How Shopify Became Profitable By Helping Anyone Open An Online Boutique

When Tobias Lütke opened an online snowboarding store he realized how painfully cumbersome ecommerce software was. So he decided to create Shopify, a platform that made it easy for anyone to open up an online store.

In this program you’ll hear how Shopify went from an idea to a profitable company that helps 6,000 merchants — including Pixar, Foo Fighters, Tesla Motors and Amnesty International — sell online.

Tobias Lütke

Tobias Lütke


Tobias Lütke is CEO and co-founder of Shopify, the marquee shopping cart system of the e-commerce industry. As a programmer Tobi has served on the core team of the Ruby on Rails framework and has created many popular open source libraries such as the Typo weblog engine, Liquid and Active Merchant.



Full Interview Transcript

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Here’s your program.

Andrew Warner: Hey everyone, I’m Andrew Warner. I’m the founder of, home of the ambitious upstart. This is like take three that I had to go through. You guys know what we do here, even if I don’t know exactly how we do the movements and how I introduce it. Every day I bring on a different internet entrepreneur to talk about how he or she built his or her business and teach us what they learned along the way so that you can go out there, build your company, and come back here and let me interview you. Today I have a guy that I’ve been trying to get on Mixergy for a long, long, long, long time. You’d think I’d have gotten him on here sooner because his company, Shopify, is a sponsor of mine. I’m really excited to finally have you on here. I’m really impressed by how far you guys have grown and how big you’ve built your company, Tobias. I’ll introduce him formally. His name is Tobias Lütke. He is the cofounder of Shopify, the company that makes it incredibly easy for anyone to create a store online. Six thousand stores are currently running on the Shopify platform. Tobias, I know you go by Tobi, so I’ll use that. Tobi, welcome to Mixergy.

Tobias Lütke: Thank you so much for having me.

Andrew: The first question is this, let’s get to the revenue. Last year, what size revenue did you guys do?

Tobi: Last year, actually, as always, it’s a bit more complicated than you think to say how much the revenue was. We just changed when our year ends and how to calculate it. If you go by calendar year, we made our first million dollar last year, actually multimillion-dollar year. We are looking forward to increasing the size of that margin this year. It’s going up.

Andrew: So, a minimum of two million dollars last year. That’s what you’re going to say. Over two million.

Tobi: Yes.

Andrew: And you said that was your first multimillion-dollar year. Did you in 2008 hit a million dollars in revenue?

Tobi: Yes. Yes.

Andrew: Wow. Okay. Just to give people perspective, when did you guys launch?

Tobi: We formally introduced out product in June 2006. That’s about 100 years in Internet age. For various reasons revenue took a while to kick in. This is one of those things. It always goes a lot slower than you think in the beginning and then all of a sudden something amazing happens and it goes a lot faster than you ever imagined. Luckily, we’re in the second part of that now.

Andrew: You know, I’m wanting to take this interview in chronological order and find out what you did before and how you came up with the idea and so on, but you said something magical happens or something amazing happens and suddenly growth shoots up. I have to ask you about that, even if it’s out of order. What happened?

Tobi: In our case, I think in a way you can blame, one of the best things that an entrepreneur can bring to the table when they start having a business is a complete disregard of the poor odds they have of being a success. If you are too experienced, you’re going to have problems every once in a while. Most of the time being not so experienced is a good thing, once in a while it’s a bad thing.

In our case when we founded this one of the basic problems we had was we picked a very poor business model when we started. Even though we had a great product that many people wanted to use, we essentially made it so the people who would use it a lot would pay way too much, and the people who wouldn’t really need it would get it for free. Once we realized that and once we readjusted pricing, everything happened at the same time. Essentially, we sometimes refer to the time we changed to our second business model as the true launch of the product, which was in 2007.

Andrew: So changing the way that you charge customers was the magic that changed the whole business. The whole fate of the business.

Tobi: Yes. This actually shouldn’t come as such a big surprise. One of the things with our product is, we have a transaction fee that’s a very small percentage that goes to us. In our original model, we had a flat rate system where everyone would pay the same percentage. If the customer who we would really want to use our product would look at our system, they’d say, ‘I’m going to build a multimillion-dollar widget operation within the year.’ Then they do the math and the whole thing would become extremely expensive for them. Whereas someone who just wants to supplement some side income can get the product very cheaply. We essentially were turning away people that we really, really wanted as customers. That needed changing.

Andrew: I see. The previous model was that you were charging a percentage of sales. If someone had zero sales, they would get charged zero dollars. The current model is to do what? To charge a monthly fee plus a percentage?

Tobi: Yes. Now we charge basic rental subscription and charge a much lower transaction fee. In fact, the transaction fee goes away entirely with the highest plans.

Andrew: I see. Okay. I can see how then saying, ‘We’re not going to charge you anything until you make money,’ would bring people in that aren’t making any money because they’re the ones who are going to be excited by free. Those who are bringing in revenue are going to say, ‘Well, who needs to give them a big cut of our revenue. I’d much rather pay a flat fee.’

Tobi: Yes. One of the other things about it is people tend to, if they like something they like spending money on it. In a way just the fact that you pay money for something focuses the mind in such a way that you really want to make a success out of it now. So saying, ‘You can use this for free until you’re ready,’ for many people that actually does a disservice because it’s less incentive to actually give it a go. They’re status quo.

Andrew: I love my audience because they know the kinds of questions that I want to ask. They’re already asking it themselves. I have this guy in the audience, Sohail, whom I guess is also from Canada, probably from Ottawa if I’m understanding. Or you’re probably from Ottawa. People love Canada in the audience. I guess they’re excited to see that Canada in general is being represented. Sohail is from Toronto. Anyway, back to business, he is saying, ‘How did the original customers find out about Shopify?’

Tobi: That’s a good one. Good stuff for the chronological order. Let me give you a bit of background and get back to that. I moved to Canada in 2002. I was still working for a company in Germany. I’m a programmer. I love programming. It’s what I do for fun. I was working remotely. This was okay; it was nice. It was cool that I was still being paid from a German company even after I moved to Canada. The company kind of went away though, and I was looking for something new.

