicker wallets, as opposed to the millions who own a simple WordPress blog with no intentions of making any money.
Sure, we also have the in-between category — not quite free and not quite paid. The freemium model is for small sellers that want to lure merchants into higher plans, while forcing them to pay as their store grows. This will always be a compelling model for apps.
But compared to WordPress site owners, Shopify merchants don’t seem to expect that all plugins should be free. There is a baseline assumption around paying that makes developing for the Shopify app store far more compelling. Perhaps that assumption will go away someday when the app store is flooded, but we’re not there yet.
Buying a Shopify app
Okay, so now’s a great time to be a Shopify app developer. If you’re a Ruby developer looking for an opportunity, Shopify is rolling out the red carpet for you.
But we wouldn’t be called Alternative Assets if we didn’t talk about using cash to buy an existing Shopify app instead, from sites like Microns.
As we all know, developing and marketing an app takes time and effort. (Not to mention you need to get through their approval process. Unlike WordPress, Shopify doesn’t just let any app into its app store. I know firsthand this can take a long time!)
I think it’s safe to assume that because of these changes, competition will increase. Perhaps the Shopify app market even starts to get flooded. Within a few years, equilibrium will be hit again, as app store growth catches up with merchant growth.
Until that equilibrium happens, you have some time on your side. Don’t spend it developing, marketing, and waiting for approval. Instead, do what the smart people are doing, and buy an existing app that’s already out there earning revenue, reviews, and algorithmic trust.
The market is thin, and will likely remain thin for quite a long time. You want to get a head start on everyone else. Just like with buying newsletters, you need to look off-market.
It’s not rocket science, it’s just hustling. Reach out to app developers directly. Join Facebook groups for Shopify app developers and ask if anyone is interested in selling. Heck, join one of the million other Shopify groups and make it known that you’re looking to buy. People talk. Get out there and hit the town early before everyone else does.
And if you want an extra unfair advantage, give Alternative Assets Insider a try. Since yesterday’s announcement, we’ve been scouring the marketplaces good Shopify apps, and we think we found one we like. Later this week we’ll publish our analysis & recommendation to Insiders.