Tobi Lutke, Shopify CEO @ Masters of Scale Podcast
All credits go to Masters of Scale podcast. Full transcript can be found here. Below you can find my curation of what I found the most relevant from the interview.
* The definition and power of platforms *
And we built a lot of the technology which is underlying it in 2009. And only in 2018, almost a decade later, is when – like I think Bill Gates said this, I think it's almost called the "Gates line" – You are not a platform until the people who are building on you make more money than you do. And we've only cleared that in 2018. So it takes a long time. And it’s hard to do, because you are leaving a lot of economics that you could easily take for yourself on the table – or actually, you are investing it into your own future by giving it to other people. And that's very hard to do for most businesses.
* The best definition of a CEO *
But this direction wasn’t for Tobi’s co-founder. So Tobi, the engineer, became Tobi, the accidental CEO. He spent two years searching for a replacement. Until... LÜTKE: Eventually, someone took me aside and gave me the good advice that I will never ever find anyone who will care as much about Shopify as I do. And that is actually probably the best qualification for a CEO.
* Focus to scale *
HOFFMAN: Building the first 80% was straightforward. But if Tobi’s team also built the last 20% of unique features it would create an almost endless engineering challenge. It had other drawbacks too.
LÜTKE: We knew that if we would add all the features for all our unique customers, we would end up with this problem of having something that is impossible to use.
HOFFMAN: Tobi worried that if they tried to build everything for everyone, they’d build a product that worked for no one. It’s a phenomenon called “feature creep.” And Tobi had seen it before, in previous versions of Microsoft Word, for example.
LÜTKE: We were worried about what we internally called the Microsoft Word toolbar problem. Now this is hard to explain, because now Word has a ribbon and hides a lot of this stuff. But back in those days, and we talked about it, Word had toolbars, and if you were on a normal 17-inch screen, and you would enable every single toolbar that you could, you would actually only have a centimeter of space for actually typing text, right? Because Word had a lot of features and packaged good software has to make another sale every single cycle, and that makes perfect sense. But we thought that was a problem for us building Shopify, because e-commerce is – we are the home of these businesses. We are the software that people open up in the morning and that's their work day, where they spend it in.
HOFFMAN: Instead of giving in to feature creep, Tobi focused on getting Shopify’s core features right. Then he opened the platform to outside developers, so they could create specialized apps that merchants could install on their stores. Think customer support chat, or specialized inventory control. As more developers built custom apps for merchants, Tobi saw the potential for a true platform, one where merchants could choose from hundreds of apps and developers could offer their apps to many more merchants. Tobi remembers asking early merchant developers if they’d be willing to turn their custom apps into something any merchant could buy.
LÜTKE: The question we always asked, saying, "Hey, would you generalize this, and make it so that other people could also use this?" And eventually we heard "yes" more often than "no" to this question, and that's when we introduced an App Store, where these developers could list their software, and created the software discovery issue. Now the typical plus Shopify store probably has 20 different apps installed, grossing over a billion dollars a year.
* The power of the Long Tail *
Before the break we heard how Tobi opened up an app store for merchants, with apps by third party developers. This kickstarted a positive feedback loop that spurred innovation. Merchants were attracted by the ever-growing range of features, while developers were attracted by the ever-growing demand from merchants for apps. And this is one of the biggest strengths of a platform: you can rapidly respond to that “long tail” of user needs. And this puts your virtuous cycle into high gear. Cultivating a rich ecosystem of third-party developers isn’t the only way to do this though. You can also do it by keeping your model flexible, and ensuring the feedback loop between yourself and your customers is as short as possible.
This is the approach that Julia Hartz, CEO of Eventbrite takes. JULIA HARTZ: One of the things that's actually been a strong contributor to our competitive mode, if you look at where Eventbrite sits in the live experience market and who we are, is our instinct to not try to force the product to be something specific to just one kind of event creator. While you can say that, yeah, the top four largest categories – music, festivals, registration events, endurance sports – make up about 80% of our gross ticket fees today. The other 20 is just completely long tail, in terms of category distribution. That gives us a really interesting playground, to both cultivate creators, but also to expand our platform capability. HOFFMAN: You can hear more from Julia on this in our episode titled “Let Your Customers Be Your Scouts”.
For Shopify, developers built around the core product, fulfilling merchants’ needs and ultimately attracting more developers AND more merchants. This thriving, self-reinforcing ecosystem of merchants and developers is what set Shopify apart. It was a platform that people could mold to their own needs.
* Commerce x Advertising-based business models *
Silicon Valley has always, and still does – and potentially will always – underestimate commerce, just straight up. There's a reason why most commerce companies can't come from Silicon Valley. And I think this is actually has a lot to do with by osmosis everyone kind of observes the current debate. And the early successful business models were advertising-based. And by the way, in China, they are commerce-based. And I think that is a very, very big difference between those two places. Business models are generally more about selling things than advertising. And for a European living in Canada and observing places from outside, that just kind of felt really obvious that it was underestimated.
* Location matters: where to settle your HQ *
HOFFMAN: So Tobi built Shopify in Ottawa, on his own terms.
LÜTKE: I realized that almost every business book that I then was reading, was not written for me. Right? It was written for the people who are building companies in these places. And that the rules of secondary cities are completely reversed. For instance, when I hire someone, the chance of us working together in five years or 10 years, is massive, in Ottawa and Toronto. Right? So that's just one very tangible difference. Where the average tenure of engineering in Silicon Valley is 18 months at this point. And that means I can invest completely differently into people. Right? And which means that I can build a learner's organization.
* The master insight: Commerce is relationship-based *
LÜTKE: There's a very strong belief at Shopify that commerce is a relationship thing, and not a transactional thing. A lot of commerce world is about connecting with something larger, joining some kind of tribe. The best way to tell real stories is this idea of a brand. And giving brands a way to have something they own on the internet is hugely important. We are all the descendants of either the people who told the best stories around the campfires in the more primitive times, or the people who listened the most to those. And I think it just sometimes gets lost. Because at a certain point, you just think about things too rational.