Andrew: The company went away and you were looking for something new?

Tobi: Yes.

Andrew: What does it mean that it went away?

Tobi: The worst possible way.

Andrew: Out of business.

Tobi: Essentially. The company folded and there was no more work for me to be doing. This was just as well. I was burnt out. I taught myself programming when I was twelve years old. I’ve been doing it for a very long time. I left school when I was 17 to join a company to start programming for a time as a trainee in Germany. It was a neat system that you can take programming as a trade, which means you start as a trainee, then become a journeyman, then a programmer, and so on. This was a great track. School never worked for me really well and this was a much better idea. I was working for a very long time at that point. I didn’t like the tools we had to use at that start-up. I was looking for something else to do.

My idea was that maybe I could have more fun programming again if I would find a new job that would allow me to use my technical skills to get a leg up in creating this new business; however, give me enough time so that I can focusing on snowboarding and programming as a hobby. A friend of mine shortly thereafter started a snowboarding store, Snowdevil, where he sold nice handmade snowboards and amazing stuff. Beautiful items. You pick up the phone, you call a supplier, and then the supplier goes to his garage and gets a snowboard made to order. It’s all tiny little cottage industries. So, anyways, we had this online store . . .

Andrew: You had the online store, is the website, you guys can still see it up online now. When you would get an order, you would send it out to somebody who in his garage would build the snowboard?

Tobi: Yes. Usually you order the product when you think about the entire world of snowboards, you would immediately take one, take it to the mountain, ride it for a day, then post some pictures on Snowdevil about how that went. We really wanted to run with the community. Establish a bit of authority on cool unique snowboards. That’s what we wanted to do. It gave us a lot of time to do snowboarding and do programming.

Andrew: You’re that passionate about snowboarding that you’re actively thinking of ways to get to do more snowboarding? That that’s a major way for you to decide what your career is going to be?

Tobi: Sure.

Andrew: Really?

Tobi: Who doesn’t? If you love doing something, how can you think about anything else but doing more of it? That’s the whole point, isn’t it?

Andrew: Your two things are you love snowboarding and you love coding. If you can do both of those things you’re in hog heaven, right?

Tobi: Yeah.

Andrew: I’m going to come back to those because I know you’re now the CEO after being the CTO. I want to find out what it’s like for somebody who didn’t dream of being a CEO from the time he was a child to now be the CEO of a fast growing company. Okay, but you set it up, you were building a snowboarding company, and you had an issue with the software that you saw online for ecommerce, right?

Tobi: Yes, exactly. There was a lot of, it was one of those things, if you are a technologist, especially if you are a programmer, you can look at things, you can see how things are made, and you just want to change things. You are extremely intolerant of bad software. I really tried to not put a lot of work into it because, obviously, I wanted to work on more fun stuff instead of building an ecommerce system. At least, so I thought back then. I tried to use Yahoo stores, osCommerce, and stuff like that, but it just wasn’t working. Our clients were different.

We had this great design made by a company in Germany that we wanted to put online but software packages were just fighting us every inch of the way. We just couldn’t make it work. Around the same time, something really awesome happened. A friend told me that I should check out this Ruby on Rails thing. Ruby on Rails came out in August 2004. So right about the time we were running the snowboard store. I downloaded this and realized it was better than anything else I’d see, anything I could write, and I would actually have fun using it for some project. What I did because we were so heavily invested in blogs, in 2004, blogging was very new and I didn’t like the software packages there either, I wrote this weblog system called Typo in Ruby on Rails. That was my fun project on the side.

Andrew: Typo was a blogging platform.

Tobi: Exactly.

Andrew: Okay.

Tobi: A Ruby on Rails open-source blogging system. One of the first open-source Ruby on Rails applications. This found many people really liked that. It got very, very popular. I talked with a hosting company in 2005. They told me I had 10,000 installations. The great thing about that is that every single installation of those installations had a link back to my blog. It was the biggest SEO scheme of all times, even though I didn’t know it. It was absolutely fantastic. My weblog got a lot of readers. Those readers were fantastic for launching Shopify later on because I already had an audience. Therefore, this was my extremely longwinded answer to that question you asked me earlier. One of the biggest ways of helping our launch our product in 2006 was having an audience that we built from the technology we used through Typo.

Andrew: Wow. I have to say that for people who have listened now to my interviews for long enough to know the types of questions they can expect here, like, ‘How do you get the first audience? How do you get your first customers?’ I think this is also something that they are getting used to hearing a lot. ‘I got my first customers because I had an audience first. Then I was able to tell that audience about my first product. They started using it and giving me feedback,’ and so on and do forth. Did you when you launched Snowdevil in the back of your head say, ‘I’m going to launch a platform? I’m not really cut out to just sell snowboards that are being made in some guy’s garage. It’s not a big enough opportunity for me. This will just be my way of testing the waters to see what an ecommerce platform would be.’

Tobi: In the very beginning, no. The idea essentially came up through Ruby on Rails being exposed to my friends business and just seeing what wonderful new kind of business, they were creating with Basecamp. After the use space came out, we just like the model so much that we thought that maybe this is the way an ecommerce system should be run too. It came up then. Around the end of the first season of sales, winter was over; people buy a lot less snowboards when it gets warm. We just said, ‘You know, actually, using Ruby on Rails all this time that was fun. Maybe we should be a software company after all.’ We sat down and said, ‘Okay, well, with everything we learned, these are the things we want to optimize or change about how an ecommerce store should be run. Maybe there’s something that we can put together that would be compelling to an audience.’

Andrew: Okay. Speaking of the founders of Basecamp, 37Signals preached that you should when you have an idea, create a landing page on your website and start collecting email addresses of people who will be your Beta testers. I went back to to see what Shopify looked like over time and I saw that you had that landing page. In fact, the name wasn’t Shopify. It was Pixie, what am I thinking? What was the name of the company that owns Shopify?

