Excellent. Thank you, everyone, for joining us. My name's Keith Weiss. I run the US. research, software research, franchise here at Morgan Stanley. And very pleased to have with us from Shopify both President Harley Finkelstein as well as CFO Jeff Hoffmeister. So, gentlemen, thank you for joining us.
Thanks for being here.
Yep, thank you.
So, this is year two of Jeff being on board. and,
15 months. Let's talk even too much.
15 months. Not quite year two.
Year two of Jeff being at my conference.
That's right. Okay.
Yeah, it is year two of the conference, yes. And I was looking back at my notes from last year and last year's presentation, where I basically asked Jeff about margins and then just asked you about Shopify Fulfillment Network for the rest of the presentation.
You did.
A lot's changed in that time.
No more SFN, and margins are pretty good.
Exactly.
Yeah.
Yeah. Both improvements in my view. You guys talk about it in terms of, like, the new shape of Shopify. So maybe, Harley, just to start with you, can you give us a sort of an overview? What do you guys mean by the new shape of Shopify? And maybe kinda talk through what happened over the past year and the position it's gotten you into today to really go after the opportunity.
Yeah, I think when we were on the stage, which was about 12 months ago, I think it was, you know, March or so, 2023, we talked about a few things were changing. One was, size of the company was changing. I think at our peak we were about 14,000 people. We're now at around 8,000 people. And we just had our offsite last week. We have a fairly new executive team, so we're starting to spend a lot of time in person together. But we really like the size of our company. We think the size of our company in terms of headcount, we can really continue to grow at the pace we want, be ambitious. But the second piece of this new shape of Shopify is really about a focus on what we call sort of the main quest, which is really commerce and retail.
There were some areas that we felt we had to get into, you know, to, to your question last year, Keith, things like SFN. We've just realized that when we're able to leverage partners to get that same, that same goal, the same objective, and help merchants, you know, create an end-to-end logistics network with partners, whether it's Flexport or it's Amazon, that's what they do best. Let them do it. Let us focus on the things that are truly important to us. And the new shape of Shopify, which, again, is now, you know, I don't know, 14 or 15 months old, it's working. We're able to grow top line. We're able to grow bottom line. We have new segments of our business. Enterprise is doing great. International is kicking butt.
Even things like Shopify Point of Sale, which traditionally had been a bit of an appendage on the e-commerce, is now a standalone business. And people are coming to us for, first and foremost, point of sale and for retail, and they're expanding to offline as well. So all in all, we're really happy with where we are. We think. I mean, this is my going to my 15th, 15th year at Shopify. I'm 40, so I've been at Shopify for a big chunk of my life. This is unequivocally the best version of Shopify I've ever seen, best team, best product, and most momentum.
Got it. And then, Jeff, for you, I mean, you've been on board for 15 months. What has kinda surprised you? Like, I like, let's get an assessment. 15 months in, how has the job been in reality versus kinda your expectations when you first joined?
Yeah, I, I think one of the things that's tough from the outside in to appreciate. We talk about within Shopify this term Merchant Obsession. It really, it's been a key part of our success in terms of how Harley, Tobi, the whole senior team in terms of product development really think about what are the pain points of entrepreneurs? What is this market gonna look like two, three, five, 10 years from now? And how do we build the products that really address those needs and set those in motion now? And the ability for us to look around a few corners, build those products in anticipation of those needs, it's, it's really, really good. And it's because we start with this: we have a lot of founders on our management team.
Without going through all the names right here, right now, there's just a lot of people in the senior team that started businesses themselves or entrepreneurs themselves. And so that helps in the mindset of how can I build something that the merchant, we'll talk about logistics. We'll talk about audiences. We'll talk about all these things, which are what are the complexities for a merchant, and how do we solve those? And that's been the key piece.
Got it. So maybe to start the conversation, we could talk about sort of the macro environment. It's something that investors have been trying to assess. We all thought a year ago we were heading into a recession. Doesn't really look like a recession. Looks like a soft landing. Your Q4 saw really strong results. We're trying to assess how much of that's seasonal versus how much of that's just Shopify executing really well to your initiatives. So when you look at sort of what you're hearing from your merchants, what you see in the demand environment, how do you feel about the sort of the underlying spending environment, the underlying macro, supporting your outlook?
I mean, generally, what you saw if you just look at, like, Black Friday, Cyber Monday, the four-day period, 2023 in November, I think we saw something like $9.3 billion of GMV in, like, four days. Obviously, that was, you know, higher than every previous year. But there was something else sort of beneath, I think, the numbers, which may be less obvious, which is, there seems to be a real intentionality with, with consumers to buy brands they love. I mean, you're wearing Allbirds, I think. He's wearing Common Projects. Happy were wearing On Running shoes, it seems like, in the crowd. Those are brands that are beloved by consumers. And we're very fortunate that all of those brands, for the most part, are powered by, by Shopify.
