Types of Ecommerce Business Models Working Right NowBy Jamie Toyne
When you need something new, how often do you think ‘I’ll buy it online?’ It’s easy, it’s quick, there’s WAY more choice. And all without even getting up from the couch.
Ecommerce sales have tripled in the last four years and it doesn’t look like they will be slowing anytime soon. Therefore it is a great time to get involved in the world of ecommerce. But with so many different types of ecommerce businesses out there, each with different levels of input, profit margins and capital, how do you know which one could be right for you?
What exactly is ecommerce?
So let’s start at the beginning, what exactly does ecommerce mean and how does the business model work? Ecommerce, or electric commerce, does what it says on the box; it means selling goods or services electronically over the internet.
The sales of these products generate revenue, and this is how an ecommerce business makes money. Ecommerce is a blanket term encompassing all online buyer/seller marketplaces, but there is lots of diversity within ecommerce.
Depending on what you sell will define whether or not you will need to have capital up front to start and run your ecommerce business. If you sell a physical product, for example electronics, you may need to invest money in buying, storing and shipping your product. If you are selling a service or digital product, for example an ebook that you wrote yourself, you may not need any upfront capital at all.
What categories of ecommerce business are there?
So before we look into specific ecommerce revenue models, let’s explore the different categories of business models there are within ecommerce.
1. Business to Business (B2B)
A B2B business model, means a business selling to other businesses. This could be anything from selling physical products like a wholesaler or supplier, selling a service such as a corporate lawyer, to selling digital products like software. And many others.
B2B business examples:
- Alibaba B2B Marketplace
2. Business to Consumer (B2C)
A B2C business is the typical retail model most people relate to ecommerce. It covers any online store where customers can buy products or services. This could be an online fashion retailer, a send-away subscription service or even an online course.
B2C business examples:
3. Consumer to Business (C2B)
A customer to business model sounds counterintuitive, but this business model refers to sites where the customer sells a service to the business. Service provision sites for freelancers for example, or review sites where companies offer benefits, money or products in exchange for reviews, are a good example of this.
C2B business examples:
4. Consumer to Consumer (C2C)
A C2C business acts as a sort of marketplace that allows customers to trade with each other while the site makes money by taking a small commission.
C2C business examples:
5. Business to Administration (B2A)
B2A or also B2G (Business to Government) businesses refer to companies that sell directly to the government or public administration.
B2A business example:
- Lockheed Martin – a defense contractor that sells arms to the government
6. Customer to Administration (C2A)
Finally there also exists a model we refer to as C2A or C2G (Customer to Government). This refers to things like the tax system where consumers pay money to the government.
C2A business example:
- University tuition fees
6 Types of Ecommerce Business Model that work right now
So now we have established some different models, let’s dive into some different specific revenue models for ecommerce and how they work.
1. Dropshipping Business
Dropshipping involves selling products online, like a traditional ecommerce store, but there’s a twist! They use a third party supplier to both produce and ship the products to the customer.
This can be beneficial for the dropshipper as it avoids a lot of money and hassle to produce, handle or store the items themselves. However, it also greatly reduces profit margins as the dropshipper only takes home a small percentage of each order.
Dropshipping is easy to set up, particularly if you use a dropshipping network like Shopify or WooCommerce. These platforms help you easily set up a dropshipping site with little to no experience, and even help you find suppliers and products to get started with.
It is a fairly limiting business model however, as you are very reliant on the supplier. If demand goes up can they meet demand? And if there is a delay in delivery, or a problem with the product quality, then there is very little you can do.
How do you get started with dropshipping? Sign up to a dropshipping network, create a site, find some suppliers, and start marketing your products.
Pros of dropshipping:
- Fairly passive income model
- Low start up costs
- Simple to run
- Easy to scale
Cons of dropshipping:
- Low profit margins
- No control of the supply chain
- Using paid ads further lowers profit margins
- Highly competitive model
Dropshipping business example:
DudeGadgets is a pretty successful dropshipping site that sells all sorts of gadgets under the sun. With a huge range of products, and through developing a brand name for themselves in the niche, they are able to generate high sales and revenue!
Although highly scalable, dropshipping profit margins are very low. There are other ecommerce revenue models with much higher earning potential.
2. Amazon FBA Business
An Amazon FBA business model, or Fulfilled by Amazon, sits somewhere between dropshipping and a traditional ecommerce model. This is because the FBA business owner has to supply the products themself, while Amazon stores them in their warehouse, ships them to the customer, and even handles all the customer service and returns.