Tobi: It’s jadedPixel.

Andrew: jadedPixel, right. It’s where I saw it.

Tobi: That’s actually a product of GoDaddy domain generator I think, which is now our corporate name. In more innocent times, we thought we might have more than one product. That’s why we didn’t call ourselves Shopify. That train left the station a long time ago. We now realize that there are enough challenges to just have one product at a time.

Andrew: I see. When you stopped being burned out and got excited about this new programming, Ruby on Rails. You said, ‘I’m going to build a whole bunch of companies, just like Jason Fried’s got Basecamp, Sortfolio, and all that. I’m going to do that same thing.’ Then you realized, ‘Wait. Hold on. Shopping is a massive issue. I’ve got to spend a lot of time on that.’

Tobi: Yes. It’s a big project to tackle for a small company. We’ve had to come up with some really clever things to really make it to launch and make it work. The guys who run those systems are much smarter than I am, so it’s no surprise that they can run five products at the same time. Shopify is going to be our only product though, and it will remain so.

Andrew: On that landing page that I saw on, there were three names. Yours was one of the three. What happened to the other two people?

Tobi: The second one is Scott Lake. He was my cofounder. We really cofounded for the snowboard business. He was originally CEO of the company. We had about 6-7 people. I think it got too much for him. He wanted to start something fresh. You incorporate for one thing and he worked at it very hard. He was a very good person to run a store with. He was a massive help to get involved. Group work is always like herding cats. You always need someone to sit down and say what are the things that are really important. That’s the kind of thing Scott was good at. Once those challenges were behind us then we really talked about, he actually did another company called SWIX, a social media tool that is very, very cool. He goes and does smaller companies now.

Andrew: I see. This is Scott Lake that we’re talking about. The cofounder. The one who was CEO. If I understand you right, and tell me if I am wrong, he wanted to build not just one product and focus on it, he wanted to diversify and build many different products. You needed to focus. You guys went your separate ways.

Tobi: Yes.

Andrew: And ownership of the company was right down the middle. Does he still own his share of the business or has it shrunk?

Tobi: Well, he still has shares. He is still on the board of directors. We have a great relationship.

Andrew: But his shares didn’t vest over time the way that yours did because he is not at the business.

Tobi: Yes. Right.

Andrew: Okay. Someone, Mike@Shopify, who is in the audience, he is saying the site is SWIX, S-W-I-X. One more person in the audience, JamesF is saying, ‘Shopify os a brilliant brand name. People are wondering how you came up with that name and how much you had to pay to get that domain.’

Tobi: The domain was free. No one believes me that it’s one of those things. We wanted to simplify ecommerce, started playing around with names, came up with Shopify, went to GoDaddy, and registered the domain. That was that. It’s not like we actually fought for the name. I guess the ‘ify’ ending is extremely popular now, so I think people have applied that to every word possible, but it wasn’t in 2004 luckily. We lucked out and got the domain.

Andrew: You know what? I actually own I just bought that domain for $10. It made sense, so I got it. I also own Trip, the letter F, the letter I, and also Trip, I don’t know whatever variation. For $10 it’s worth it. What else do I have here in my notes? Roy Ruben, who I interviewed here on Mixergy, the father of Magento, also had issues with ecommerce platforms. He didn’t like osCommerce, which he was helping his customers implement. He went a different direction. He said, ‘I’m going to help create an open source ecommerce platform and I’m going to make money in different ways from it.’ You decided yours wasn’t going to be open source. It was going to be a web based platform that people could go, create an account on, and you’ll handle everything. Why did you go in that direction considering that you had such an open source background?

Tobi: You know, that’s a difficult question. I think that we techies sometimes overestimate how much extra benefit there is for a customer in the fact that the software is open source. Just creating the software is really just half of the challenge. There are many things around it. Hosting, scaling, the high up-times. You essentially don’t get this when you use open source on one server. You get a server, you put your software on it, and now you have a single server that is running your software. I don’t need to tell you that that is generally a bad idea. Especially if you are trying to earn your livelihood from that software. Now you are actually getting in high challenges. I understand the Magento guy set this up for his customers, but there are many benefits that we have by hosting everything that Shopify has to offer.

First of all, I actually used to write Windows software that I had to update every year. If there is any issue the fix can be on the serve probably half an hour later. That’s for every single customer out there. There is a lot of strength in numbers. Ecommerce really profits from very, very quick response rates. Therefore, we put a lot of work into answering any requests coming into us in a few milliseconds and try to do that around the world. We can go to a customer for example and say, look, he has so many terabytes of traffic. He would like good rates. So, if you can make it so that every Shopify store around the world is going to be very fast. No matter where people are. Then we can do that once and everyone gets that. There are many things like that.

Overall, I am just a fan of, I don’t want to just provide technology to people I want to own an entire part of a business. I think you can do a very, very good job of anything that is technology hosting related and that’s not necessarily what our customers would concentrate on. That being said, there’s very little intersection between the market Magento targets and the one we target. We really, our software essentially is a modern take that idea that the online world can have boutique stores. If you could go downtown just for the fun of shopping, lots of people like shopping, they tend to go into the nice area of downtown region where the little boutique stores are. There are no squeaky floors. Good music. Knowledge of the sales products, what would go well together. That’s very different from the mall approach, which is a mod store, you get there, you can find every product. We want to bring this art of the shopping world back to the internet where people go top have fun shopping and trust the store that they choose good products. That’s where Shopify came from. Magento is more focused on many, many million-dollar operations of very large brand names and these kind of things. They are doing a brilliant job at servicing that and I am glad they do because there was nothing before Magento that was good for that market.

Andrew: That answers Moses question in the audience. He was asking about Magento, too. Okay, let’s talk about the angel investor who came in. Actually, let’s talk about the first funding, before you even got the angel investor. It was you guys. It was friends and family. How much money did you guys get from friends and family and your own pockets?

