This blog post is recently updated on 24 December 2018.
Electronic commerce has reached new heights in recent years. The growth around this area has been great. There have been many technological advances that have been added to the growth of e-commerce businesses, resulting in 5 types of e-commerce business models – in the broad sense.
Several e-commerce models which are being defined to ensure the smooth operation of e-commerce activities.
According to statistics, E-commerce sales are expected to reach $4.5 trillion by 2021. Although this is an excellent statistic for any e-commerce activity, it is important to not get carried away.
Before you start an e-commerce business, it is important to understand the fundamentals involved is setting up an e-commerce store.
To make the most of your e-commerce business, it is essential to understand the underlying fundamentals of all e-commerce stores.
A thriving e-commerce business requires a solid business plan, insight, market knowledge, and in-depth research on e-commerce products and business models. Many newcomers do not understand and do not research the business models involved in e-commerce.
It is essential to understand the business models and products available on the basis of market research.
According to The US Bureau of Labor Statistics report, about 60% of new businesses will survive up to three years, but only 35% will survive in their 10 years.
95% of start-ups do not see the expected performance. Some rates are as high as 90% fail for new Internet businesses, maybe as fast as the first 120 days.
Here, in this article, we’ll take you through types of e-commerce business, revenue and product models that will surely help you decide which business is for you.
Few reasons for the failure of e-commerce business are
- Lack of business plan or direction
- Poor marketing. Failing to understand the importance of internet marketing
- Poor site design with a bad user interface. High loading time is another factor
- Poor customer service
- Payment issues
- Lack of trust. 76.5% of visitors consider credibility and trustworthiness of the website to be the 2nd biggest influencer for buying decisions
- Security issues. 66% of customers consider payment security checks before making any buying decisions.
Before we check the different e-commerce business models, let us briefly discuss the types of e-commerce business classifications.
Types of E-Commerce Business
There are 6 different types of e-commerce businesses. Read further to know about all these types.
- B2B – Business to Business
- B2C – Business to Consumer
- C2C – Consumer to Consumer
- C2B – Consumer to Business
- B2G – Business to government
- C2G – Consumer to administration or consumer to government
Every transaction occurring over the internet for e-commerce can be classified into one of the above types.
B2B, or Business to Business, is the largest e-commerce model. In this model, both the sellers and buyers are business entities.
This model describes the transactions between a retailer or a wholesaler, or a wholesaler and manufacturer.
Also, the transaction of the B2B business model is much higher than that of the B2C model.
Some of the examples of B2B models are Alibaba (world’s largest online business to the business trading platform), Amazon business, IBM, Boeing, ExxonMobil Corporation, and more.
Benefits of B2B Model
- Products of import and export
- Encourages business online
- Position trade guides
- Determine buyers and suppliers
Features of B2B Model
- Long sales cycle
- More complex model and target market
- Less price sensitivity
- Niche marketing strategy focused on trade channels
- Less potential for emotional and impulse purchases
- More revenue per sale
- Customers demand more data
- Multiple users and user IDs
The B2C business is the most common type. This is the thickest e-commerce market.
Business to consumer, known as B2C, is the most common and the thickest e-commerce market. In this online model, the business sells to individual customers. This business model offers direct interaction with the customers.
This model works by marketers and retailers so that they can sell their goods to internet users. This is the traditional retail model, but the business is conducted online as opposed to in a physical store.
Some examples of B2C models are Wal-Mart, Staples, Target, and REI.
Benefits of B2C
- Expansion of niche marketing opportunities
- Expansion of the marketplace to global proportions
- Greater customer loyalty
- Cheaper electronic transactions
Features of B2C
- Easy to understand
- Short sales cycle
- Clear target market
- Lower risk and costs of entry
- Potential for emotional and impulse purchases
- Mass/ consumer media marketing strategy
- Price-sensitive customers
B2B and B2C are easy to understand. So how does a C2C look like?
The C2C or consumer to consumer business model involves a transaction between two consumers. It is also known as a citizen to citizen. A common example of this model would be an online auction, where a customer or visitor posts an item for sale and other customer bids to purchase it. However, the third party generally charges a commission.
