The Real Reason Shopify Just Fired 1,000 Employees 1 Day Before Quarterly Results
Source: Medium, Jano le Roux
Photo: Illustration
What would you do if the end of the pandemic wrecked your startup?
During the pandemic, Shopify made money like a greedy orthodontist.
Now that the pandemic is fading out, it’s firing hundreds of employees because of a lack of growth.
But how did Shopify get things so wrong?
Let’s break it all down.
What the world saw
From an outside perspective, the early pandemic hype around Shopify was simple.
If a 17-year-old kid with braces in [insert location here] can make $100K a day dropshipping [insert silly product here] from anywhere in the world on Shopify— you can do it too even if you’re stuck at home in a pandemic.
While Covid pestered us with variant waves, dropshippers pestered our feeds with hype waves.
First, the Rolex wave.
Then, the Lambo wave.
Finally, the exotic vacation wave.
And Shopify poured hype all over it like a perfect storm.
Soon every second tech-savvy twentysomething-year-old with an internet connection called themselves a Shopify dropshipper or an e-commerce expert.
It seemed like Shopify got so stuck in its own hype that it started hiring by the hundreds.
What the dropshippers didn’t want people to know though, was that they were basically reselling a bunch of cheap trinkets from AliExpress that they saw on some “mastermind” YouTuber’s channel.
But the problem is, most dropshippers had the same lame idea.
They set up a Shopify store with the same boring theme every second online store out there has just to sell the same boring product every other dropshipper is selling.
After your aunt Sally has seen the thirteenth Facebook ad about those travel resistance bands in a row — she just got them on Amazon with free next-day shipping.
One by one dropshippers started to give up.
First on Facebook ads.
Then on Shopify.
And then the stock market started to give up on Shopify.
The slip-slide got so bad the investors who bought at its peak last year November made a nearly 5X loss on investment.
What was really going on behind closed doors
When the pandemic first broke out, Shopify saw an e-commerce adoption rate like never before.
It seemed like this was the big moment e-commerce was going to replace the brick-and-mortar store once and for all.
Shopify’s CEO, Tobi Lütke, gives us a remarkable insight into what happened behind closed doors:
“Before the pandemic, ecommerce growth had been steady and predictable. Was this surge to be a temporary effect or a new normal?”
He explains that the initial spike made it seem like the e-commerce adoption rate instantly leaped 5–10 years ahead. The CEO made a bet that this growth was going to continue.
Shopify went on a hiring spree to compensate.
“And so, given what we saw, we placed another bet: We bet that the channel mix — the share of dollars that travel through ecommerce rather than physical retail — would permanently leap ahead by 5 or even 10 years. We couldn’t know for sure at the time, but we knew that if there was a chance that this was true, we would have to expand the company to match,” Lütke continued.
It turns out, he was very wrong.
As soon as the world went back out, people returned to their old habits. The initial e-commerce adoption rate spike turned out to be an outlier and adoption rate returned to its original trajectory.
“What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful 5-year leap ahead,” Lütke explains.
As a result, Shopify now has to let go of 1,000 employees.
Let’s learn from Shopify’s mistake
At its core, Shopify’s decision was made because of adoption rate.
And adoption rate at its core is behavior change.
The lockdown, at it’s core, is a temporary external change that boosted natural consumer behavior as it made it easier to buy online than go to a brick-and-mortar store.
Shopify’s biggest mistake came when it made long-term decisions based on temporary external events that made it harder for consumers to buy from brick-and-mortar stores.
Consumers are likely to follow the path of least friction.
So the moment pandemic restrictions started to loosen up, consumers returned to the original path of least friction and adoption rates returned to normal.
Shopify’s big mistake teaches us to never make long-term decisions based on short term data that is likely to change at any given moment. It is so easy to get lost in short term hype and to attribute brand growth to internal efforts.
But when temporary external forces are at play — consumer behavior is likely to change too, until the external forces change.
Shopify’s big bet didn’t take a change in external forces into account in its decision-making process, and the moment external forces changed, the decision came back to bite its tale.
Shopify’s bad bet ended up leaving us with a good decision making framework in unexpected times:
Don’t get stuck in short-term hype.
Make long-term decisions based on long-term data.
Understand that external events temporarily add or remove fiction.
Expect consumers to follow the path of least friction.
Take into account that external events may return to normal at any moment and the trajectory is likely to follow suit.
Now, say you were in Tobi Lütke’s shoes, would you have made the same decision? What would you do if the end of the pandemic wrecked your startup?