Tobi: We raised $200,000 from friends and family, so to speak.

Andrew: What was it like to go to your family and ask for money for a business?

Tobi: Let’s not do that.

Andrew: Too painful to talk about?

Tobi: Yes. We won’t go there.

Andrew: How do you mean?

Tobi: I just don’t know. The funny thing is, I have to admit when we started this there was no doubt, and it just didn’t cross my mind that this could fail. I really, really had a complete disregard for the potential of this going to fail. I’m really thankful for that in retrospect. I said like, ‘Yeah, why don’t you give me money? That’d be great. Get more back.’ Yes. Seems like it’s going to be a good investment for them. I am glad it worked out the way it did. I would never do friends and family investment like this again.

Andrew: Why not?

Tobi: What’s that?

Andrew: Why not? Because of the risk that you’d be giving your friends and family?

Tobi: Yes. Because just think about how much the entire family fortune hinges on one person’s success. You tend to invest pride in their word and there’s no market for it. Okay, problems happened along the way in this case. Sometimes you build a great product and someone else builds a greater one, or not a greater one but they still build it. It’s too much of a gamble for an entire family to take so much risk.

Andrew: So, they put in a substantial portion of their net worth into you?

Tobi: Yes.

Andrew: You ever wake up in the middle of the night worried about that?

Tobi: Now I do. Now that I don’t actually have to any more. That’s what I’m saying. I really did not realize that money could be gone. It didn’t cross my mind.

Andrew: Wow. All right. It does feel good now, right? I mean, you’re over the, the risk isn’t there as much, if it’s there at all.

Tobi: Yeah, they would definitely recover the costs. Absolutely. And I hope that, at this point actually, I’m going to contradict myself, even though I said I would never do it again, I am very grateful for having that because providing a substantial, making this the best investment of those people’s lives is now my goal. It’s really hard for me personally to think about what a company like this might mean to me financially because really all my hobbies are cheap. It’s great to think of some proxy people you can protect, for who this might be a very big deal. Yes.

Andrew: Has it ever pushed you to work harder or slowed you down out of fear to know that it’s your friends and family whose money is behind it?

Tobi: No.

Andrew: No.

Tobi: It definitely, well, okay, it definitely pushed me to work harder, absolutely.

Andrew: Okay.

Tobi: It didn’t, the fear just really didn’t kick in. The moment I realized how crazy that is, it was over.

Andrew: I see, it’s kind of like the cartoon character that is running off a cliff and doesn’t look down, and as long as he doesn’t look down until he gets to the next cliff he’s fine. You happened not to look down.

Tobi: I didn’t look down until I was on the other side of the cliff.

Andrew: John Phillips is an angel investor who reached out to you and asked if he could invest in the business. You credit him with teaching you the process. With helping you understand the business side of business. How much of an investment did he make?

Tobi: We took slightly more than a million dollars total. We took slightly under a million dollars in investment. He definitely invested money in the beginning, which was incredibly useful, especially to get through the first year when we built the core of our business model. Having to just pay for basic things like rent and payroll. John has spent a significant amount of time on the phone with me and in person. Part of the reason that he invested in us is his parents are from Ottawa wanted him to come to town more often. We really lucked out getting him.

Andrew: Who is he? What’s his background? Who is this guy?

Tobi: The busiest acquisition in Canadian history, as far as I know, was the company TELUS buying the company Clearnet. John was one of the executives/founders of Clearnet and got his worth through that.

Andrew: I see.

Tobi: He used to be a very well regarded and well-known lawyer before he went into the private sector to work for Clearnet. I believe he has 12-15 investments. Canadian companies like us.

Andrew: It took you, from the time you decided to build it to the time you actually launched the site, as I understand it, it took you a year and a half. Why so long?

Tobi: It’s, I think the concept of making a viable product is much better understood now. I think in 2004 spending essentially a year and a bit to make one work was a fairly short time at least compared to what I was used to before. Now it seems like a massive time investment. We just wanted to get it right. We realized it at the moment we’d have major problems. Our tests for can you release this software was can we take the Snowdevil store and build it on Shopify in half an hour. Less than half an hour was a funny thing, because obviously, we know the software very well, that’s why we move faster through the software than most people, but it was still a very useful benchmark because we could say that now we have all the pieces in play. There were actually some last minute additions that turned out to be the most important features we’ve ever had. We really did need that time to come up with a good product.

Andrew: Usually when companies spend a year and a half building and then they launch, what they launch is a little, if not a lot, out of touch with the audience. How much of what you launched was out of touch with what the audience really needed?

Tobi: Luckily, I think very, very little.

Andrew: Very little, you said, right?

Tobi: Yes, very little. I think the product as it was, was very useful for building a business. We wanted to enable that. Part of the reason is I don’t think we were really out of, the fact that we essentially did software for ourselves because it was always the goal, again I’m repeating myself, to build an ideal software for the Snowdevil project. We were our own customers. We extrapolated that there were more people like us. More people who would appreciate the same thing.

Andrew: I understand that, but you guys can’t be your own customers. Your customers, I’ve seen the websites, are people who don’t know anything about coding, couldn’t tell you what url stood for, couldn’t tell you why there’s http:// before a url. They don’t know any of this stuff. What’s great about Shopify is that it’s not built for people like you who do know code, you contributed to Rails. It’s for the person who just wants to sell muffins online and wants to not care about the technology. How did you understand that customer base so well that even though you were isolated from that customer base for a year and a half and didn’t have much experience with them before, how did you hit exactly what they needed when you launched?

Tobi: I don’t know. Even the most technological people have iPhones. Yes, the iPhones are devices that you can give to anyone. People will appreciate it. I think opinions about what’s good are less diverse than what people can imagine. So, I think as long as you have someone on the team that has good taste I don’t think it’s that hard to build something . . .

Andrew: Who is the person with good taste on your team? Is it you? Is it Dimitri? Is it Mike?

Tobi: In most parts, it’s the third person.

