Shopify: Platforms vs Aggregators

The Stratechery blog put out a great article in 2019 on this concept.

I wanted to fill in a few details, by adding in my own flair and understanding of the theory.

What is a platform?

The locus of control is decentralized to each vendor in the marketplace.

https://stratechery.com/2019/shopify-and-the-power-of-platforms/

Platforms exist to facilitate relationships between 3rd parties (vendors) and end users. They provide functionality that acts as a support structure for 3rd parties (vendors) to make these efforts easier. When a buyer is looking for a pair of shoes, it is up to the vendor to make a connection and sell their shoes.

Platform providers share a small piece of the entire network’s pie and success is tied to overall economic growth.

Platform Pros

  • Reduces direct competition in the marketplace.
  • Prevents one party from prioritizing self-interest.
  • Promotes individuality and merit based success.
  • Increases the value of each product and service.
  • Allows for open participation.
  • Each vendor’s success is a success for the platform supplier.
  • Vendors are able to build direct relationships with customers.
  • Networking effects have a higher compounding growth curve.
  • Risk is spread out through the entire network.

Platform Cons

  • Marketplace providers can’t leverage economies of scale as easily.
  • Marketing efforts are individually sourced by vendors.
  • Users don’t have a central place to find goods and services.
  • Bootstrapping is slower, and not co-dependent for a given channel.
  • Marketplace providers have to use networking effects to enact change.
  • Platform supplier does not have direct relationships with customers.
  • Networking effects take longer to reach critical mass.

What is an aggregator?

The locus of control is centralized to the marketplace host.

https://stratechery.com/2019/shopify-and-the-power-of-platforms/

An aggregator is a system that collects all available inputs in a marketplace, and regulates the flow of goods. When looking for a pair of shoes, a buyer just needs to visit the aggregator and enter ‘shoes’ into the search bar to find all available items for purchase, across all suppliers.

Aggregators take the largest piece of the network’s pie and success is tied to the amount of demand they can generate, and what kind of margin they can take on each sale from suppliers.

Aggregator Pros

  • Simplifies the user journey for buyers.
  • Larger selection of products.
  • Simple procurement and fulfilment processes.
  • Aggregators have leverage to take action immediately.
  • Marketplace providers have more control when it comes to market sentiment.
  • Marketplace providers are able to build direct relationships with customers.

Aggregator Cons

  • Creates price based competition for suppliers.
  • Turns products into commodities.
  • Central parties can manipulate the marketplace for self-interest.
  • Product differentiation is reduced, as top selling products are copied and duplicated.
  • Wealth gap becomes bigger between players. Over time, smaller and medium sized players get pushed out of the market.
  • Suppliers do not have the ability to build relationships with customers.
  • Risk is concentrated onto the platform host.

The Amazon effect makes product selection indiscernible, as many products are copies of each other -- and price or relative popularity becomes the main differentiator.

Unlike Amazon, which has a bad reputation for pitting suppliers against each other, Shopify works to create a democratic ecosystem where both small and large players can thrive within their own niches.

"Amazon is trying to build an empire. Shopify is trying to arm the rebels." - Tobias Lutke