Also, having a C2C business or website requires immense planning and marketing understands. Although the sites act as intermediaries to match the customers, they don’t check the quality of products being posted online.
The few examples for this model include Craigslist, eBay and OLX.
Benefits of C2C
- No intermediary
- Low transaction cost
- Round the clock availability
- Wide Reach
Features of C2C
- Negotiable market-based price
- Simple buying process
- Potential for emotional and purchases based on needs
Customer to business, known as C2B, involves customers selling their services or products to business. It is roughly the same as a sole proprietorship serving a larger business.
The one thing that differentiates C2B from other business models is that the consumers create the value for the products. Also, the model caters to the need of freelancers, who work on tasks given by the clients.
However, these websites require planning due to the legal complexities involved.
The examples of C2B business models include Google Adsense, Commission Junction, and Amazon. Fotolia is also a good example of the emerging C2B model.
Business to government is also referred to as the business to administration commerce. In this model, government and businesses use central websites to do business with each other more efficiently than they can off the web.
This e-commerce model is also referred to public sector marketing, which means marketing services and products to multiple government levels. With this platform, the businesses can bid on government opportunities including tenders auctions, and application submission.
Consumer to administration or consumer to government e-commerce model enables the consumers to post feedback or request information regarding public sectors directly to the government administration or authorities.
For example, when you pay electricity bill through the government website, payment of health insurance, make payment of taxes, etc.
Having understood the e-commerce business types, let us now check the business models.
Types of E-commerce Models
Generally, there is 5 types e-commerce business model, which are explained below.
- Drop Shipping
- Wholesaling And Warehousing
- Private Labeling & Manufacturing
Let us discuss each of this in more detail.
1. Drop Shipping
Drop shipping is when an e-commerce store buys the products from a manufacturer or wholesale and sell it to the customers at a commission. This is the simplest form of e-commerce that eliminates the hassle of managing inventories, stock or dealing with packaging. You just need to set up a storefront and handles payments and orders.
There is a major limitation though. If the product quality is not up to the mark, or the sellers are slow, you’ll be held responsible. These drawbacks will be added to your website reviews.
But, if you dead set on this model, you can use Shopify and Oberlo as these are inexpensive and quick to set up.
Example of drop shipping is Wacky Hippo.
2. Wholesaling and Warehousing
Wholesaling and warehousing require a significant investment, to begin with. You must manage and organize the inventory and also follow the orders. This requires tracking demand, customer orders, shipping information and also investing in the storage space.
DollarDays is an example of wholesaling. It has a massive product catalog that includes over 260,000 products. They can sell to the retailers as well as the general public. They engage in a key strategy for retailers in this space, which helps them maintain a higher profit margin.
Another example of wholesaling is Alibaba that is a popular platform for small and large wholesalers that trade with the businesses all over the world.
3. White Labelling
White-labeling is a business plan in which one company produces the product, and another company rebrands and distributes it.
This is a faster strategy, and you just have to choose a successful product that is sold by other companies. You then need to design your package, label and sell it. You’ll see this model usually in the beauty and wellness industry.
The biggest challenge of white labeling is demand. You must completely manage what you order. To tackle this problem, most companies set a minimum amount of production.
If you’ve ordered more than the request, there is no way to return it. This option is feasible if you are ready to work full time on your business and you know exactly the product demand in the market as well as the product trends.
So, if you own a branded product and look forward to getting people to know you, BigCommerce is a good choice. However, their pricing model can become expensive when you start making large sales.
The example of this model is The Dollar Shave Club.
4. Private Labelling and Manufacturing
Private labeling and manufacturing is a good option for low investment. So, if you have the perfect idea with lack of resources to build your factory, this might be your option.
Companies, which manufacture off-site products for sale, send the plans or prototypes to contract manufacturers who produce the product according to the customer’s specifications. They may ship it directly to the customer, to a third party or the company selling the final product.
On-demand manufacturing will allow you to change suppliers quickly if you face problems with the quality of the product. You don’t have to tie to a particular provider. Start-up costs are minimal. If you wish to open your production facilities eventually, you will be able to test a new product or concept with this model.
If you have an excellent product idea and need a manufacturer, you can try Sourcify.