Andrew: The third person. What’s that person’s name?

Tobi: That’s Daniel Weinand.

Andrew: Okay.

Tobi: He joined me. He’s a friend of mine who I knew. He was in Germany. He came over for a summer to hang out in Canada. He just started helping me a bit with the programming on Shopify. I was doing it all by myself at that point. At the time, we had a great designer by the name of Justin Palmer, who we contracted to work for us. That was before we raised money so we kind of ran out of money. Daniel kind of, he has a background in music, he does programming, at one point he just decided, ‘All right. I’m also going to be your designer,’ and picked up Shopify. He’s just someone who can do things incredibly quickly and fast. He is our VP of Design. Every feature that goes into Shopify he has veto rights.

Andrew: To this day Daniel has veto rights?

Tobi: Yes. He has complete veto rights over every feature going in. He is involved in every decision about features and stuff. What happens fairly frequently is we are working hard on a feature that we really want to get in but we cannot make it fit into the UI. The UI would be harder to use. Our opinion is that every time you add something to the UI of the software that someone doesn’t use than it makes the UI worse as a whole. We kind of try to strike a nice balance and make sure everything is intuitive. We had that from the beginning. Usually, I’m sad to say, people are very visual, very right brained. Opinionated people like Daniel wither don’t have that kind of power, that kind of comprehension, or not involved as easily as that. This was a massive luck event for us. He has made sure that the software stayed very easy to use.

Andrew: What about user experience? The idea that the site could look beautiful and we all have a sense of what looks good, but what is confusing to an end user who wasn’t there from the beginning of the development of the site and what makes sense to the end user and where he is expecting to see certain features is hard to predict. How did you make the user experience work so well?

Tobi: Well, I don’t really differentiate between design and user experience. I think that is really the same thing. The design is just pretty to look at, but it is a bad design if people can’t use it. This is all in a day’s territory. Figuring out where the checkboxes go. Figuring out how the writing should go.

Andrew: Does he bring people in to watch them build the site and rebuild the site based on what they need?

Tobi: To a point, we use, I think.

Andrew: Again, user testing keeps coming up over here. User testing dot org or dot com, I forget what they are, but it is where you give your site to a user online. They watch what the user does and you get to see their face on video. You see how they are interacting with your site and you get to see their face when they are confused. That’s what you used?

Tobi: Yes, we used that. We did thing internally. One thing that helps is my mother-in-law was 72. She actually runs a carpet sore on Shopify selling Persian carpets. If she is confused about something it’s time to change the screen. That helps as well. It’s just a thing, you know. People will tell you what they don’t like and why.

Andrew: The audience is antsy. They think I am ignoring them. I see your questions guys. I am going to get to asking about Tim Ferriss. I am going to get to asking about SEO. I am going to get to asking about how he got more customers. Don’t worry. I’m reading. I’m paying attention to you.

Was there ever anything that you built and had to take back out? Like what? Give me an example of something that in retrospect would make you say, ‘What were you even thinking?’

Tobi: We built an entire, very elaborate Facebook application when they launched their platform, until we figured out that Facebook was the worst possible place to sell product. The only people who can see your profile are your friends and they are not going to buy. That just doesn’t make any sense in retrospect.

Andrew: What else?

Tobi: Let’s see. Now it’s getting harder to think of things. We had many projects that we had to restart three times after we got the UI right. Let’s see, what was one of those? One bad effect, for example, of running a snowboard store is that we didn’t have any t-shirts or these kinds of things to sell. Once you get into apparel, you have kind of a problem in that you don’t just have different sizes you have different color and different trim colors, these kinds of things. You have much more complex decision making on what kind of product to choose. That was actually really hard to add. It sounds like nothing but the problem was when we introduce a new feature, we introduce it to many thousand stores at the same time, none of them can break, everything has to stay compatible, and everyone should be very easily able to use the new features. That took a long time.

Andrew: So what kind of problem, did you have a problem when you launched it and you were missing an element of that? Or you confused people?

Tobi: We got to staging and realized the entire project needed to be completely redone. That project was killed and we restarted like two times.

Andrew: Why? What was wrong with the first two?

Tobi: The first one was performance. The way it was integrated was simply putting too much stress on the database. We had to completely redo it. The second one’s biggest problem was compatibility through the templating system we already have. The way we created that feature it couldn’t have been in the software compatibly. The idea was to have a version 1 of a storefront and version 2. That was an approach. In the last moment though we said, ‘If we do this, we have to support this whole eternity. There has to be a better way.’ Eventually someone came back the next morning with a solution we were hoping for.

Andrew: Let’s take the question that keeps coming up here in the audience. People say, ‘All right. It makes a lot of sense. He had an audience on his blog and he was able to covert some of them into early shop owners, but that doesn’t explain the huge growth afterwards.’ Where else did you get your shopkeepers? I want to keep calling them your customers, but they’re really storeowners. They’re entrepreneurs on their own.

Tobi: You cannot isolate the boost we got initially through our position in the Ruby on Rails community. It was very surprising to us, too, but it turns out that if people want to start an online store they tend to go to the technology guys in the family. This is the same reason I advertise with you, because the people who watch this show are very smart, entrepreneur types, techies very often. They are the kind of people who family members ask what works. Having those people know about Shopify is huge. To this day, I believe 60% of all signups come from people who type Shopify into Google.

Even though we have a very big marketing budget these days. We are doing many interesting things with our marketing, but you cannot even compare to word of mouth. We have fortune in this area. Other than that, we are running a very elaborate affiliate system, which is very successful. We are running it especially for design companies. Design companies love to be there from day one. It’s easy to make great looking stores on our system. Now, what we figured out is that almost all design companies want to become more like service centers. A design company that created products and now they are selling monthly and making money not just a one-time payment. Therefore, we figured we could actually give people that kind of thing, where they can say they are working on contracts. They are going to make $2000, $3000, $4000 for a project. If that project were ecommerce though it would be monthly recurred income for us. We would share our profits with them for the lifetime of the customers. This allows creates a new revenue stream that will go into even higher sales. Great feedback loop.