So I think there's an intentionality that, that the consumer is really voting with their wallets to buy from brands they really, really love, as opposed to indiscriminate purchasing. That doesn't mean there's not gonna be room for other, other retailers, that sell consumers things that they need. But for the things that you want, things where you have a deep connection to, for the most part, those are powered, those are powered by Shopify. And I think that that will continue. I think that that's, that's sort of in that intentionality will continue. If you sort of compare Shopify, both e-commerce and Shopify physical retail, we outpace the broader US. market. We're now about 11% of total e-commerce in the US., which would make us the second-largest checkout after, after Amazon.
But the other part, just to sort of circle back to something I said earlier, one of the new things that I think you're seeing is these sort of new on-ramps into Shopify. If you fast-forward excuse me, if you rewind 10 or 12 years ago, there was one on-ramp into Shopify, which was effectively small business e-commerce.
Mm-hmm.
Today, you have some of the largest brands on the planet on the earnings call I mentioned, you know, On Running and Oscar de la Renta and these very, very large brands coming to Shopify. But you also have Point of Sale. And you also have, I mean, Carrier, the industrial, you know, heating and cooling company, has come to Shopify exclusively to do wholesale, to do B2B. So all these new on-ramps not only expand our total addressable market, but it allows us to once you come onto Shopify through any one of these particular on-ramps, over time, we can provide you with more and more services and really create that retail operating system. But from a consumer perspective, consumers seem strong. They're still buying. And, and that's, that's powered by Shopify.
Got it. And, Jeff, when you're giving us the outlook into the forward year, what are you assuming in terms of that consumer spending environment?
Yeah, we're assuming something similar to what we've seen in Q4. We're not assuming any sort of inflection in either way, shape or form, Keith. I am very cognizant, and we and Harley and I both talked about this on the earnings call in terms of the strength we saw in Europe, right, our merchant base. Our revenues grew 40% in Europe. And that's a function of, and we talked about this pretty consistently for the last few quarters, it being roughly half, half same-store sales growth and half new merchant acquisition. Very cognizant that that's a better performance than what we're seeing, what most merchants are seeing in Europe more broadly. We think we're doing, and Harley alluded to this.
We think we're doing a really good job of getting the best, strongest performing merchants on the Shopify platform and making them even stronger. So we're attracting the right merchants, and we're helping them get even more successful.
Got it. So a decent consumer spending environment, but really, it's the portfolio effect of having more on-ramps, more sort of solutions to sell in that's keeping the market share gains going, keeping the growth going well. Turning to the profitability side of the equation, subsequent to this spin-out of Deliverr, operating margins improved markedly. I think, Jeff, you surprised the street a little bit, when you gave the Q1 guide and talked about OpEx growth in the low teens, sequentially going into that quarter.
Yeah.
Can you talk to us a little bit about the nature of that OpEx growth? What is it that you're spending on specifically? And, and number two, what's the rationale behind it? Why, why is now the right time to be pushing in that investment?
Yeah, I think a couple of partly to your comment about delivery. Part of what it's tough for us to do right now is do year-over-year comparisons and, for example, talk about sales and marketing percentage as a percentage of revenue on a year-over-year basis. And so we've talked about OpEx dollars on a sequential basis. And to your point, going from Q4 to Q1, we talked about essentially four pieces that were the percentage of that, two of which were related to personnel. One was just the payroll taxes and just it happens every year, front-loading of some of the things: Social Security, Medicare, Medicaid, and the Canadian equivalents of those. It just for to make a long story short, the most of those end up in the first quarter. We also do twice a year payroll reviews, promotions, comp increases. And that was a very normal function.
That was roughly half those personnel expenses, roughly half. The other half, which we talked about, was marketing. And there's two pieces. We talked about performance marketing. We also talked about retail. Retail, and we talked about it the Investor Day, has just been performing phenomenally well. So we are just supporting a business that is doing exceptional things, not only in North America but also in Europe. And performance marketing, there are just some things that we saw in the market in terms of the prices that we could get and the LTV to CAC on these, which were phenomenal opportunities. I-it's just they were extremely compelling. And if you candidly saw the dashboards that we see internally, you'd be like, "This is absolutely something we wanna do." This, that external dynamic was also combined with an internal dynamic.
