Do you want to start an ecommerce store but unsure about a model to adopt? If YES, here are 8 types of ecommerce business model plus example of companies using them.
What is eCommerce?
E-commerce is a method of trading goods and services between buyers and sellers through an electronic medium. E-commerce is also referred as the paperless exchange of business information using EDI, Email, Electronic fund transfer etc.
E-commerce has become very popular among the people because of the convenience it offers to both buyers and sellers; the cost benefits to retailers and cost savings to customers; and also the secrecy it offers to customers.
The concept of electronic trading is made possible by such technologies that enable payment to be made online such as electronic funds transfer, supply chain management, internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems.
The ecommerce business niche has long been established and running smoothly, so businesses are now free to key into the various business models available to run their businesses. Many would-be ecommerce business owners just don’t know how ecommerce businesses are set up and what business model options are available to them. We have listed below the various business classifications and models one can run their ecommerce business on.
8 Types of eCommerce Business Model With Example of Companies
There are various ecommerce business models in existence and they include;
- Drop Shipping Business Model
Drop shipping business model is a retail model where you don’t have to care about the costs of running a business and stocking products. The model involves a partnership with a wholesale supplier who stocks your inventory and deliver the goods on your behalf directly to your customers.
In this model, all you have to do is to is to create a platform listing the products you have for sale and handle the marketing of the business. The inventory, delivery, and handling are taken care of by the drop shipper. There is an extra charge for this though, but this is better than piling up an inventory of products with no guaranteed demand.
This type of eCommerce business model is suited for businesses-
- Who don’t have much investment to buy and store inventory
- Who prefer mobility over fixed business locations
- Who prefer to focus more on the marketing of the business
However, there are certain limitations to the drop shipping business model. These include
- A lot of competition
- Low profit margins since many businesses sell the same product
- Heavy dependency on the drop-shipper
How Drop Shipping Works?
Dropshipping works on the principles of aggregator business model where you focus on building a brand for your organization while the actual product or service is delivered by someone else under your brand. Many drop shippers use Shopify and Oberlo. It’s quick and inexpensive to set up. A popular model is to set up a quick store and drive traffic with Facebook Ads. Margins are thin in this model, so making a profit will be a tedious job.
Profit margin calculation with this model requires a deep understanding of the market and accurate calculation. The orders are given to the drop shipper as and when they arrive. This is done either through automated or manual emails, calls, or spreadsheet files, which is decided in the contract between you two.
There are many dedicated dropshipping business websites and they include Shopify, Aliexpress, etc.
- Wholesaling and Warehousing Business Model
Operating a wholesaling and warehousing eCommerce business model is comparatively simpler when compared to dropshipping. This business model runs on the principles of offline wholesaling. That is, you buy products directly from the manufacturer or the middleman at discounted rates, store them in your warehouse, and sell them at profitable prices.
This business model suits businesses with guaranteed demand. Setting up and maintaining a wholesaling and warehousing eCommerce business model requires a lot of investment and supervision. This type of eCommerce business model is suited for businesses which-
- want every aspect of their business in their control
- deal in exclusive products
- have guaranteed demand for their products
- want to sell products in volume
- want to cater to other businesses (b2b)
However, there are certain limitations to the wholesaling and warehousing business model. These include;
- A lot of upfront investment
- Business may make losses if there isn’t much demand
- Dependence on sale volumes to generate profits.
Examples of Wholesaling and Warehousing Business Model
DollarDays, with a product catalogue of 26,000 products, is an excellent example of wholesaling and warehousing business model.
- White-labelling and Manufacturing Business Model
This business model is perfect for the organizations which don’t have enough investment to manufacture their own products. This business model allows you to outsource the manufacturing but at the same time put your name as a manufacturer on the label of the product.
This eCommerce business model turns out to be profitable as you make use of the infrastructure already set up by the outsourcing company. This business model suits businesses which:
- want every aspect of the product in their control
- deal in products which are similar to other competitors
However, there are certain limitations to the wholesaling and warehousing business model. These include
- This isn’t for commitment-phobic businesses as goods once manufactured belong to the business
- Businesses have to develop a process to monitor and maintain quality control
BigCommerce is a good choice in case you own a branded product and are looking forward to getting traction. However, their pricing model can get expensive when you start making significant sales. One such example is the Dollar Shave Club.
