If you’ve ever tinkered with the idea of starting an online business, now is the time. However, before diving into eCommerce, crucial decisions await you — from product selection and target markets to types of eCommerce business and revenue models.
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In this article, we’ll dive deep into the successful models and break down each concept. Whether you’re an established digital entrepreneur or a newcomer, by the end of this article, you’ll be able to identify the best eCommerce business model that makes you stand out from the competition and thrive for greater success. Let’s dive in!
Article Roadmap:
- What Are Ecommerce Business Models?
- Types of Ecommerce Markets
- Types of Ecommerce Revenue Models
- Key Considerations
- Next Steps
What Are Ecommerce Business Models?
An eCommerce business model is the core framework for operating, driving sales and reaching customers. It defines your pricing strategy, target market and customer value proposition. A structured model allows your business to position itself strategically in the market and effectively reach customers.
There are two layers to defining an eCommerce business model. Firstly, you must internally determine how to acquire or manufacture the product, who your target audience is and how to generate revenue. Then comes figuring out how you plan to attract, convert and retain customers.
You should regularly update the business model to stay ahead of industry trends and obstacles. Active business model innovation helps meet changing market demands and retain an edge over your competition.
Types of Ecommerce Markets
Before chalking out a business model, you must figure out who your customers are. For example, it’s important to decide if you’ll sell to end consumers or other businesses and middlemen. It helps align your marketing strategy and create a suitable customer experience.
Let’s look at the four major types of eCommerce business models based on markets and audience bases:
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B2C
Business-to-consumer (B2C) is the most prevalent model where you sell to end users. Most online stores you come across on the internet, from clothing brands to food supplies, grocery markets and even entertainment businesses (like Netflix or YouTube), follow this model.
B2C involves lower-value products than B2B or B2G. This means customers don’t need to research long before purchasing, leading to shorter sales cycles and lower average order value. The key is to focus on driving sales by adding value to your products and marketing campaigns.
B2B
The business-to-business (B2B) model involves commercial transactions between two companies, where the buyer can be the end user or a reseller. B2B businesses typically sell high-value products that demand in-depth descriptions and extensive customer research before a purchase.
Traditionally, B2B businesses weren’t known for providing the best customer experience and operated with long, unassuming catalogs and order sheets. However, that is rapidly changing as younger generations enter this industry and start influencing decisions.
According to a Forrester report, Millennials and Gen Z constitute 64% of B2B decision-makers, and they demand more engaging buying experiences.
These businesses should offer self-serve options with transparent pricing and intuitive interfaces. B2B innovators must replace boring sales cycles with intuitive eCommerce storefronts that mimic B2C customer experiences to attract younger generations.
B2G
A few businesses specialize as contractors, providing goods and services to government entities and public agencies. The agencies typically issue requests for proposals (RFP), and B2G (business-to-government) businesses bid on the project. These highly specialized organizations adhere to strict product or service criteria that government agencies define.
It’s a more secure business model because it’s contractual and has a steady revenue source. However, the bureaucratic nature of public agencies can lead to unnecessary delays and other unforeseen circumstances.
C2C
Consumer-to-consumer businesses, also known as marketplaces, establish a foundation to connect consumers and let them exchange goods and services. These businesses typically make money by charging listing or transaction fees.
The marketplace can be auction-style like eBay, mimic a flea market with fixed item rates like Etsy, or warrant further discussions and have unique policies for each item like Craigslist.
The primary motive of C2C businesses is to empower individual customers to buy and sell without middlemen. They rarely invest big in marketing; the self-fuelled motivation of buyers and sellers propels their brand value. The only challenge is quality control and technology maintenance.
Types of Ecommerce Revenue Models
There are different types of revenue business models, and some are more suitable for your business than others. In this section, we compare each model’s benefits and drawbacks to make it easier for you to identify the ideal model for your business.
White Label
White label companies sell products manufactured by third-party distributors but add their branding and logo to the packaging. The company contracts a manufacturer to produce per their needs and sells products as its own.
This model is common in industries that require niche expertise in product development, and white label companies focus on branding and marketing products.
Advantages
- It saves the company’s time, energy and money in terms of production and enables it to focus solely on branding.
- Third-party manufacturers get huge contracts that guarantee sales and revenue over a period of time.
Disadvantages
- The company has limited control over product design and quality control.
- White label companies dominate their respective categories and create barriers to entry.
Private Label
Private label businesses are similar to white labels as they contract third-party manufacturers to produce products under their brand. The only difference is that white label manufacturers can sell their products to other businesses, but a private label company obligates the producer to sell to them exclusively.
Advantages
- A private label company retains complete control over product specifications, design and packaging.
- The parent company has low manufacturing costs and can push down the final price to boost sales and win over the competition.
Disadvantages
- Manufacturing mistakes made by external producers will take a toll on the parent company’s brand and reputation.
- Most private label manufacturers don’t have well-defined return policies, leading to products winding up in clearance as dead inventory.
Dropshipping
Dropshipping is by far the least expensive way to start an online business. It’s similar to the previous two revenue models, where you outsource manufacturing. But the difference is that the manufacturer also stores inventory and ships it to end customers.
You’re only responsible for running and maintaining an online storefront. You can list dropshipping products on your eCommerce website, and the external manufacturer takes care of storing and shipping inventories when orders arrive.
Advantages
- You operate with zero inventory and don’t have to worry about stock-outs or overstocking.