We just continue to perform or increase the performance of the algorithms, partly through AI in terms of how we're doing this, but also just making the algorithms smarter. And so we saw an opportunity to really take advantage. And it was just a phenomenal opportunity. So that's what we really stepped on. That being said, more broadly, and we talked about this, as Harley said, the new shape and size and shape of Shopify, if we can stay at these levels of headcount we talked about in the annual report. We quoted 8,300 people. If we can stay at that level, for we've been at that basically since the end of Q2 of last year.
And if we can stay through that period for the FCF at that level for the foreseeable future, that gives us the opportunity to be very disciplined on headcount and take advantage of things like the marketing spend opportunity and still, therefore, be able to drive margins down because we're being so thoughtful on headcount.
Got it. So we put these pieces together. We're talking about a shape and size of Shopify that you like in terms of headcount perspective. A lot of the sequential increase in OpEx comes from one-time items, if you will, or sort of seasonal items in Q1. The other half comes from performance marketing, which is gonna drive really good LTV to CAC ratios based upon what you're seeing. That's what supports your guide of improving operating margins throughout the year.
Yeah, we talked on the call, we talked about free cash flow dollars and free cash flow margins going up sequentially every quarter for this year. And obviously, Q4, it ended up really well for us.
Yeah.
I'm not translating that Q4 result to all of this year, to be clear. But for Q4, we did 13% operating income margins and 21% free cash flow margins. That's something, as Harley alluded to before, that's a new, good, strong development for us. And we've worked really hard to build this discipline. Like, we've had, when you followed this for a long time, Keith, you know, as you think through the quarters last year, there were some quarters where we underspent on marketing because we looked at the LTV to CACs, and we said, "This doesn't meet the thresholds we want. So we're gonna underspend a little bit." Q1 is just an opportunity where we saw the inverse. And so we're gonna lean into that.
Got it. And I think what investors are always often asking me about is kind of this structural margins over time. When we think about structural margins, we often think about gross margins.
Yeah.
You've given us some puts and takes, at the analyst day on some pressures, some potential positives. Can you kinda walk us through those puts and takes in terms of how we should be thinking about the directionality of those gross margins over time?
Yeah, we talked about gross margins really kinda three pieces. There's obviously, in our financials, we give the gross margins are both subscription solutions and merchant solutions. Subscription solutions has always been strong margins. It's helped with the price increase. We did standard last year. We announced roughly a month ago, obviously, what we're doing with Plus. We've also done some things in terms of our cloud infrastructure that's helped some of those margins. But subscription solutions should be, and we talked in the macro, all of this leading to something which is relatively stable to slightly dilutive on a multi-year period. Subscription solutions will be helped this year by the price increase, a little bit like it was last year. Payments, obviously, is a phenomenal business for us and continues to grow really well.
That does have some headwinds for us in terms of margins, as we continue, we obviously now have a relationship with Stripe and Adyen and PayPal. And as contracts come up with them, there may be some additional opportunities for us, which will be a tailwind. But also, to the extent that there's network cost changes or other things, it would be a headwind. As we do more, do more with large enterprises, that's gonna be a little bit of a headwind. And then the third piece for us is the other merchant solutions, like installments, tax, Markets Pro. Think of the margins on those as you would any other good software business. So those are gonna be tailwinds for us too. And so when we talked to the investor day, we broke up our products into four pieces.
So we talked about kinda the relative size and growth rates of that bucket of growing merchant solutions, products that we've introduced over the last two years. As they get bigger and bigger and bigger, it's just gonna help margins.
Got it. So, it just one thing I just wanna clarify on that. A lot of that is, like, payments, lower gross margin business growing really fast is a makeshift element on that. Pricing is very high incremental margin business. The enterprise component, is that because of volume discounts that you need to give to sort of get the larger enterprises on board?
Yeah, for some of the real and really large enterprises that do huge volumes with us, they'll, they'll be at a different level on price.
Got it.
Yes.
Okay, Harley. We're done with the boring stuff.
Okay.
We're gonna talk about growth now. I wanna dig into traction with Shopify Plus. I think it's probably been one of the most impressive parts of this story, over the last 12-18 months is the, I both from an investor standpoint and also within the market, the perception of Shopify and where Shopify could go has really changed, a lot of this on the back of Shopify Plus. Can you talk to us about sort of how far you've made it in terms of that traction of market? Is there levels that you're still afraid to tread? Or is Shopify really applicable to sort of the entirety of the market you see out there today?
Yeah, I mean, we're going after the largest brands and retailers on the planet. And actually, in many cases, what we've been able to do is increase the service area of which they can adopt Shopify. If you go back, I think around this time last year when we were on stage, we talked about this introduction of this new thing called Commerce Components by Shopify. Historically, for those of you that have been following the story, there's really been one on-ramp for enterprises to come to Shopify, which is Shopify Plus, which is everything you need, like full stack, business in a box.
