What is the Problem with Shopify?
There is a Spectre that haunts Shopify Merchants - the Spectre of Profitless eCommerce. Swap the vanity metric of GMV for the critical eCommerce number of MERCHANT NET PROFIT — and most Shopify Merchants do NOT make a PROFIT at all but a LOSS.
Running the numbers - when the direct eCommerce Costs of Selling are ALL factored in — it appears that a majority of Shopify merchants do not make a profit. Some sources suggest the amount of loss making Shopify Merchants is over 80%. Shopify’s inability to address the Merchant Profit problem reveals a Fundamental Flaw in their platform Architecture.
To unpack Shopify's profit problem we must swap eCommerce jargon to THE STANDARD LANGUAGE OF BUSINESS. The language of Sales, Margins, Gross Profit, Traffic Spend, Overheads — and by far the most important number of all — NET PROFIT.
The Problem is 80%+ of Shopify Merchants Don't Make Profit
Some Shopify Merchants do make profit - but it seems to be a Pareto Distribution where 80% make Losses and 20% make Profits.
Read a Merchant's financial accounts and you will see the problem. The loss making spans from SME Merchants through to big Shopify Merchants. AllBirds are currently operating a negative 48% margin and even landmark Gym Shark just reported a mere 1.2% Net Profit Margin. Is this "Profit Problem" a SHOPIFY issue or just a COINCIDENCE? It is a PLATFORM related problem and let's explain why.
In a GDPR and post-cookie world, the Merchant eCommerce Platform is the only piece of technology that has the ability to SEE and TRACK ALL Merchant cost, session, order, product and traffic data . The core platform offers the ONE possibility to accurately see the profit on each individual product. While technically challenging, a platform CAN accurately track and report net profit per unit. Shopify CANNOT REPORT NET PROFIT PER UNIT - it does not even report Net Profit at all.
Shopify CANNOT track Traffic Cost to the Unit Purchased
Profit Tracking is the Fundamental Flaw in Shopify’s Architecture
Shopify cannot report Net Profit per unit BECAUSE it does not track TRAFFIC SPEND to the unit level — and without this reporting, Merchants lack any true understanding of how their business is performing.
TRAFFIC SPEND is a highly variable cost that largely determines eCommerce profit. Shopify cannot allocate Traffic Cost to the Unit Purchased — and from that standpoint, Shopify can NEVER provide merchants with true visibility of profits.
Some Shopify Apps attempt to fix the problem — but Apps do not have the ability cost allocate to Unit level. This reporting gap of Unit Net Profit can NEVER accurately be filled by 3rd party analytics. The end result is that Shopify enables Sales but obscures Profit - with TRAFFIC SPEND visibility being the fundamental flaw in Shopify's Architecture.
Shopify has no Idea if Merchants are Making Profit or Not
Traffic Spend Gap Exposes Shopify's Architectural Flaw
Perhaps Shopify manages the Traffic Spend problem by avoiding the elephant in the room — recognising it would open Pandora’s Box on the real eCommerce problem.
Shopify’s Own Recommendation is that a ROAS of 4 is “GOOD”. In cost of revenue terms that is an incredible Traffic Spend of 25% on TOP of ALL the other Merchant costs. The recommended 25% cost comes directly out of the net profit margin — and very few merchants can absorb that hit and still remain profitable. Far too often the result is a “profitless” outcome for Merchants.
Is there a solution? Visibility and Control over Traffic Spend holds the key to eCommerce’s final frontier — transforming it into a profit-driven industry. Can Shopify do it? NO. But can it be done? Absolutely. Read on…
Shopify Site Advocates 25% Traffic Cost as 'GOOD'
How does an eCommerce Profit Based Architecture Work?
Traffic Spend and Profit can only be accurately tracked with first party data in the eCommerce Platform. Step one to realtime Profit Visibility is that the Platform clearly and accurately allocates Traffic Cost to every single unit purchased. When Merchants know their profits they make much smarter trading decisions.
Full Visibility of Profits and a Service Marketplace brings eCommerce into the "Reality Era" where it is all finally built around Merchant Net Profit.
NET PROFIT is the new "REALITY ERA" of eCommerce
Conclusion
If we swap Shopify's entire vanity GMV for the total Net Profit made by Merchants using Shopify - it might be a negative number. Many Merchants are unaware they are funding their eCommerce from the retail side of their business — or worse — from DEBT.
From day one eCommerce should have been built around MERCHANT NET PROFIT. The ONLY reason the "eCommerce profit problem" persists is the technical difficulty of accurately tracking and allocating Traffic Spend.
After £35 Million of RnD to create realtime visibility of Net Profit — accurately reported to unit level — IRP Architecture has solved the eCommerce Profit visibility problem. The result is IRP has a Pareto distribution where 80% of IRP Merchants make stong profits with good net profit margins.
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