Andrew: I see. Therefore, when you say you have an elaborate affiliate program, what you are saying is that you allow your affiliates, who are these designers, to earn money not just once when they refer people to Shopify but on an ongoing basis and that way they can establish a revenue stream that’s a little more passive that allows them to grow.

Tobi: Yes. So 20% of all the revenue is from people who design companies send to us, we give back to design companies, even though we do all support, we do all training, we answer all the questions about how drop shipping works, we do all the services, so on and so on. They don’t have to do anything. It’s a great gig for them. It’s great for us too because it’s all customers we would have never gotten.

Andrew: You said it’s 20% that goes back to them? 20%. That answers another question in the audience. One other person, Moses, asked, ‘What about pay per click?’ How much are you guys doing in pay per click?

Tobi: How much, not a lot different from what we spent. Google is very good at getting to a point where they charge you exactly how much they are going to give you back in money. You can spend as much money as you want and you will probably get it back in a twelve-month period but it is a very boring type of advertising. There are many more exciting things you can do than pay Google for AdWords.

We use targeting a lot. I don’t know if people are familiar with that. It’s a system where if someone comes to Shopify they get a cookie. Then they go to other websites, including like The New York Times or whatever, and they keep seeing Shopify ads. It’s great for us. That works very well. There are issues surrounding it because we see on Twitter so many times that people have mentioned it so many times now they are everywhere. It’s better than pay per click.

Andrew: I’ve seen that. There are times when I go over to a website and suddenly I see the banner ads everywhere for them. Moses is asking about the return for investment on pay per click.

Tobi: Pay per click?

Andrew: The return for investment on the pay per click ads that you buy on Google? It’s a small portion of your business, it sounds like.

Tobi: Yeah. It’s not that big of a deal. It’s nice, but it’s about 10% of our business that might come through that channel.

Andrew: There is one other thing that is more exciting, Tim Ferriss. You guys met at RailsConf, another place where you raise your profile in this Rails community. You’re right, if a family member who goes to a techie who happened to be at the RailsConf and says, ‘Where shall I set up my online store?’ they won’t say, ‘Yahoo stores.’ Mostly because Yahoo store is a little antiquated at this point, but largely also because they’ve seen you at the conference and they’ve gotten to see you and talk to you. Tim Ferriss saw you there. You guys were talking about wantepreneurs. People who want to be entrepreneurs but haven’t really gotten started and you collaborated up on a contest. Did you have to hire him? Did you have to pay him to help do all that promotion for the contest?

Tobi: He’s an advisor to the company.

Andrew: You got him as an advisor through that conversation at the conference?

Tobi: Yes. It was a perfect set up for me. I have been a huge admirer of Tim. He and I obviously have our differences. Like he would probably not be excited about sitting in front of the computer all night programming. In many ways, though we think very much alike in terms of pragmatism. I was a huge admirer of him. He actually did a poll at some point asking of all these ecommerce systems which one should we use. He was bombarded with use Shopify. That was three weeks or so before the Rails conference at which we met. I had the perfect opening to say, ‘Hey, Tim, I built Shopify. We should work together.’ He knew about us. He really liked what we are doing. He agreed to become an advisor. We are a company in Ottawa, Canada. That’s a bit off the beaten path.

One thing that is great about the Valley, and I travel there quite a bit, is there are very unique people who are good at thinking big. That is a big part of any company. Tim thinks bigger than most people. It is just being able to talk to him and have him come up with an idea or even come up with an idea yourself and then let Tim inflate it times ten is such a great thing for figuring out what to do next.

The contest is a perfect example. This was really, Tim, we were thinking, ‘What can we do together?’ We said, ‘How about a contest. Contests are great.’ We just finished a tiny little design contest where people could vote for their favorite Shopify store on Twitter. That was nice. That cost us a couple of iPods, etc., and was really cool. Contest was on my mind. Tim said, ‘Yeah. We should do a contest. How about give away $100,000?’ I almost fell off my chair. It’s a lot of money. Then you’re thinking, that might work. It’s strange to many people; we’re a start-up giving away $100,000 in prizes. That just doesn’t seem like a normal thing to do. That is exactly the reason why it is good. Marketing is all about doing things that people don’t quite expect you to do. I think that’s why it was so successful. We are going to announce how the contest played out very soon. Unfortunately, it is not out today. I hoped things would come out by today. We’ll have to have a vigil on that. We got enough orders from the contestants in this contest that if you let out the beginning point and the endpoint of all the orders combined it goes 40,000 times around the planet. It is unbelievable. It is millions and millions of dollars of money that changed hands in businesses that might never have been created without this.

Andrew: The contest was, go out there, create a store, the store that ends up making the most in revenue, not profits, because it’s really tough to figure out, most in revenue, wins the prize.

Tobi: Yeah. Six months.

Andrew: Sorry.

Tobi: Six months timeframe. We look at the best two months of every store. That’s how we award the prizes.

Andrew: Okay. I love how you guys were thinking about this too. I forget where I saw the story on it, but basically you said, ‘If we end up getting something like,’ I think it was 800 stores or so, ‘we know that we can expect these stores to stay open for at least 6 months which means that we’ll pretty much make our money back, plus raise our profile,’ and so on. You burst through those numbers. That’s one of the great things about having a product that you sell. You can back into what you need to do with each marketing campaign. The other thing that I noticed is The New York Times ran a story on this and basically, they said, ‘A start-up is running a contest for start-ups. This is so different.’ Then they wrote a whole long piece on it. It was one of the longest pieces I saw in preparation for this interview.

Tobi: Awesome.

Andrew: Tim Ferriss. I saw you blogged about it. How else did you get the word out about it?

Tobi: That was basically just about it. Tim has a tremendous audience going on.

Andrew: Unbelievable. One blog post from Tim Ferriss is able to get you that many storeowners. Enough that $100,000 can be paid from the response?

