The Expansion of E-commerce and its Supporting App Ecosystem

The increase in e-commerce activity spurred by the recent pandemic is now widely recognized and thoroughly documented.

However, a crucial question arises regarding the app ecosystem that underpins this e-commerce surge. Is this ecosystem experiencing growth? Are industry consolidations or initial public offerings (IPOs) anticipated? Could we witness the emergence of comprehensive superapps?

A Journey of Exploration

This discussion isn't focused on definitive answers, but rather on sharing the process of investigating these questions and satisfying a personal curiosity.

Currently, indications suggest all three of these trends are developing:

• Superapp Development: It is probable that superapps will become more prevalent. Companies such as Bold Commerce are positioned to be among the first to achieve this status.
• Industry Consolidation: We can expect consolidations, particularly those centered around substantial Software-as-a-Service (SaaS) providers and acquisitions driven by private equity investments.
• Independent Growth: Certain entities, like Tiny, are employing a strategy of acquiring early-stage companies while allowing them to maintain operational independence.

Parallels with the Marketing Automation Stack

The growth trajectory of the e-commerce software stack bears a striking resemblance to that of the marketing automation stack. While some overlap exists, comparing and contrasting the development of these ecosystems and the forces behind consolidation is particularly insightful.

From 2015 to 2021, the martech stack expanded from 1,800 to 8,000 entities, effectively doubling approximately every three years.

The explosive growth of the martech stack is well-known, and meticulously documented by Scott Brinker through his renowned supergraphics. Notably, the anticipated consolidation is indeed occurring, yet the continuous emergence of new companies offsets this consolidation – and even surpasses it.

Martech Landscape Growth

According to Brinker’s analysis, the martech landscape experienced a 5,233% increase between 2011 and 2020. Within martech, the fastest-growing category in 2020 was data and governance, expanding by 25%. The martech application ecosystem more than tripled from 2015 to 2018, fueled by the expansion of both SaaS and e-commerce sectors.

I closely monitor this space, and I am also interested in applying the lessons learned from martech’s evolution to the e-commerce stack. The e-commerce stack itself grew by a factor of 3.5 between 2017 and 2020. However, a significant portion of this growth is still to come, as is the subsequent consolidation.

Shopify and the App Store

Shopify introduced its app marketplace in 2009, but it wasn't until 2013-2014 that the app store began to achieve substantial traction. Using 2014 as a baseline, the entire martech landscape comprised 947 applications. Shopify’s app store, at that time, already featured over 750 apps. The Shopify app store lagged behind the martech stack by approximately three years in terms of application numbers. While some overlap is likely, this distinction remains relevant.

A Cambrian Explosion in E-commerce Software

A significant proliferation of software is occurring within the e-commerce space. This excludes the Amazon app store, which already hosts thousands of applications. Furthermore, numerous region-specific app stores exist. Considering all these sources, the overall e-commerce stack is larger than the marketplace stack.

Unique Nuances of E-commerce

While similarities exist, certain unique characteristics distinguish the e-commerce landscape.

While major companies dominate, the market isn't limited to two

Consider Hubspot and Salesforce within the marketing technology sector, or Amazon and Shopify in e-commerce. The broader system supporting the e-commerce infrastructure, however, is considerably more extensive and complex.

In regions such as Europe, platforms like PrestaShop demonstrate greater prevalence than Shopify. The open-source character of platforms like PrestaShop and WooCommerce fosters substantial ecosystems of open-source plugins and themes, poised for continued growth alongside small businesses.

A recent IDC study, supported by HubSpot, indicated that HubSpot’s partner network generates $5 in revenue for every $1 earned by HubSpot itself. The direct correlation of this revenue to HubSpot is debatable.

Conversely, Shopify’s partner ecosystem accounts for only 10% of Shopify’s total revenue, despite Shopify asserting that partners collectively generate over $6 billion. This suggests that a significant portion of partner revenue stems from activities operating independently of Shopify.

This highlights the strength of independent businesses within the e-commerce stack, a trend likely to continue with the rise of approaches like headless commerce.

The Growing Importance of Independent Businesses

The increasing adoption of headless commerce is expected to further empower these independent entities. This architectural approach allows businesses to decouple the front-end presentation layer from the back-end e-commerce engine.

Consequently, businesses gain greater flexibility and control over their customer experience, reducing reliance on the core platform provider. This shift supports a more diversified and resilient e-commerce landscape.

Merchant Technology Stacks Exhibit Greater Diversity Within Revenue Segments

While marketing technology solutions tend to be quite similar for businesses within a particular revenue bracket, the technology stacks utilized by e-commerce merchants are notably diverse, even when focusing on a specific revenue segment.

This heterogeneity stems from factors like geographic location, product category, and varying compliance requirements.

Regional Variations in E-commerce Dominance

The e-commerce landscape differs significantly across key markets. In the United States, sales are relatively split between online marketplaces and direct-to-consumer (D2C) brands.

Conversely, China’s e-commerce sector is largely dominated by marketplaces.

India currently favors marketplaces, although a growing and dynamic D2C ecosystem is emerging.

The Rise of Region-Specific Applications

Each of these distinct markets fosters the development of applications tailored to regional needs, which may not have global appeal.

This contrasts with the broader martech space, where regional or category-specific solutions are less prevalent.

Consequently, even merchants targeting similar revenue levels can have vastly different technology stacks due to these localized influences.

• Key takeaway: E-commerce tech stacks are more fragmented than general martech stacks.
• Driving factors: Region, category, and compliance needs.

E-commerce experiences less consolidation fueled by dilutive funding compared to marketing technology

The structure of e-commerce software has historically been characterized by numerous specialized, smaller solutions, predating the current trend of micro-SaaS. Furthermore, the prevalence of open-source platforms like OSCommerce, alongside the continued success of systems such as WooCommerce and PrestaShop, has fostered a robust ecosystem of plugins and agencies that have largely avoided venture capital funding for expansion.

Conversely, the martech landscape exhibits a greater tendency towards consolidation, driven in part by the pursuit of rapid growth and reliance on dilutive capital. This is partially attributable to the relatively uniform nature of the total addressable market, leading to intense competition for marketing spend.

However, additional factors are prompting consolidation among e-commerce stack providers. As direct-to-consumer (D2C) brands prioritize sustainable growth over the high-burn, VC-backed models of the past, a demand arises for updated tools that support long-term independence and profitability.

Evidence of this shift is already visible in the realm of subscription payments. Traditional SaaS-based subscription platforms are becoming less relevant than solutions specifically designed for e-commerce environments. Similar dynamics are unfolding in the field of analytics as well.

The rise of omnichannel e-commerce is undeniable. With content creators leveraging livestreaming and platforms like TikTok for sales, the need for real-time analytics has become paramount. The end-user of these analytics is often the same individual creating content across multiple channels, such as a YouTube tutorial. They require direct answers, not complex visualizations.

This necessary evolution of the e-commerce stack will undoubtedly spur some consolidation. However, significant opportunities remain for new companies to emerge and cater to the needs of lifestyle-focused D2C businesses.

Moreover, regionally popular solutions will likely give rise to localized software stacks capable of thriving independently.

Therefore, consolidation within e-commerce is more likely to be dictated by evolving market demands rather than considerations like market size or investor returns. Currently, it represents an opportune moment to invest in, build, or acquire e-commerce SaaS companies, focusing on both U.S.-centric strategies and regional opportunities.