We've had a lot of very large retailers utilize that for a very long time, some big ones like, you know, Staples, for example, and obviously, the Homegrown Success Stories, the Allbirds and the Gymshark and, you know, the FIGS and companies like that. But it specifically was based for you coming to Shopify and taking all the entire product suite. We then introduced something called Hydrogen, which is our headless product. And we introduced it because we realized that there are some very complicated merchants out there. A good example is Dollar Shave Club or ButcherBox, which do very sophisticated subscription logic where you have to sort of you can skip a month, and you can sort of, you know, double up a month.
And so we wanted to create something where even the largest, most complicated business models can utilize Shopify and headless provided that. So that was our sort of second ramp into enterprise. And then last January, January 2023, I announced on stage at NRF this idea of CCS, Commerce Components by Shopify, where effectively, you can take any component of Shopify, and you can add it to your existing stack. And the rationale for that was there are going to be some brands, some retailers who wanna use some part of Shopify but might not be ready to migrate the entire stack yet. And, you know, the thing about, like, large-scale enterprise retail, it often moves fairly slowly. And so asking them to do a full migration won't always happen, sort of in hyper-real time.
But commerce components gives us this opportunity to start a relationship and almost, you know, like sort of the tip of the spear with a lot of these large retailers. And the largest component and the most successful one has been the checkout. Our checkout, if you just compare it to a company like, you know, Salesforce Commerce Cloud, converts like 36% better. If you add in things like Shop Pay, it's, it's like 50% better.
Okay.
So we wanted to create this on-ramp for merchants that may not otherwise come on. And CCS did that. Recently, we announced, like, Everlane, for example, came on. Everlane is using Shop Pay, for example. But they're keeping their same stack. By having these three different on-ramps plus CCS and Hydrogen, it means we have something for everybody when it comes to the enterprise of any size. And it's working. I think the product has been ready for quite some time. I think the big change over the last 12 months or 18 months or so is that the go-to-market engine around Shopify Enterprise has really started to ramp.
Okay.
That's there. There's a couple, you know, couple tendencies there. One is we began to work very heavily with the SIs, the systems integrators, the Deloitte, Accenture, these big companies, WPPs of the world, these companies that are already working with the largest enterprises. Now, Shopify Enterprise is one of their new offerings they can bring to market. The second thing is we just made a conscientious effort to go to on the marketing side of enterprise with things like making sure we're the highest-rated, you know, Gartner Magic Quadrant enterprise retail and working with Forrester to tell the story that this is not a small business software that has sort of stretched up market. This is fundamentally the best way to run an at-scale, modern retail stack. And so that's working really well.
I think because the go-to-market is now caught up with the software scale, the result of it is that we're winning more market share almost on a daily basis from some of the largest brands. I also think that at the same time that we have these large brands migrating over, we're still seeing this sort of funnel of these small brands that start at their mom's kitchen table become industry leaders. You know, I mentioned SKIMS earlier. I mean, these companies that did not exist three years ago that are now dominant, you know, like the dominant player in their particular space. So we kinda have both of the things happen at the same time, these homegrown success stories that are getting larger and larger and staying with us, and then these large enterprises that are migrating over.
That's happening both domestically in North America but also internationally. But there, there is no cap, or there's no ceiling in terms of what size of merchant we can get. As I mentioned earlier, I mean, the fact that Carrier, an industrial company, is selling all their B2B products with us now shows that we actually can go after even new areas of retailer or wholesale.
Got it. I'm drilling down into that a little bit. Can you talk us through. You talked about the checkout engine being sort of the tip of the spear or what gets you into that large enterprise account. Can you talk us through the customer journey, what you've been seeing since then? How well have you been able to expand out from that entry point?
What's really great is because we have sort of the bellwethers or, or the beacons of every type of retail so I mentioned, you know, some of the subscription businesses, the Dollar Shave Club and the ButcherBox. Now that we've proven out that not only can they use us, but they can use us and have a higher conversion rate, lower total cost of ownership, we, we're becoming sort of the go-to place for businesses of that nature. And we can do that around a bunch of different categories. The sales cycles are longer. There's no question about it.
Okay.
Relative to a small business paying $39 a month who, you know, who effectively comes on in a matter of a day or two and makes a buying decision, it does take a little bit longer for these enterprises to come on. However, they come on with GMV in some cases that are in the billions on day one, which we, we love. And more importantly, because our product is so sticky and because the way that they consider their relationship with Shopify far different than just a software partner or their retail operating system, we tend to keep them indefinitely. And that's really working well too. And we began to find real success with some of the SIs, with some of these enterprise agencies as well that are bringing them on. And we think we can keep going with that, for the long run.
