Choosing and applying the right ecommerce business model to your online store might be a bigger challenge than you thought. Especially if you’re new to the industry. Your greatest chance of success starts with knowing which model best fits your target niche, resources, and capabilities. Let’s take a look at the 4 major ecommerce classifications and 6 proven ecommerce business models.
People mainly still think of the B2C (business-to-consumer) private label model — selling privately branded retail products to individuals — when we talk about ecommerce. But ecommerce has more options than we realize.
Here are 4 major ecommerce classifications and 6 proven models to consider before making a plan.
4 major classifications of ecommerce
Let’s take a look at the 4 major classifications of ecommerce.
1. Business-to-business (B2B)
Business-to-business (B2B) ecommerce describes online transactions between businesses. Organizations involved in the B2B model are mainly wholesalers, manufacturers, and distributors. Despite not being the most prominent form of ecommerce, the global B2B ecommerce market is projected to reach 6.7 trillion USD by 2020.
Here are 3 questions to ask yourself before launching a B2B business:
- Does your target market prefer bulk ordering?
- Do your clients require specific sizes, materials, or other specifications?
- What are your competitive advantages?
Potential competitive advantages can be uncovered by asking yourself more questions about your business model, including:
- Do you control the manufacturing?
- Can you offer competitive pricing while maintaining efficient ROI?
- What are your inventory and supply chain management capabilities?
2. Business-to-consumer (B2C)
B2C ecommerce is a more traditional ecommerce model that most are familiar with. In B2C, online retailers market and sell products directly to end consumers. While B2B can be more complex, B2C business is as simple as ordering a book or camera online.
B2C online retailers serve a wide audience and prioritize modern marketing and sales strategies like ads-based marketing, influencer marketing, and social media. B2C ecommerce business owners spend more time on optimizing traffic, promoting campaigns, and sales conversions than on negotiating quotes and terms or managing order production and fulfillment.
3. Consumer-to-business (C2B)
C2B is less well-known and intuitive than B2B and B2C. In the C2B model, individuals (consumers) sell products or services to a business.
Most typical C2B businesses are freelancer platforms like Upwork and Fiverr. In this digital and social age, influencer-matching marketplaces like Ifluenz are on the rise as new, innovative forms of C2B.
4. Consumer-to-consumer (C2C)
C2C ecommerce businesses facilitate transactions between consumers. In C2C platforms, individuals can sell, buy, and exchange goods or services. Consumer-to-consumer connecting platforms earn profits by charging listing and transaction fees.
Unlike B2B and B2C, C2C extensively deals with a third-party business to facilitate transactions, protect consumers, and manage quality control.
Since the early days of the Internet, Amazon, eBay, and Craigslist have been the largest C2C ecommerce websites in the world. Recent innovators like Depop are taking advantage of social media to expand their reach.
6 ecommerce business models growing in 2020
Once you’ve decided on a category, the next thing to tackle is choosing an ecommerce model for your business. The last few decades have seen a lot of ecommerce startups rising and falling.
Here are 6 different types of ecommerce business models:
1. Private label
Many new ecommerce entrepreneurs have great product ideas but no internal resources or capacity to manufacture products themselves. So they order from manufacturers and then label, market, and sell products under a private label.
Recent projections suggest the ecommerce private label market will quadruple in the next 5 years to meet growing demands. Here are 2 of the most convincing reasons that make private label a solid choice:
- Private-label products are developed, branded, and sold by one company, separating it from competitors. Private-label brand owners own the design, specifications, production technique, and have exclusive rights to sell under a private brand. Since they’re the only supply source, private labels with good marketing can create a demand hype and charge premium prices
- Private-label products typically enjoy very high profit margins. Brand owners take control of the manufacturing and operation costs so they can minimized the cost of goods sold (COGS). And since they’re the only sellers in the market, they can make strong margins from premium prices
There are some roadblocks and risks to consider for private label ecommerce businesses:
- Finding the right private label manufacturers to collaborate with is a challenge. To minimize the cost per unit, many entrepreneurs travel halfway around the world to developing countries like China and Vietnam. They pay a lot of upfront capital to order large batches and lower per-unit costs
- Manufacturers can’t guarantee defect-free batches, even when a prototype is perfect, so running and managing quality control is necessary to avoid expensive problems
- Selling branded products online that are only sold by one vendor limits customer access
2. White label
Like the private-label model, white label retailers apply their brand names and resell generic products purchased from a supplier.
