Company insightIdeaGrowth and business modelsFounders and companiesTechnology
Forgo the revenue you could capture if the platform grows more by letting others earn it
Tobi Lütke · Shopify's 2015 IPO letter from Tobi Lütke · 2015
The idea
Shopify's 2015 IPO letter tells investors something unusual: the company does not treat revenue as its main driver and will give up short-term revenue for long-term value. The concrete version is the app ecosystem. Developers and designers were allowed to build businesses on the platform, keeping profits Shopify could have taken, because a platform that others can earn on grows faster than one that captures everything. The letter also names simplicity as the thing the company delivers and says it takes great care to achieve. It is a merchant-first explanation of platform economics, from someone who started by building a shop.
A platform that lets others earn on it grows faster than one that captures every dollar; the forgone revenue is the investment.
When it works
Platform strategy, take-rate questions, and any marketplace where the company could raise its share of the transaction.
When it may fail
Forgone revenue is a strategy only when the ecosystem compounds into a moat. A platform that gives away margin and gets commodity partners has simply given away margin.
How to use it
For a platform, compare its take rate with what it could charge and ask what the gap buys: more sellers, more apps, a stronger network. If nothing, the gap is a mispricing; if the ecosystem, the gap is the strategy.
Where it came from
Letter Shopify's 2015 IPO letter from Tobi Lütke · Tobi Lütke
What the source says. Lütke tells investors Shopify does not treat revenue as its main driver and will forgo short-term revenue for long-term value, describes letting app developers build businesses on the platform instead of capturing those profits, and names simplicity as the main thing it delivers.
Connected ideas
Puts it to work
A platform sets rules for a transaction it does not performName the two sides, say which one pays and why, and describe exactly how one side's growth helps the other.
Says something similar
Given a choice between flattering earnings and future cash flows, take the cash flowsTell investors in advance that you will optimise long-term cash flows over reported earnings, then do it, so the market can price the choice rather than be surprised by it.
Concepts
Put it to work on L3VLUP
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