Got it. So Jeff, when investors think about moves up market for software companies, we always like the higher LTV to CAC ratios that you tend to see, the better retention rates, the bigger, then it's typically a bigger market opportunity. But we get worried about the investment necessary for distribution of building out an enterprise sales, for us being able to sort of work with the partners. Should we be worried about that in Shopify's case? Is there significant build-out of the enterprise sales motion yet to be done?
No, and I think Harley alluded to a lot of this. And also going back to my comments before about keeping headcount flat, a lot of this, and we have a gentleman, Bobby Morrison, who is our Chief Revenue Officer who joined roughly 18 months ago. And he was at Intuit. He was at Microsoft. He was at Verizon. He was at a couple of spots where he did some really interesting things in terms of building the sales force. And he's been doing this for 18 months. And so as we look at our sales force, there may be areas where we say, "Hey, we wanna add a little bit more expertise here, a little bit more there.
There's probably a little bit more we maybe need to do, for example, on retail to support that." But that's less a large enterprise and kind of more of a different product feature set. Harley alluded to all the success we're having with the SIs historically. Again, our targeting on the enterprise is really kinda 18-24 months in. And so these SIs have a great ability just to highlight stuff like, "Hey, Company X is thinking about their commerce stack. You should be spending time talking to them if you're not already." And that goes above and beyond for a lot of just, like, the relationship they'd have with Salesforce or something else. They're still very the SIs are focused on going to their client, which is the company, which is the merchant, and saying, "What is the best tech stack out there?
What is best gonna serve your?" We are extremely well-positioned in that context. So we're gonna continue to get momentum with the SIs. Gartner, Forrester, etc., are starting to do more. There was just one a couple of days ago, more and more reports on us. The Salesforce is continuing to get better and better, stronger every single like, we're in a very good spot. So I think it's more continuation, but I don't wanna get into the baseball analogies of early innings. But it really is when you think about us being, you know, less than two years into this really.
Got it. Can you give us some kinda sense of where we are in terms of the percentage of GMV coming from the larger enterprises versus the small and mid-sized businesses?
Yeah, we haven't really talked about the enterprise. At the Investor Day, Keith, as you know, we talked a little bit about percentage of GMV, which is from Plus versus our standard merchants. Although admittedly, Plus historically has been kinda more medium-sized businesses. As Harley alluded to, some of the sales cycles and the lead times for the, quote, "big enterprises" just takes a little bit longer. We haven't talked about that much yet, but you'll see more of it. The other thing too, which I think sometimes is, maybe not fully appreciated, especially in a lot of the industries which we deal with, some of these larger brands, like some of the big fashion houses, for example, they're still run by the founders or kinda that family.
And so, the way we think about and sell to them is very similar to the way we sell to some of the small and medium merchants. And those big fashion houses, for example, will bring smaller merchants on board like, "Oh, this really very cool, highly successful brand, they're using Shopify, and that helps us bring more merchants." And then it does the inverse too because we get our kinda flywheel for lack of a better way of saying that because a lot of these emerging brands, like, they do really well. They do very successful businesses. And then it pulls even more large enterprises. It really helps.
Yeah, one of the things that I think gets missed is, from an enterprise perspective, I think we have the best product out there. I mean, we've innovated at a pace that no other enterprise commerce retail company has done. On the go-to-market, we're getting better at that really, really quickly, which is really positive. There's sort of a third bucket as well that's worth mentioning, which is that there was sort of this Gen 1 of these direct-to-consumer brands who felt like in order for them to justify their valuations and market caps, they had to build everything themselves. And so you had these companies that had, in some cases, hundreds of e-commerce engineers in the companies. They were cosmetic businesses that had 300 engineers. Those days seem to be over.
Actually, that's one area where the tailwinds really help us because you think about, like, you know, when Kyle became CEO of Glossier, one of the first phone calls she made was to Shopify to say, "Why don't we have 350, you know, e-commerce engineers here? We should just use Shopify." And when you think about these brands that famously ran their e-commerce stacks in-house, Glossier, Supreme, which is a VF Corp company, they're now coming to Shopify 'cause they realize that is not the type of business they're in. They're in the cosmetics business. They're in the streetwear business. And because of, because I think those that sort of mentality around we have to build everything ourselves is over, Shopify is the natural and organic place to go.
So we can do in the same way we did that for small business, and I think we've done a good job in the medium size. I think we can also do the same thing for enterprise. But much of that growth is in our future.