- Minimal overhead costs because you’re only responsible for marketing products and confirming sales.
Disadvantages
- Low-profit margins as the supplier takes a big cut out of every sale due to product development, storage and shipping.
- You rely on the supplier’s stocks and fulfillment cycles, providing limited control over out-of-stock situations and delivery times.
Wholesale
Wholesale is when you sell bulk products instead of individual items to retailers and end consumers at a discounted rate. It’s beneficial when you’re looking to sell a wide range of products and don’t want to spend on marketing and supply chain management for each product.
Advantages
- Retailers are responsible for marketing products and fulfilling orders, leaving you room to focus on product innovation.
- Wholesalers sell in bulk and usually have minimum order values, which helps forecast sales and revenue better.
Disadvantages
- It’s a capital-intensive model, and you require significant capital just to kickstart your business.
- Retailers will buy inventory from wholesalers based on market trends, resulting in dead stock and product-on-shelves situations during recessions and low-demand periods.
DTC
Direct-to-consumer (DTC) is a modern approach that cuts intermediaries like wholesalers, retailers and distributors from the supply chain to allow enterprises to reach end consumers directly. DTC businesses manage the entire value and supply chain in-house, starting from sourcing and procurement to manufacturing, distribution and marketing.
Advantages
- You can build better customer relationships when they buy directly from you instead of Walmart or Amazon.
- You’re the only one with your hands in the profit pie, and you don’t need to share it with third-party middlemen.
Disadvantages
- Not having middlemen is this model’s biggest charm but also a major risk. You’re responsible for handling the customer-facing frontend and backend involving product development, storage and routing.
- It’s expensive to create standalone brand websites with rich customer experiences that can compete with industry-leading marketplaces like Amazon and Alibaba.
Allbirds is a leading DTC brand selling sustainable shoes and clothing directly to end consumers.
Digital Products
Digital products are nonphysical assets you can distribute and sell online repeatedly without reproducing inventory. The upfront cost of inventing a digital product may be high, but the variable cost of doing transactions with it is minimal. A few examples of digital products include videos, mp3s, NFTs, plugins, software and templates.
Advantages
- You don’t have to sweat over order fulfillment, as customers can download the product after a successful transaction.
- You don’t need to spend big on storing and routing products.
Disadvantages
- Digital products are easily copyable, and you need to enforce strict copyrights.
- Most social media sites (Facebook, Instagram and TikTok) only allow you to sell physical products per their commerce policies.
Subscriptions
Businesses with a subscription model offer you access to their digital products or services with a monthly or yearly subscription fee. Some businesses also send curated product bundles for a fee at a fixed cadence. Dollar Shave Club, Spotify, Netflix and Sakara are common examples of subscription-based companies.
Advantages
- You can predict yearly revenues, plan inventory and calculate the growing reinvestment amount.
- Regular transactions give insights into customer wants, behaviors and trends, allowing you to improve products and customer experiences continually.
Disadvantages
- Subscription businesses are only fit for a few niche product categories, and you can’t replicate them with any and every product.
- You must constantly update your product or service bundle to keep customers interested or risk having a high customer churn rate.
Classpass is a leading subscription-based eCommerce brand offering personalized fitness programs.
Key Considerations
The eCommerce landscape is ever-changing, and so are its business models. Be careful not to fall into the “one-size-fits-all” trap and choose a model without considering your unique strengths, weaknesses and requirements. A poorly chosen model is like a leaky bucket for your revenue.
Invest time in finding the perfect fit, and your business will thank you. Ultimately, it boils down to asking the right questions internally and identifying your requirements.
Ask yourself these questions to find out what’s best for you:
What’s the type of your product?
Identifying the nature of your product is pivotal in tailoring your eCommerce model. Every product category has distinct requirements. These requirements guide your marketing approach and influence the logistics and operational aspects of your business, ensuring a well-suited and efficient business model.
Who are your customers?
Understanding your customer base is crucial as it forms the foundation for your eCommerce strategy. By delving into their needs and preferences, you align your product offerings with their demands and cultivate a more meaningful connection.
Keep in mind that a successful model is not just about selling products but fulfilling a need or solving a problem for your audience.
What are your strengths and weaknesses?
Build your business around what you’re good at. If social media is your thing, go for models like dropshipping or white labeling that heavily rely on marketing finesse.
Alternatively, if you have expertise in supply chain management, the DTC model allows you to curate a personalized business model from inception to delivery. This alignment with your strengths maximizes efficiency and sets the stage for sustainable growth.
What’s the best model for your products?
If you manufacture products, consider wholesaling or subscription models to generate revenue that offsets production costs quickly. But to distribute other businesses’ products, you should invest heavily in marketing strategies to grow your audience.
How will you position your business in the market?
You must consider making your business more attractive to customers than your competitors. Determine whether you will compete on price, quality, selection, service, added value or other factors.
Next Steps
There are different types of eCommerce models, but choosing the right one helps you set the stage for a successful online empire. So, take a moment to consider your audience, your product and your strengths. This decision is the starting point for your journey into the world of eCommerce.
Beyond that, your business needs the best eCommerce platform to power its online presence. To make sure you’ve got the right tools for your business, check out our free comparison report. It lets you analyze the industry’s best products based on criteria you can define. Start your eCommerce journey today!
Which model do you think suits you the best? What lessons have you learned in your online journey so far? Drop your thoughts below, and let’s build this conversation together!