Thomas Felice is an example that uses this model.
This model aims for long-term commercial engagement by offering customers incentives to shop again with the same brand. For this, e-commerce companies use a subscription model to provide their customers with a set of products selected at regular intervals.
Subscription companies have relatively reliable revenue sources and can easily encourage customers to purchase additional subscriptions or encourage their contacts to subscribe.
The challenge here is to choose the right niche and the right products. This is most evident in the areas of beauty, fashion, health, and grooming. Outside this zone, few e-commerce companies have a subscription model.
BigCommerce and Shopify support subscription-based models but require a separate paid application for their subscription. Therefore, you would require a WooCommerce subscription for X-Cart or WordPress to handle it.
Popular models of e-commerce subscription include Dollar Shave Club, Stitch Fix, Blue Apron and Nature Box.
Top E-commerce Product Models are-
- Single Product
- Single Category
- Multiple Category
1. Single Product
As the name suggests, a single product focuses on a single product. This could be at different levels offered to businesses or consumers. It is a good product model if the product has high requirements and low market risks. However, a sudden drop in market demand or another controversy around the product can have a negative impact on sales.
Another factor to consider with this model is the level of competition for this product. If you are just another player in the market for a product, this model is more likely to fail.
This model is risky and recommended only if you have a solid knowledge of the product and the market.
2. Single Category
As the single product has its own drawbacks, the single category is another model that can be considered. It’s a wise choice, especially when you want to experiment with the market.
You can build your reputation and credibility by carefully selecting a few products. Several e-commerce companies are adopting this product model.
For these types of products, it is important to choose a niche with several subtypes. For example, it can be books, clothes or any other popular category. The goal should be to attract customers and develop interests and then draw a subset of those interests that seem to be more effective. This is a smart model for new businesses and new business owners.
Such a model requires a minimum effort and a low investment to manage. A disadvantage of this model is to choose the most appropriate niche. Another disadvantage is that it is likely that you would catch the interest of a very small portion of e-commerce buyers.
The White T-shirt Company is a good example of this product model.
Multiple Categories is yet another successful product model. This is a great alternative for owners who want to expand their business and have already tried a single product category. The most difficult part of this model is selecting the products.
One bad product can affect your reputation in the market. This model requires multitasking as well. You need to manage several product categories, various suppliers etc.
Also, this model requires smart market knowledge and good choice of products. Besides, you should also quickly makes amendments to the products based on their sales and demands. For this, you need to keep track of the sales of the products and the increase in their number.
Some companies that use this model are REI, Target, and Cultures for Health.
Nowadays many companies are using affiliates to boost their sales. Blog and reviews provide additional visibility to a product, which in turn increase the sales.
In this model, the affiliate can monetize based on the blogs, product reviews or another site.
Although affiliate sites aren’t big money makers, they can provide extra income for the sites that rely on other income streams. If you want to connect with vendors and affiliates, JVZoo is a good place. Other popular affiliate services are ClickBank, CJ Affiliate, Rakuten Affiliate Network, Amazon Associates, AvantLink, AvanGate, and eBay.
The affiliate earns by pay per click or pay per scale or pay per lead. The companies that are boosting their sales with affiliates include DoTerra Essential Oils and Amazon.com.
However, you need to be a well-known brand to attract customers if you want to start this product model otherwise it could be a tedious task. Also, with this model, there is no guarantee of the profit margins as the payments depend on the sale that happens through the website. The sales depend on the demand and popularity of the products.
As affiliate based mole has its own limitations and Single Category also has its own risks, for the business that have outgrown product confines of a single category store, upgrading to hybrid (single category and affiliate) store is beneficial.
In this model, you can test related product categories in your niche and see what customers like. It provides you with the extra product category without needing you to commit to managing and marketing additional products.
Now, you are familiar with the different e-commerce businesses, e-commerce business models and product models; you can easily decide which business will profit you the most. But, first, decide what you want to sell. Next, you need to think about how you want to acquire your products, which include the making of the products, wholesale, manufacturer or drop shipping.
In this article, we’ve discussed major e-commerce businesses and categorization of product and revenue models. These detailed terminologies will take you through the process of establishing your business and help you boost the sales.