Got it. And it sounds like a tremendous TCO advantage that you guys bring to the table.
Totally.
By obviating the need for hundreds of engineers. You've taken a little bit of pricing, Shopify Plus. Yeah, there was a recent price increase. It's a little bit difficult. Two questions for you. One, it's a little bit difficult for us to understand the effect of price increase. There's the subscription components. There's variable components. There are payments pieces. Can you, one, walk us through how we should think about the effect of price increase that comes through Shopify Plus, but also how much room is there under that pricing umbrella? Is this something that you could pull a lever on a go-forward basis as well?
Yeah, well, let me start on that second piece and kind of a couple elements of that. Number one, we saw this in the standard price increase, you know, and it's still very, very early days on the Plus. It's been basically a month since we've announced it. And obviously, there's a period of time for new merchants versus existing merchants in terms of transitioning. But one of the things we saw on standard and we're seeing this thus far on this as well is there is a clear vote by the merchants that the value that they're getting from our platform significantly outstrips the cost. And so it especially on enterprises, we think about the prices that we're charging vis-à-vis other solutions out there. Yeah, I'm sure probably could have increased prices even more than that.
But we wanna be very focused on value that value-to-cost ratio and having it be extremely compelling. I don't think, Keith, to you, kinda one of the questions that's inherent to this too is, do we get ourselves into a cycle where kinda our merchants show up January 1st of every year, and there's some sort of automatic price escalation? But no, that's not where we are right now. I, I think what we are trying to do is be much more thoughtful about monetization more broadly. And so if you think of our full suite of products and if every one of those products every three, four, or five years comes up for a discussion around monetization, and are we at the right pricing levels, and how much value are we delivering to merchants, then you go through that.
And every single year, maybe there's a couple of prices that are up for that equation. But we're trying really, really hard to stuff more and more solutions, capabilities, functionality into each of these subscriptions and make it extremely compelling. I don't, again, just because it's early in this process, I can't really handicap for you the impact that we're gonna see for Plus. But again, the standard plan change went very well.
Excellent. So the interesting thing is this isn't a story of Shopify moving up market and evacuating the small business. If anything, you guys have been more bullish on sort of new merchant ads over the past couple of quarters. It, it some of it is kitchen table. I think SKIMS is an unusual kitchen table, but some of it is the kitchen table. But there's also new like you said, new avenues. Can you talk to us about how point of sale and international are creating real effective, sort of on-ramps and effective channels for new businesses to come on board?
Yeah, I mean, I'll start with point of sale. Up until recently, in order for you to use Shopify Point-of-Sale, you first came to us for e-commerce.
Mm-hmm.
And then eventually, you made the decision to actually, you know, open up a physical retail store. That's been working really well where we have existing retail online merchants who also have physical stores. They've migrated over. But we realize that there are a lot of merchants. I mean, 80% of US. retail is still done offline. I mean, it's quite remarkable, 20%. Like, it's a bit and it's even less than that in the US. It's excuse me, in Canada. And it's a little slightly more than 20% in the U.K. So we realized that there's an opportunity for us to actually create what we call the retail plan, which are merchants that only sell offline. And now what we're seeing, you know, Banana Republic Home is a good example. We're seeing these merchants that are coming to us specifically for offline retail.
And that is the on-ramp into Shopify. We think there's a lot we can do there. And obviously, at some point, some of those retailers may also sell online as well and we're the obvious choice there too. So that's one more on-ramp where we can actually go after both from a marketing perspective, a go-to-market, a sales perspective, physical predominantly physical retailers that has historically didn't come to us for that. The second piece is international. International is really big. We think that particularly in places like Western Europe, that's an area where there are some domestic players around e-commerce, for example. But in terms of the, the concept we call Default Global, they don't allow you to do that.
We think that we can actually do an even better job than we have done already going to these markets, you know, France, Germany, Italy, Spain, you know, obviously the UK, where we've been really dominant for a while, where we can help these retailers, these larger retailers, sell cross-border right away. A couple of things had to happen. I mean, some of the things are just translation and marketing and support and making sure you have the right apps. But also by pushing this concept that when you hit the launch button on Shopify, you as a retailer of any size, you are default global. Your total addressable market is the global consumer base. That has been really, really compelling. And we're winning in these markets. Europe is a great one. We're doing better in places like APAC.
But, you know, we haven't really done that much in LATAM yet. There's a lot of other geographies that we can tackle. But part of it is make Shopify the best product to use if you are a retailer in this country selling physical products, full stop. And it's working as you're seeing. You know, we're seeing great growth there as well. But those on-ramps, whether it's, you know, international or it's point of sale, now you're in Shopify. Now you're in the funnel.