Tobi: Yes. Think about it. His audience is actually, other people read his book. There is a lot of overlap with the tech industry. The tech industry knows what an asset his site is. It’s a pretty high number. In his case, it’s so unlike a tech blog. He has a lot of people going to his website and reading it and refreshing it every day to see if there is anything new. There are a lot of people looking there. Then of course, The New York Times. That is fantastic. There are a lot of mentions of this contest through universities in the entrepreneurship programs that teams launch for those things.

Andrew: Teams launch in universities?

Tobi: Yeah. University teams got together to build stores. If you just have, if it is out of the ordinary enough people will tell other people about it. You cannot replace that with any kind of PR agency or anything like it.

Andrew: And the way that you paid Tim back for this is by giving him shares in the business as an advisor?

Tobi: Yes.

Andrew: Tim Ferriss’ creativity in helping you blow up this idea from a small idea to a big one and a single blog post and his name at this point, is worth shares in Shopify?

Tobi: That guy is good.

Andrew: Talk about the value of a personal brand. Good Lord. How many, can somebody in the audience tell me how many subscribers Tim Ferriss has to his blog? I’d love to find that out. What else do I have here to ask you about? I put a pin in this idea. A first time CEO running a big company like this. What’s been the biggest challenge?

Tobi: Oh boy. There’ve been a lot of challenges. This is a real stretch for me. This is not really, I don’t particularly, I constantly say that Cody, who is our CTO, he has the best job in the company. He has the job I want. Because I am one of the founders, I just care a lot about the thing. My job is not too terribly unlike what I was when I was the CTO. I am mainly the product [interference] I go to lots of meetings. I like getting into the technology. I stay with some programming just because I love it. I try to not too much become a CEO by changing myself. I just try to approach the problem by applying it to the program space of running a company. What I do is extremely data driven. We do a lot of experiments and see what works. Does A/B testing applied to running a company happens a lot. I try to look at the problem and try to make as much of a programming problem out of it as I can.

Andrew: Give me an example of how you take a business issue and you make a programming problem out of it.

Tobi: One thing is, I break out in a cold sweat when you tell me I have to do a performance review of someone. That’s the worst possible thing to ever do because it just sounds horrible. The idea was, we could solve this by technology. You know, the company as a whole knows better who should be rewarded for great work. The system that I talk more in depth about this in a recent article, but essentially if something does something great for the company that’s shared with everybody through this system called Unicorn.

Andre: Yeah. Mike@Shopify in the audience is saying, ‘Ask him about Unicorn.’ A few other people have said it. What is Unicorn?

Tobi: Unicorn is a system that you can log into. Every employee has an account. Every employee twice a month receives money into their account. This depends on how well the company is doing. This depends on various factors, did we hit our goals, etc.

Andrew: Let’s see. How much each person gets in this account depends on how well the company has done and a few other factors.

Tobi: Exactly. Everyone gets the same amount.

Andrew: Can they take this money out and go to the bank with it?

Tobi: No. They have to take this money and they can invest it into their coworkers. Those keep it and take it to the bank. So the coworkers say, ‘Hey, I finished this on this project.’ Or just you have a control system that solves a problem on time, usually he solves a problem or so, most people go back into Unicorn and send a bit of money his way just as a thank you. This was instead of anything coming top down and just getting together in a fire in the forest type thing, instead everyone just kind of gets what they deserve. It’s a great system because it means I don’t have to do the forms reviews.

Andrew: Tobi, you have another 5-10 minutes with me. I have to dig into this.

Tobi: Yes. Yes.

Andrew: Do you mind? I love this freaking idea! If Mike is in your company, Mike gets this money, did you say he can or he cannot take this out?

Tobi: He cannot.

Andrew: He cannot. The only way he can get money out is if someone else like you or Dimitri gives him money through Unicorn and then he can take that out.

Tobi: Exactly. Mike meets our support team and does a fantastic job. He gets money and he works also in stats. He is invested in the people who invest in his team. What happens regularly and this is so amazing about Twitter and these kinds of thing is if someone from this support team puts up a new mini application for just one customer, solves one problem and goes above and beyond, that customer might go on Twitter and say, ‘Hey that was so amazing what Shopify did for me,’ then everyone else says, ‘That was Caroline’ and sends her some Unicorn money. How can executives getting together remember that she really, really made someone’s week. Businesses, that’s what got me. It’s great. It’s awesome. It happens all the time. I don’t know a company that is that fair. That really encourages this kind of thing. It really just does, it really automatically happens. This is in a way a programming solution to a business problem.

Andrew: What size money does the company put into peoples accounts? Are we talking about dozens of dollars? Hundreds of dollars? Thousands of dollars?

Tobi: Thousands of dollars going in twice a month.

Andrew: But not into an individual person’s account is it?

Tobi: In total, in the system.

Andrew: In total. An individual would get hundreds?

Tobi: Yeah, a couple hundreds, ballpark. It really depends. If we have a low month than everyone is going to be unhappy about that. This is also a nice way of getting everyone invested in how the company is doing. It’s a wonderful thing.

Andrew: I see. Do different people get different amounts of money or is it all the same?

Tobi: It’s always the same.

Andrew: Everybody gets the same amount. Are there limits or minimums on how much they can give?

Tobi: No.

Andrew: No. So, I could say, ‘I love this interview so much, Tobi, I’ve got to give you 100% of my money.’

Tobi: Yes. You cold do that. Well, I actually can’t get money through the system, but, anyways . . . Most people can, yes.

Andrew: That actually makes a lot of sense. Twenty-five thousand people are how many Tim Ferriss has subscribed to his blog. I’ve globed off his success too. Many people have seen that I have Tim Ferriss at the top of my website. There’s a reason for it. He is probably the most searched for person on my site. He brought me a lot of traffic. That picture impresses potential guest enough that they are willing to do an interview here.