White-label businesses are free from the management of manufacturing and quality control, but deal with extensive competition. White-label vendors control package design, but not product specifications or quality. Since any reseller can sell these products, competitors hardly have an edge in terms of unique selling points and use marketing strategies and distribution channels to differentiate themselves.
Another obstacle white-label business owners deal with is inventory management. Most suppliers set a minimum order quantity to achieve economies of scale by increasing production. As a reseller, understanding the demand of your white-label products is critical. Mismanaging inventory can leave white labels stuck with large batches of unsold inventory.
In recent years, dropshipping has emerged as a genius retail fulfillment model for ecommerce beginners to launch with little to no capital. Dropshipping allows businesses to market and sell products online without stocking inventory. As orders are placed, dropshippers purchase items from suppliers who then ship products directly to customers.
The benefits of the dropshipping ecommerce model are considerable:
- Dropshipping businesses don’t need to pay for warehouse space, order or manage stock, pack or ship products, track inventory, or handle returns
- Dropshippers can start with a small budget and scale up as they’re ready with little financial risks
- Dropshippers don’t have to worry about manufacturing or inventory and fulfillment management and can invest resources into site design, customer support, and marketing and sales strategies
Dropshipping risks include:
- With no product control, a bad supplier can burden customer-support teams and damage the trust and credibility of a business
- While the supplier manages the fulfillment process, the business owner still needs to deal with delivery tracking issues
- Since anyone can start a dropship business, the competitiveness is fierce. Low prices and large advertising and Google SEO budgets can mean low profit margins
Dropshipping isn’t a stress-free ecommerce model — it comes with several complexities to plan for. But the obvious advantages offer opportunities for new, ambitious, online entrepreneurs to start from zero and make something big.
The print-on-demand model is similar to dropshipping — businesses sell custom designs on a variety of products like t-shirts, hoodies, leggings, mugs, phone cases, and canvases. When an order is placed, a third-party manufacturer prints the selected design on a product, packs it up in branded packaging, and delivers directly to the customer.
Dropshipping and print-on-demand models share common benefits:
- Up-front capital is not required making it a low-risk model. Print-on-demand businesses only pay fees to third-party suppliers as orders are shipped
- Inventory management is taken care of and orders are automated by professional third-party printing suppliers like Printify and Printful
To earn an edge in this increasingly competitive market, you’ll need strong graphic design skills, excellent marketing strategies, and top-notch customer support.
5. Subscription service
Imagine you’re a busy professional, short on time — a meal delivery service that ships to your front door might be exactly what you’re looking for. The beauty of and demand for convenience has given rise to the fast-growing subscription-service ecommerce revenue model.
By definition, a subscription business model allows customers to subscribe to a service for a set period of time, typically monthly or annually. When the subscription period expires, customers can cancel or renew, enjoying convenience and savings on repeat orders.
This model has advantages that make it tempting as an ecommerce venture:
- Owners can reduce order abandonment rates and maintain high customer retention and loyalty
- Owners can plan inventory and delivery in advance
- Owners can enjoy high margins and lower inventory risks
Healthy Surprise is an example of a food subscription service websites. Other potential products for a subscription model are books, videos, training courses, and consumer goods that need to be replaced regularly like electric toothbrush heads.
As the name suggests, wholesaling is a business model where an ecommerce store offers products in large quantities at discount rates. Wholesaling used to be mostly a B2B business practice. But thanks to the internet, anyone can offer wholesale as a C2B or B2C practice.
Wholesale in ecommerce companies is quickly rising. Take for example Beard & Blade doubling their revenue in the last 2 years and Laird Superfood increasing their annual revenue 550%.
Securing business partners for wholesale ecommerce requires tremendous effort in both traditional and modern sales channels like telesales, trade shows, advertising, and influencer marketing.
Choose the right ecommerce business model
Start your decision-making process by asking yourself some important questions:
- Who is your target market?
- What do you want to sell?
- How much can you invest in your startup?
- What are you capable of?
- How do you want to position your business in the short term and long term?
Understanding the basics is important, but planning and innovation will help you stand out and scale quickly in today’s competitive ecommerce industry.