And then once you're in the funnel, then we think about, okay, horizontally, what else can we help you with, whether it's payments or it's capital or it's shipping labels or it's things like audiences where we're now actually leveraging our data and helping merchants create these lookalike audiences so that when they go and buy ads on, you know, Meta or, or Google or, or Pinterest or any of these great platforms, we can pretty much guarantee with certainty that they will have a high return on ad spend. And so not only do we wanna get more people into the funnel, but once they're in the funnel, we wanna expand the relationship we have with them, which is leading to a you know an attach rate that was approximately 3% for 2023. We can do more of that.
So adding more on-ramps and then once they're in the funnel, making sure they take more of our merchant solutions is sort of the name of the game.
Right. It is a great segue into sort of the next area I wanna dive into is the other sort of products that can help take rate up. Comparing and contrasting to this time last year, investors were very confident in the ability of take rate to go up on the back of Shopify Fulfillment Networks. They were a little less sure about what the margin profile of that was gonna look like. Now, we feel better about the margin profile, but we're asking the question of, what are gonna be the products that take rate up on a go-forward basis? The focal point of attention right now is Shopify Audiences. So can you talk to us about how Shopify Audiences actually improves the merchants' ad campaigns? And what the purview is, is it gonna expand beyond just Shopify Plus into the broader merchant base?
So right now, think of the way to think about consumer acquisition or customer acquisition by merchants on Shopify is sort of two buckets. In sort of the enterprise bucket, there's Audiences. And Audiences are very it's a complicated algorithm, but it's actually a very simple concept, which is before you place your ad in any of the major digital ad platforms where you upload your ad copy, your photography, your pricing, you also run the ad first through the Audiences algorithm. And we basically give you a lookalike audience based on all the other merchants that have pooled their data into Audiences. It's all anonymized, but you're able to get a lookalike audience.
And so now, if I'm setting up a sneaker company, I can actually find a demographic that we know with certainty will convert better than if you're just sort of casting a very broad net on Instagram or Facebook or Google or any of our ad partners. And in some cases, we're seeing merchants using audiences that are seeing up to 50% higher return on ad spend. And so the goal there is to get it so good that at some point, it is a bad idea to run an ad on one of these digital ad platforms without first running that ad copy, that ad, you know, that piece of content through audiences.
Because even with some of the improvements happening, with some of these ad platforms, we still can have an increase in ROAS. On the other side, something new that we announced in the earnings call is what we call Shop Campaigns where we have this incredible shopping app called Shop, one of the most popular shopping apps for consumers on the planet right now where a lot of consumers are doing a lot of their shopping to buy things they love, to discover new brands, to buy from brands they already know. And there, what we're trying to do is help merchants find new customers by doing things like discounts and using Shop Cash, but really creating a way for them to find new customers that they couldn't do on their own.
In both cases, whether it's Shop Campaigns for SMBs or it's Shopify Audiences for the enterprise, what we think is possible is these are things that Shopify is uniquely able to do because of our massive economy of scale. And I know your next question's gonna be, when are you gonna monetize Shopify Audiences? That, we eventually, we will do that. Right now, we're indirectly monetizing Shopify Audiences because we just wanna get as much data as we possibly can. Eventually, we think it's an offer that we can monetize, and we can offer it to a lot of our smaller businesses. One thing that actually does not get understood well is Shopify Audiences right now is also one of the most effective ways for us to upgrade merchants to Shopify Plus because it's Plus only. And it's going great.
But right now, we're still sort of in the model of teaching our merchants how to fish and getting them helping them find better customers. In terms of giving them the fish and giving them customers, that may be something we do in the future. We're not doing that just yet.
Got it. It just as a brief aside, because.
Sure.
In talking to retailers, and they often talk about basis points of change and conversion rates and whatnot. And you throw out numbers like the Shopify checkout, 36% better conversion, 50% if you use Shop Pay, audiences, 50% better ad conversion. How does Shopify get like such big performance improvements versus the peers?
We simply have if you think about, I said this at the beginning, but it's worth repeating. We're the second largest checkout on the internet in the United States after Amazon. The difference is that rather than having one single aggregated retailer, we are simply a platform with many, many millions of retailers. And because of that, if you are starting a new cosmetics company and you're on Shopify Plus, we have such a great indication and great data that explains, "This is the type of merchant you should target: demographic, city, what are their other interests?" And because of that, we can leverage that data. At the same time, it doesn't necessarily adversely affect anyone else who's in the pool too.