- Private Labeling and Manufacturing
If you’ve got an idea for the perfect product, but don’t have the cash or desire to build your own factory, this might be the right ecommerce business model for you. Companies that manufacture products offsite for sale send the plans or prototypes to a contracted manufacturer who produces the product to meet customer specifications and can either ship directly to the consumer, to a third party such as Amazon, or to the company selling the final product.
On-demand manufacturing allows you to quickly change suppliers if you encounter problems with product quality. The startup costs are minimal, and if you’re interested in potentially opening your own production facilities later, this is a good way to test a new product or concept. Thomas Felice is one such example which uses this model.
- Subscription Ecommerce
One of the most popular and successful pure ecommerce subscription brands is the Dollar Shave Club. Other examples of subscription services include Stitch Fix, Blue Apron, and Nature Box. On the local level, community-supported agriculture boxes are popular.
These ecommerce companies rely on a subscription model that delivers customers a box of products at regular, scheduled intervals. Subscription companies have relatively reliable income streams and can easily incentivize customers to purchase additional subscriptions or encourage their contacts to subscribe.
Picking the right products and niches can be difficult. Successful subscription boxes tend to fall into a small handful of product categories: health and grooming, beauty, fashion, and food. Outside of these areas, few subscription companies thrive. Some popular businesses in this niche include; Ipsy, Bespoke Post, Dollar Shave Club etc.
- Credit Model
This revenue model is widespread in the mainland Europe but has recently found its way to the other parts of the world. This is a ‘buy now, pay later’ model which allows the customers to purchase the goods and services on credit and pay for it at a later date.
The income is generated in the form of profits plus interest rate. British clothing company Next has seen a great response after adopting this revenue model.
8 Major Ecommerce Business Classifications
- Business to business (B2B)
Business to business, known as B2B model, is the largest e-commerce model that is based on revenue which involves trillions of dollars. In this model, both the buyers and sellers are business entities. B2B describes commerce transactions between businesses, such as between a manufacturer and a wholesaler, or between a wholesaler and a retailer.
The volume of B2B transactions is much higher than the volume of B2C transactions and any other transaction.
The primary reason for this is that in a typical supply chain there will be many B2B transactions involving sub components or raw materials, and only one B2C transaction, specifically sale of the finished product to the end customer.
Benefits of B2B model:
- Encourage businesses online.
- Products import and export.
- Determine buyers and suppliers.
- Position trade guides.
The B2B business focuses on providing products or services to another business. This could be across different domains. Few of these are software companies providing solutions, supply companies, hosting companies. There are numerous other e-commerce businesses under this type.
Common examples would include- ExxonMobil Corporation, Boeing, Archer Daniel Midlands, IBM. These businesses have custom, enterprise e-commerce platforms that work directly with other businesses in a closed environment. A B2B e-commerce business typically requires more start-up cash
- Business to consumer (B2C)
This is the thickest e-commerce market. Business to consumer is the first type of e-commerce and it is also the most common one. In this type online business, selling is offered to individual customers. This type started to expand after 1995 and now became one of the most common e-commerce models.
The B2C model works by retailers and marketers that use clear data in various marketing tools so they can sell their products to internet users. Internet users can use the shopping cart for everything they need. Payment is mostly done through credit cards or by payment gateways like the PayPal.
Direct interaction with the customers is the main difference with other business models. B2C normally deals with businesses that are related to the customer. The basic concept of this model is to sell the product online to consumers.
B2C sales are the traditional retail model, where a business sells to individuals, but business is conducted online as opposed to in a physical store. B2C is almost present everywhere. This includes names like Newegg.com, Overstock.com, Staples, Wal-Mart, Target, REI, and Gap.
- Consumer To Consumer (C2C)
Consumer to consumer (C2C) or citizen-to-citizen electronic commerce involves the electronically facilitated transactions between consumers through some third party. A common example is the online auction, in which a consumer posts an item for sale and other consumers bid to purchase it; the third party generally charges a flat fee or commission.
The sites are only intermediaries, just there to match consumers. They do not have to check quality of the products being offered.
