If you have ever built a website, it’s highly likely that you used a tool like Wix, Squarespace or Shopify. And today we will take a deeper look at these three companies, their business growth & how their model has evolved over the years.

Hi, I’m Viram from Vested, and today we’re diving into the world of website building tools.

We will go over four things:

First we will look at how the rise of e-commerce has helped companies like Shopify, Wix and Squarespace build a thriving business.

Second, we will look at how these companies make money.

Third, we analyse how Shopify became the largest company in this space.

And finally, we’ll discuss what makes a sticky product, and why Wix might actually be a better investment opportunity than Shopify.

Let’s dive into it!

Rise of e-commerce adoption

First, let’s talk about the e-commerce industry.

The global lockdown this past year has accelerated the adoption of e-commerce. As more people spend almost all of their time at home, they naturally prefer to also shop from home. Over the past year, e-commerce sales across the world have increased by 39%. As a result, the share of e-commerce as a percentage of total retail sales across the world went up from 11.4% in 2020 to 13.6% in Q1 2021, accelerating adoption by several years.

This rise in e-commerce has really been made possible because website building companies like Shopify, Wix and Squarespace exist. These companies provide a range of tools that enable anyone anywhere in the world to start a website without knowing any coding.

How do these companies make money

Now, let’s look at how tools like Wix, Shopify, and Squarespace actually make money? What’s their business model?

Despite different approaches in pursuing different verticals, these three companies have similar revenue sources.

At the highest levels, they all have two business segments:

The first is recurring revenue from selling software that empowers websites, or what we call SaaS or Software as a Service revenue.

And the second stream of revenue is providing payment solutions for merchants. This is where the companies provide payment services for small businesses and take a cut on the total value of sales that they are making through these payment services.

When you look at the top line revenues of these three companies, Shopify by far is the largest. Shopfiy’s annual revenue is almost 3 times larger than that of Wix’s, and almost 5 times larger than that of Squarespace’s!

It’s not just the size of the revenue where Shopify has the other two beat, but also the growth rate of the revenue. In the past 2 years, Shopify has grown its revenue by 173%, while Wix and Squarespace grew 64% and 59% respectively.

Shopify’s rapid revenue growth largely does not come from its recurring software business, but rather from its payment solutions, which contributed towards 70% of revenue in the last 1 year.

It’s clear that Shopify is outperforming Wix and Squarespace. Shopify is not only larger, but it’s also growing faster. It’s growing almost 3x faster in top line revenue compared to Wix.

So, now let’s look at how Shopify actually got here?

In the mid 2000s, both Squarespace and Wix were providers of software that enabled individuals to build their own website without coding. Earlier, these tools were used to build websites for bloggers, designers and businesses to have a simple digital address.

But with the increased importance of e-commerce, more and more offline businesses are now driven to have a digital presence.

If you run an e-commerce shop, you will not only need a website, you need an inventory management system, you need a billing and payment system, you need a coupon management system and many other tools to successfully run your business. Hotels, yoga studios and other businesses also have their own unique needs from a website builder.

Seeing this trend, both Wix and Squarespace started to expand their offerings beyond a simple website builder. They diversified their products into different verticals of commerce to cater to all the restaurants, hotels, fitness sites and also e-commerce sites out there. But instead of expanding its offerings, Shopify chose to focus on pure e-commerce, giving it a very strong position in the market.

Despite being younger than the two other companies, Shopify’s early focus on e-commerce has allowed it to have the lead in the growing e-commerce space across multiple companies.

Despite being a younger company than the other two, Shopify’s early focus on e-commerce has allowed it to have the lead in powering e-commerce sites of various companies. After Amazon, Shopify is the 2nd largest e-commerce player and enjoys three times higher valuation than Wix!

That brings us to the last section which is Shopify is a great company. However, we actually think that Wix could be an interesting investment opportunity. Let’s look at why.

Why Wix might be a better investment than Shopify?

Wix’s fintech service where it provides a payment solution to its users is a much less mature service when compared to Shopify’s, which causes it to lag behind in terms of absolute revenues.

When we compare Wix to Shopify from a subscriber standpoint, Wix actually comes out stronger, and purely if looked at from a SaaS perspective, which is Software as a service Wix wins over Shopify’ business. Wix does better essentially.

The product that Wix has built is sticky. It’s very difficult for users to move their website and their data once they’ve used Wix. Wix’s net revenue retention is 113%, slightly above industry median. This means that if a user spends US$100 in the first year, the same user would spend US $113 the following year. The higher the net revenue retention, the more efficient revenue growth will be.

Here is Wix’s net revenue retention compared to other companies:

A sticky product and increasing usage means that even without acquiring new customers, the company can continue to grow its revenue. In fact, just from existing customers, without taking into account future customers and new customers, Wix believes that it can collect $14.2 billion in subscription revenue over the next decade! That’s a huge number!

Because of the way Wix’s revenues are structured and accounted for, the growth in Wix is often understated. To solve this problem, Wix came up with a new method of reporting its revenue, which takes these variations into account.

If you look at pure revenue growth over the last two years, Shopify’s revenue growth rate is 3x faster than Wix’s. But if you compensate for deferred revenue, Wix is actually growing slightly faster than what its revenue is suggesting. Instead of 3x faster, Shopify is now only growing 2x faster than Wix over the past 2 years on a Collections growth rate basis. And, if you strip out Shopify’s payments revenue, its subscription solution is actually growing slower than that of Wix’s.

Considering that Wix is valued 3x cheaper than Shopify and its payment solution service is still very nascent. Wix actually might not be a bad alternative for investors looking for better value in the e-commerce and website building solutions.

The market for website building is large, and despite the rapid shift to e-commerce these past years, there’s still a lot of potential for growth. On average, more than 500,000 new businesses are created each month in the US, and almost half of small and medium businesses are still not online today. Companies such as Shopify, Wix and Squarespace provide services that make it easy for entities to have an online identity!

So that’s it for today, what we’ve covered a rise of Shopify as a platform enabling e-commerce and then compared it with Wix to understand Wix’s future potential in the industry.

We hope you found this video insightful.

Stay tuned for more!