We sort of look at, I mean, because what's so great about, you know, modern consumer internet is that you have an unlimited, just about unlimited amount of consumers for your products. We can leverage our data to help merchants make much better decisions. In terms of things like the checkout, for example, I mean, you know, the 36% is really impressive. Something that's even crazier is that the mere presence of Shop Pay on checkout, even if the consumer doesn't use it, increases checkout by 5% conversion. So we've optimized this checkout so methodically that, that we think not using Shopify's checkout means you are losing money.
We're going to market with that around, you know. We're going to market with total cost of ownership being better, with our conversion rate being much higher, with the product being innovating at a much faster clip. At some point, it becomes a bad decision not to use Shopify. And that really is what we're trying to build, Keith.
Yeah. The capabilities of the product, Keith, are just like that. That's the key to everything Harley said. The capabilities are such the usage of it, the way for example, on Shop Pay, the way it gives you the tracking information and kind of the shipping information, how it prepopulates all your like, it's just a better product, quite simply.
Got it. So we've made it 37 minutes without talking about generative AI. But when you have it, tell me about sort of the data advantages you're bringing to the table. You're trying to automate a full scope of workflow when it comes to commerce for your customers. It seems like generative AI could be a real game changer for Shopify on a go-forward basis. Maybe starting with you, Harley, from the top line, capability side of the equation, what are you excited about?
Yeah. I mean, we think Shopify every company's gonna benefit from this. We think Shopify in particular is uniquely positioned to really benefit from this. I'll give sort of two, two buckets. The first bucket's on the merchant side. We realize that as a merchant's day-to-day activities and business operations happen, there are a bunch of things where fundamentally, an AI assistant we call Sidekick is simply going to make better decisions than any human can. A good example is writing a product description. You may be the greatest, you know, sneaker entrepreneur, sneaker manufacturer, but have you read every single article on the internet about SEO? Do you know all the new merchandising paradigms and the new merchandising techniques? Probably not.
And that's where things like Shopify Magic can really play a role where you can say, "Just write a product description for me that's gonna be highly converting." And you can do that across product descriptions. You can do that in terms of email marketing, what subject line to use that's gonna have the highest open rate. So that there's a whole chunk of things that we think we can do for the merchant to make sure that they're focusing their time on things that only they can do, the most important tasks. And then you have sort of on the consumer side. That's where we really think about, like, shop AI where you I mean, it's now browser-based.
I know you don't have to use the Shop App for it, but you can go to shop.ai, and you can look up, type something in like, "I'm hosting a barbecue for my daughter and her friends this weekend, and the theme is gonna be, you know, rainbow unicorns." Anyone with five-year-olds in the crowd will appreciate that the way I do. So, it'll tell you exactly what to buy across hundreds of millions of SKUs across all Shopify stores and create this delightful shopping experience, which means that consumers will go back, which means more merchants are gonna wanna be featured in the Shop App as well. And I think in both cases, you know, Jeff used the baseball analogy of being early innings.
Like, I think when it comes to AI at Shopify, like, we're still getting dressed at the hotel. We haven't got to the stadium yet. And I think we can help merchants make better decisions faster, and we can also make the Shop App so much better so the consumer experience on there of navigating something they wanna buy is just world-class.
Got it. And it may be one last question for you, Jeff. It what we've described today has been a Shopify position to continue to take share in an e-commerce category, in a commerce category that continues to grow well on the base of an employee base that's not necessarily gonna grow very much, which to me speaks to a lot of productivity gains.
Yep.
Is GenAI a part of that? Like, is you guys sort of internalizing these innovations to the.
I was leaving that for him, so I'm glad you asked this.
Yeah.
It's good.
Yeah. I assumed you were, but yeah. So well, support is one of the been the most obvious spots where we've been able to use AI to help on this, and that is related to headcount. We've been able to do and we've done a lot of work, Keith, looking across all the different departments of the company and what is gonna be the AI multiplier or the capabilities of the people in that department. And so how much can AI accelerate, for example, the product generation capabilities of our engineers? What can it do in terms of support? For example, on support, historically, it's been a little bit more of answering merchant questions in terms of how can we help address any questions or issues they have.
Now, we can use AI to not only be thoughtful about headcount, but also then add to that the capabilities of being proactive of, "Hey, you have these three solutions, these three products. How about you have the fourth or the fifth? Or have you thought about expanding into this?" And so we can not only be really disciplined on headcount and be more effective at the same time, but we can do this across all the different elements. And so that's kind of the reason why one of the key reasons why I get as confident as I am in terms of where we are from a headcount perspective. And obviously, its implications on margins.
Outstanding. Great conversation. Jeff, Harley, thanks so much for joining us.
Thank you, sir.