The products are then sold through the Amazon platform, where they appear as any standard product listing, although they are also happy for you to sell through your own site as well. As an FBA business model still means using a third party supplier to stock the goods, and Amazon handles the logistics, this is a fairly low maintenance, passive business model.
Although it does have much higher earning potential and profit margins than dropshipping, Amazon still takes a significant percentage of each sale which wouldn’t be the case with your own store.
However with the added benefits of no storage, shipping and customer service costs and hassle, this is more than worth it for many. One downside however, is that you have little control over the supply chain, so you need to make sure your supplier can handle any sudden spikes in sales. It is always best to have some backup suppliers at the ready. Finally
Pros of Amazon FBA:
- Benefits from all of Amazon’s organic traffic and brand reputation
- Supplier sends the stock straight to Amazon’s warehouse so you never need to handle physical stock
- All logistics and customer service is handles by someone else
- Passive business model
- Decent profit margins
- Your products are automatically included in Amazon Prime
- Paid ads can be a viable option
Cons of Amazon FBA:
- You need some upfront capital to get started
- You have to deal with your suppliers
- Little control over supply chain issues
- Heavily reliant on Amazon
If you are looking for a fairly passive business model, looking to transition your affiliate site, have some capital to invest, or are great with sales funnels and ads, an Amazon FBA business model could be perfect for you.
3. Wholesale Business
A wholesaling business, or warehousing business, involves buying goods in bulk straight from the manufacturer, and then selling these on to other businesses at a better price than they would get from the manufacturer.
As wholesalers buy in very large quantities, they can buy at highly discounted prices, and then turn a profit when they sell them to their customers at higher rates. One important thing to consider before starting a wholesale business, is that this business model requires you to have lots of capital upfront.
You will have to invest in stocking up on your products before you get started, and have enough capital to buy large quantities of goods. You may also need a warehouse which again will cost money, as well as requiring strong operational skills to manage.
It is possible to be a wholesaler without your own warehouse, shipping the products straight from the manufacturer to the end client. However, this gives you limited control over operations and fulfilling promises to clients so is not recommended.
Successful wholesalers work with high volumes of goods, and may sell products to marketplaces like eBay or Amazon. You can use a platform like BigCommerce to help you with this. Wholesalers can make anywhere from a couple of thousand dollars on a deal to hundreds of thousands.
Pros of a wholesale business:
- You can benefit from discounted rates when buying in bulk
- You have control over sales, such as setting minimum order quantities with clients etc
- You can establish repeat customers
Cons of a wholesale business:
- You need a large amount of capital to invest upfront in stock and a warehouse
- You need a wide range of skills
- Large overheads as you will need to have large amounts of stock at any one time
Example of a wholesale business
Fitness Clothing Manufacturer
A wholesaler of fitness clothes in the US and Canada, Fitness Clothes is an example of wholesaler in a specialized niche.
A wholesaling business can be a great option for people with a large amount of capital to invest up front. It will suit people with a diverse skill set, including strong logistical skills to organize stock and run a warehouse and strong negotiation skills to negotiate with manufacturers.
4. Private Labeling
A private label product is a product that is sold under the name of your brand with your company’s own packaging, but the products are manufactured by a third party. You can decide everything from exactly what is included in the product to how it looks and how the label is designed, and then sell these on your own online store to turn a profit.
Amazon, for example, has two lines of private label products, Pinzon bedding and bath products and AmazonBasics work and home products. Common types of products that can be sold under this revenue model might be cosmetics and beauty products, food and drink or cleaning products.
The good thing about private labeling is that the products can be manufactured on demand. That means that you don’t need too much capital to get started. It also means changing suppliers is easy should you have problems with quality or deliveries. Most manufacturers can also deliver straight to the customer or to you. You can help decide the ingredients and the quality of your product so that it is produced up to your standards.
You can also therefore decide on a product that can be produced within your budget. As you can decide the costs, as well as the price you will sell it on for, it means you have direct control over the profitability of your product. On the downside however, if your manufacturer runs into any supply problems, there is little you can do.
If you are considering manufacturing your own product in the future, on-demand manufacturing is a great way to test it out beforehand. Check out tools like Sourcify to help you find overseas manufacturers for a new product idea.
Pros of a private label business:
- You have control over the product, manufacturing costs and profitability
- You don’t need your own factory to manufacture
- You don’t need too much upfront capital
- You can design and control the branding
Cons of a private label business:
- You need some upfront capital to invest in producing your product
- You are dependent on the manufacturer
- Private label products are often sold at a lower price point than branded products
Example of a private label business
Amazon’s private label for electronics and household goods is a very popular and successful private label brand. They can capitalize on the strong brand reputation of Amazon, and boost sales by offering cheaper products than other listings.