Dimitri. I know Dimitri as like the cheerleader. What is his official role at the company? How do you get a guy like Dimitri?

Tobi: He actually joined us while he was still working on his business degree. Our offices are actually very close to seven great universities. He was introduced to us by one of his professors. Every time I meet a professor, I tend to ask, ‘Who is amazing that’s going to have a great career?’ Then they introduce you to them and then you hire them really fast. Dimitri started with us doing marketing overtaking this from me back then. He just completely took charge. He reads books about this kind of stuff like a fiend. He just has a great overview of what is going on. He finds some of the most amazing marketing opportunities. This is actually an amazing story. We are a bit off the beaten track in Ottawa. We have fantastic universities in town. We have the community to essentially train most of the people from scratch. We very recently, I mean two months ago, I think we had the first person into the company that has a computer science degree. They’ve been friends here a very long time.

Andrew: You know what I’ve see, first of all that is somewhat funny. You don’t have a computer degree do you?

Tobi: No. I stopped school at 17. I didn’t even finish my training degree. I am officially a high school dropout entrepreneur.

Andrew: I remember reading in one of Guy Kawasaki’s books that the first people that you hire need to be like Dimitri, need to be like Mike, who I don’t even know how he found out we were doing an interview today but somehow got in here and is getting everybody riled up in the audience. These people fire the fuels of everyone else who you hire afterwards. There’s my little statement right there. Let’s see what we’ve learned here. We figured out how you got all this traffic. It had a lot to do with you building up an audience on your blog. It had a lot to do with you building up a reputation in the Rails community. Speaking out at conferences. The affiliate program brought in a lot of people. It gave designers an incentive to bring new shops to your site. Pay per click didn’t do so much. Following people around with banner ads, that did do pretty well. That’s a Google feature right?

Tobi: You’d have to ask someone else that. I’m not sure that’s available for everyone. If you’re foolish enough to spend enough money with Google to become a Tier 1 advertiser and now we can get all the features.

Andrew: You’re sending that much money and it is still just 10% of your overall spend. Of your overall marketing. Not necessarily spend. Plus, we’ve learned that Tim Ferriss’ blog is so freaking powerful and his ideas are so powerful that he can get a share in a business just for blogging and helping come up with ideas. All right. Finally, you’ve not talked to lots of different storeowners. You’ve helped lots of them build companies online. Do you have advice for somebody who is building a store online right now?

Tobi: Oh, yeah. [interference]

Andrew: Hang on. We just lost the connection. All right. There we go.

Tobi: Okay. Have a very good look at the guys who one this contest because they are all case studies in how to do something. They are amazing. In fact, Andrew, you should interview those guys. Especially the guys who won the contest. You’ll see why as soon as you do. There are so many amazing opportunities out there. The most important thing is it is really not so hard. People can learn a lot of Shopify or on Magento.

The most important thing is, once you start concentrate on nothing. Incredible services, services like ShipWire for example, that is a service where you get some space in a warehouse, you send your entire product there, and they ship to your customer directly. That means who can take your iPhone, use your mobile app, go backpacking, check it out on your cell phone, check ship, it goes to ShipRight, and it ships it out. You click email you talk to your customers. You click call and you talk directly with them. You really don’t even need to sit anywhere. It’s ridiculous. You can build an entire great business without putting that much work into it. It’s something a lot of people should do. We have some customers who are running stores as side businesses. They have a full time job at a Fortune 500 company. They are doing more sales in this side business. It is absolutely crazy.

Andrew: Multimillion-dollar sales on the Shopify platform for people who have jobs at Fortune 500 companies, which means jobs at pretty good companies.

Tobi: Yes.

Andrew: Sohail in the audience is saying, ‘What?’ That’s right. I would like to interview one of these guys. I would like to interview the winner. I’ve got to believe Dimitri is probably the person for me to talk to, right?

Tobi: Yes. Exactly.

Andrew: Dimitri, I have to talk to you after this. I want to interview whoever it is that one this contest. Fid out how much money they made. And you guys will release how much money they made, right?

Tobi: What’d you say?

Andrew: You guys will reveal how much money they made with their store?

Tobi: No.

Andrew: Oh, you won’t even say how much?

Tobi: No. I will tell you how much in total was made. But that’s not something we can release about a company.

Andrew: All right. I will grill them. I found out from you how much money Shopify made. I found out from other companies. I’ll do the same thing with the winner. We need to get the winner on here. Dimitri, I am going to talk to you about that. Great feedback. Great ideas. I see that InTheMix is the guys name here in the audience who is saying, ‘ShipWire is great.’ Yes. I guess people have shipped using ShipWire in the past. You don’t have to carry all this stuff in your house and ship it out at the local post office. ShipWire will do it. All right. Well, thank you for doing this interview. It’s been great to find out about you. I am looking forward to seeing who won.

Tobi: Thank you, Andrew. It’s been great.

Andrew: All right. You bet. Thank you guys for watching.

Tobi: Cheers. Bye-bye.

This transcript brought to you by

What’s included in this program

– How “the biggest SEO scheme of all time” accidentally helped Tobias get his first customers.

– How Tim Ferriss earn a share of Shopify with a simple blog post and a big idea.

– The technique Shopify uses to help its employees reward each other.

– The one pricing change that Shopify made that got it to profitability almost instantly.

– Much more.

Sponsors I mentioned

Walker Corporate Law – Scott Walker is lawyer who takes startups from incorporation, to funding, to sale and everything in between. Watch this video to learn about him.

99designs – The largest crowdsourced marketplace for graphic design. When I used them, I wrote a description of the design I needed and how much I wanted to pay. I got a bunch of designs back. I gave each designer feedback and picked the one I liked the best. Try them for Logo Design, blog design, app icons and more.

PicClick – Is a 1-person startup from my friend Ryan in San Diego. His site gives you a visual way to search eBay, Etsy, and other sites. Try it this iPad accessories search, for example, and tell me what you think.

Who should we feature on Mixergy? Let us know who you think would make a great interviewee.