Shopify wants to become the 'back office' for direct-to-consumer brands' ad budgets and marketing

• Shopify has quietly become a major e-commerce player powering DTC brands' websites.
• The company aims to be a one-stop shop for merchants, handling fulfillment, analytics, and web design.
• While Shopify is best known for e-commerce, it's increasingly moving into marketing and paid advertising to compete with Amazon.
• Brands like how Shopify can create customized websites, but Amazon can handle all parts of e-commerce for brands, including shipping and warehousing.

Outdoor Voices, Allbirds and Kylie Cosmetics have more in common than being direct-to-consumer startups.

All three use Shopify to power the back-end of their e-commerce websites and are a few of the platform's 60,000 merchants. From toothpaste to bed sheets, the number of direct-to-consumer brands pitching wares has exploded, and instead of selling products in retailers or through Amazon, DTC companies are increasingly selling through social media platforms or their own websites. At the same time, Amazon is cozying up to small and mid-size brands with its "Amazon Storefronts" site that sells items from 20,000 merchants.

As the DTC boom continues, Shopify has quietly become a tech giant through its self-serve platform that powers e-commerce, handles fulfillment and analytics, and, increasingly, ad buying. Shopify reported $270 million in revenue in the third quarter (a 58% year-over-year spike) and expects to bring in roughly $1.05 billion this year. The company's growth and work with DTC brands landed Shopify on Business Insider's annual list of most interesting ad-tech and mar-tech firms of 2018.

While 12-year-old Shopify is most known for handling e-commerce, the firm is building out its marketing platform with tools that let merchants do things like run paid media campaigns on Facebook and Google and text a virtual assistant called Kit to manage their campaigns. There is also a messaging app named Ping that logs customer queries for merchants to respond to.

Read more: E-commerce giant Shopify is set to become a major player in Canada's legal-weed market

Shopify offers an alternative to Amazon for merchants who don't want to rely entirely on the e-commerce behemoth for their business. But there are catches to both.

One major challenge with Shopify is that it can be harder for merchants to drive traffic to their own websites than it is to Amazon, said Matt Rednor, who runs the ad agency Decoded Advertising. Merchants also have to figure out warehousing and shipping on their own with Shopify.

"You need to generate your own traffic to your [Shopify] website," he said. "If you're not a savvy marketer that knows how to drive traffic, then it's hard for you to prove success there. Amazon has a built-in audience and billions of online buyers already."

But retailers that go all-in on Amazon risk becoming "dependent on Amazon not screwing you," Rednor said. For example, Amazon can control prices and brands' ranks in search results.

Shopify wants to handle digital ads for retailers

Shopify's director of product and marketing technology Michael Perry said Shopify aspires to be a one-stop shop for merchants, particularly direct-to-consumer brands that use the company's software to sell through their Instagram, Snapchat and Facebook accounts.

"We've become the true back office for all these businesses that are now having this direct-to-consumer experience," Perry told Business Insider.

In addition to powering e-commerce sites and doling out reporting and analytic tools, Shopify is inching into paid media. In October, the company launched a marketing section to its platform that allows for merchants to create, run and track Facebook and Google ads.

Unlike traditional brands that focus on branding and creative, direct-to-consumer marketers are notorious for zeroing in on performance marketing and often don't have huge advertising budgets to spend with agencies.

Shopify is looking to capitalize on brands moving advertising in-house and is arming its merchants with media-buying tools. Merchants can set a daily ad budget and Shopify's tools - including the virtual assistant Kit that Perry founded - then manage ad campaigns and can set bidding and targeting parameters automatically.

Shopify

Shopify's director of product and marketing technology Michael Perry

Shopify also recommends specific products for merchants to promote in ads based on how they're selling.

"It once took teams of people at agencies and huge pools of people to leverage all these places where their audience existed," Perry said. "Now, we've done so much with helping them maintain and scale their authenticity through really smart technology choices to help them create those bridges of direct-to-consumer relationships that they historically have not been able to establish on their own." 

Shopify also has an app store - much like Apple's App Store - in its marketing dashboard that offers services that merchants can pay for to handle more complex, ongoing ad campaigns. For $49 a month, they can use an app called Looga to manage their Facebook advertising. Most recently, Shopify added support for Google Ads to its platform and also plugs into Google's Smart Shopping campaigns that use machine learning to change bidding, creative and targeting on the fly for small businesses and retailers.

Shopify doesn't completely replace media buyers, though

Decoded Advertising's Rednor said that while Shopify's move into advertising does cut into the work that media buyers do, it does not necessarily replace the strategy, creative and branding expertise they can offer.

"There's still a reason that you need the best of the best, and so I'm not concerned," he said.

Rednor has been experimenting with Shopify and Amazon to sell its 42 Birds yoga brand - a brand the agency built itself to better understand what makes direct-to-consumer marketing work. Right now, 42 Birds' e-commerce efforts are split between Amazon and Shopify.

"It's more expensive to have everything on Amazon, but they handle your warehousing and shipping for you," he said. "We're trying to test the waters and hopefully start shifting away from Amazon and more towards Shopify if we can - it allows us to create our own brand and we don't have to pay as high of a commission and other charges as you do with Amazon."

Digital brands are setting up IRL stores


As direct-to-consumer brands move into physical retail, Shopify isn't far behind. Furniture brand Burrow, for example, is testing a brick-and-mortar store a few blocks away from Glossier's recently opened flagship store. Brooklinen and Thinx have also set up holiday pop-ups in New York's SoHo neighborhood.

Shopify is the technology behind many of these brands' websites and has developed point-of-sale technology similar to Square as they move into physical retail.

Physical retail still makes up 90% of sales and point-of-sale technology is an area where Shopify sees an opportunity to further blend the personalization of e-commerce shopping with real-world stores.

"The landscape of physical retail has matured - people don't like walking in big, random malls or department stores," Perry said. "They want to have that Instagram-like experience in the real world, and they will see a lot more of that in 2019."