The C2C model facilitates online transactions of goods and services between the individual net users. But in this both the web users or both the parties cannot carry out any transaction without the platform that is provided by an online market maker such as the eBay.
Opening a C2C business requires immense planning and market understanding. Created by the rise of the e-commerce sector and growing consumer confidence in online sales, these sites allow customers to trade, buy, and sell items in exchange for a small commission paid to the site.
Few successful examples include- eBay, Craigslist. There are a number of auction and classified sites which have opened and closed too quickly due to unsustainable models.
- Consumer to business (C2B)
C2B is another model most people don’t immediately think of, but that is growing in prevalence. This type of e-commerce business involves individuals selling products or services to businesses and is roughly equivalent to a sole proprietorship serving a larger business.
Common examples include – Reverse auctions, and service provision sites like UpWork. This also includes common blog monetization strategies such as affiliate marketing and Google AdSense. This is a type of business which is still being explored.
- Business to Government (B2G)
Governments use B2G model websites to approach business organizations. Such websites support auctions, tenders, and application submission functionalities.
- Government to business (G2B)
Governments use G2C model websites to approach citizen in general. Such websites support auctions of vehicles, machinery, or any other material. Such website also provides services like registration for birth, marriage or death certificates. The main objective of G2C websites is to reduce the average time for fulfilling citizen’s requests for various government services.
- Mobile Commerce
Mobile commerce or m-commerce, uses mobile devices like the mobile phones that can carry out online transactions. Nowadays, web designers are trying to optimize websites so they can easily view on mobile phones and to allow the use of this model.
Mobile Commerce conduct commerce using a mobile device, such as a mobile phone, a Personal Digital Assistant (PDA), a smartphone, or other emerging mobile equipment such as dashtop mobile devices. Mobile commerce products and services that are available include:
Mobile ticketing – tickets can be sent to mobile phones using a variety of technologies. Users are then able to use their tickets immediately, by presenting their phones at the venue.
- Peer To Peer (P2P)
Peer to peer, peer-to-peer or usually said as P2P, is a communications model in which each party has the same capabilities and either party can initiate a communication session. This type is a technology that helps customers to share a computer resource and computer files to anyone they require without the need of a central web server.
In recent usage, peer-to-peer has come to describe applications in which users can use the internet to exchange files with each other directly or through a mediating server. In some cases, peer-to-peer communications is implemented by giving each communication mode both server and client capabilities.
Those who are going to implement this model are required to install the expected software so that they could work on the mutual platform. Businesses in this model include;
- Mobile vouchers, coupons and loyalty cards – mobile ticketing technology can also be used for the distribution of vouchers, coupons, and loyalty cards. These items are represented by a virtual token that is sent to the mobile phone.
- Content purchase and delivery – mobile content purchase and delivery mainly consists of the sale of ring-tones, wallpapers, and games for mobile phones. The convergence of mobile phones, portable audio players, and video players into a single device is increasing the purchase and delivery of full-length music tracks and video.
- Location-based services – the location of the mobile phone user is an important piece of information used during mobile commerce transactions.
- Information services – a wide variety of information services can be delivered to mobile phone users in much the same way as it is delivered to PCs. These services include: news, stock quotes, sport scores, financial records and traffic reports.
- Mobile banking – banks and other financial institutions use mobile commerce to allow their customers to access account information and make transactions, such as purchasing stocks, remitting money.
- Mobile StoreFront – mobile phone as a touch sensitive handheld computer has for the first time made mobile commerce practically feasible
- Mobile brokerage – stock market services offered via mobile devices have also become more popular. They allow the subscriber to react to market developments in a timely fashion and irrespective of their physical location.
- Auctions – unlike traditional auctions, the reverse auction (or low-bid auction) bills the consumer’s phone each time they place a bid.
- Mobile Browsing – with a mobile browser, customers can shop online without having to be at their personal computer.
- Mobile Purchase – catalog merchants can accept orders from customers electronically, via the customer’s mobile device. In some cases, the merchant may even deliver the catalog electronically, rather than mailing a paper catalog to the customer.
- Mobile marketing and advertising – refers to marketing sent to mobile devices.