If you already have a product in mind that you have designed and would maybe even like to manufacture it yourself in the future, private labeling could be the business model for you. It can help you launch your own personalized product and brand, while saving money on manufacturing costs.
5. White Labeling
White labeling is a very similar business model to private labeling where a retailer sells a product under their own brand name and logo, but that is manufactured by a third party. Although sometimes used interchangeably, there are some differences between white label and private label.
With private label products, the business owner can specify and customize the product that is produced. White labeling, on the other hand, refers to a product that is already being manufactured and sold by a company. This company then allows you to purchase the same product and sell it under your own brand name. White label originates from the idea of a product coming with a blank white label that can be filled in with the retailer’s trade address.
If you are thinking of starting a white label business, you need to do your research and make sure there is demand for your product. There is often a minimum order quantity when you buy stock and so you need to make sure you can actually shift it once you have it.
Pros of a white label business:
- You don’t have to spend time and money developing or manufacturing a product
- You can take advantage of other people’s expertise in making a particular product
- You can get a huge variety of different products
- You can take a brand new product to market quickly
- Manufacturer can often sell straight to the end user
Cons of a white label business:
- You need some capital to invest upfront in stock
- You often have to bulk buy so you need to make sure there is demand
- You have little control over the product and production
- No direct contact with the end user
Example of a white label business
White label business can be anything from water bottles to cosmetics. Even down to things like hotel towels or robes, as they all look the same.
White label products are perfect for people who are not and don’t want to be an expert in their products. It is a super quick way to get products out on the market. It is also ideal for any products that you already know have high demand.
The number of companies selling regularly-delivered subscription boxes has leapt up in recent years, and that’s exactly what we are talking about with the subscription model. As many customers will be ordering each month, you can make fairly stable revenue.
It can also be easier to encourage customers to buy additional products or subscriptions. However, of course there is always the risk of customers churning (cancelling their subscriptions), so you need to make sure you can keep their interest.
It can be hard to find the perfect product that will sell well. Some popular niches are:
Pros of a Subscription business
- Regular cash flow over time rather than one lump sum can be easier to manage
- Modern consumers enjoy customer services and experiences
- It can give you a competitive edge over a traditional ecommerce business
- There’s potential to reach untapped markets
Cons of a subscription business
- Making sure there is demand for your subscription products
- More supply chain management needed for regular subscription
- Consumers tend to subscribe to just a few ‘favorite’ services
Example of a subscription business
Birchbox is a beauty subscription box service that shot to success with it’s monthly boxes of deluxe make up and beauty sample products. Personalization is one of the keys to their success as customers can choose the products they receive each month. The product then sells the full size products online for customers to order if they try them and like them. Giving Birchbox an extra revenue boost!
This can be a good idea for someone with a good, in-demand product idea for a subscription service and some capital to invest in the venture. It is a good idea for someone hoping to make a stable and regular income over time.
Which ecommerce model is best for you?
So you like the idea of running your own ecommerce site, but which type would suit you best?
Do you want a passive business?
If you prefer to run a fairly low maintenance or passive business, you may consider dropshipping or Amazon FBA. As both of these don’t involve handling the physical products or arranging any of the logistics or customer service, there is potential to generate revenue while still having time to invest in other things.
Do you have a product idea but no way to manufacture it?
Perhaps you know what you want to sell and even know it’s in high demand, but don’t have the time and money to invest in producing it. Well then, perhaps a private label or white label business would do the trick. Both these business models will let you try out selling a product you have in mind with the option of changing later if it doesn’t work.
Do you mind investing capital?
If you have significant capital to invest, or don’t mind having a business with significant monthly overheads, you may be able to consider a wholesale business, a white labeling business or an FBA business.
Wholesale businesses need a fair amount of capital to buy and replenish stock and pay for a warehouse. A white label business often requires you to buy the product in bulk so you will need some available cash. An FBA business also requires you to buy initial stock, and make sure you don’t run out, as well as pay for the shipping to Amazon’s warehouse.
Do you prefer not to invest capital?
If you don’t have much upfront capital or prefer a business that doesn’t require much money to run, dropshipping could be a great option. This is because the supplier takes care of all the stocking and shipping, while you just worry about making sales. Private labeling also doesn’t need much upfront capital as manufacturers often work on demand.
So now you have seen 5 types of ecommerce businesses that are generating people revenue right now. Online business is only growing and it’s time to get your piece of the pie. It doesn’t matter what experience you have, there is something for everyone.