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What is an e-commerce business model?
A business model is one company’s core plan for making a profit. In simple words, it’s the strategy of how a company makes money. It includes the products or services that the business intends to start a business with, its target market, and any anticipated expenses. The two key pillars of the business model are pricing and costs.
Business models are critically important to any business, regardless of how long they have been established or the company’s size. The business model helps companies to define their business, attract investment, recruit talent and motivate their employees. Long-established businesses also need to pay attention to their business plans regularly to make sure that they stay up to date, keep up with the trends, and be prepared for the curve ahead.
Also, when investors evaluate a company, the business model is the key factor for them to assess if that company’s business strategies make sense and whether it has the potential to grow. And thus, based on those criteria, investors will make well-informed decisions about their investment.
E-commerce business model categories
Before exploring which e-commerce business model suits your company the best, you need to understand the categories that they will go into. There are four main types of e-commerce business models, each with its distinct transaction flow.
- Business-to-consumer (B2C)
The business-to-consumer, commonly known as B2C, is the model that refers to the buying and selling activities between a business and an individual consumer. For example, when you buy a product from a retailer, online or offline.
If you sell goods from overseas to customers in the UK, make sure you handle VAT under HMRC’s guidance.
- Business-to-business (B2B)
Business-to-business (B2B) is any commerce between two businesses; For example, when a company sells a product or a service to another company.
This is also where wholesale retailers typically fall under. Companies might also have a mix of B2C and B2B in their offerings. For example, a coffee brand might sell its beans and ground coffee to an individual on its online selling platforms (B2C) while selling the coffee beans in bulk as ingredients to coffee shops (B2B).
- Consumer-to-consumer (C2C)
The C2C business model refers to selling and buying activities among two consumers.
- Consumer-to-business (C2B)
With the evolution of the creator economy, there is a surge in consumer-to-business (C2B) activities. This refers to commerce between a consumer (with their products or services) and a business or an organization. Think when a photographer might sell his or her photos online to Shutterstock or a freelancer selling services to a company.
Best e-commerce business models
To make the right decision on the business models, it’s important to understand each of the following methods. Each method will have its pros and cons and depending on your product, target market, and cost structure, there might be one method that suits you more than the others.
By far, dropshipping is the newest and most popular form of e-commerce. This model is a form of B2C but slightly different as in this case, an online store sells products to customers, but it’s the dropshipping suppliers who fulfill the order.
The retailer essentially delegates the order fulfillment process to a third-party service provider. This model attracts people who are less concerned about margins. It is also an ideal model for those who don’t want to hold and manage inventory.
- Low cost to start
It has little or no upfront cost as no inventory cost is needed. All you need to invest in is the website, selling software, and other operating expenses.
- Low risk
Since you don’t hold the inventory, you aren’t risking the items you can’t sell. Also, product lineups can be switched easily and flexibly.
- Streamline sales
Dropshipping creates streamlined sales activities and you can manage your business from anywhere in the world.
- High competition
With its low barrier to entry, the competition is critically intense as a lot of people are doing it. This makes it difficult for you to set yourself apart from the crowd.
- Low margins
With this model, you’ll have to rely more on building content, customer service, etc. Low margins mean you have to sell at significant volume to make a decent profit.
- Inventory syncing (backorders)
Because you’re relying on someone else’s inventory, the control you have over it is pretty low. There might be a case in which you place the shipment order to the supplier but that product is sold out.
Making your product is a common approach nowadays no matter what that product might be. This allows you full control over quality and brand but it comes with the price that you will have limitations on time and scalability. The upfront costs associated with this include the purchasing of raw materials, the storage of inventory, and labor.
- Low startup costs
You generally don’t have to produce a large number of units upfront when you are the sole manufacturer making your own stuff. This offers you relatively low production costs.
- Brand and price control
There will be no limitation in branding as you could create any brand you wish. This also offers you the ability to control the selling price as you see fit.
- Quality control
When making your products, the quality is in your full control. You have 100% authority over whether the products meet your expectations and your customers’ expectation.
- Flexibility and agility
This lets you adjust quality, features, and even the entire product at ease.
Making things manually on your own requires a great amount of time to be invested. The more sophisticated and complicated your products are, the more time-consuming they can be. This increases the time to market your goods and downgrades competitive advantages.
Handmade products sound sweet at the beginning but they can become bitter when your business takes off. Looking for a manufacturer might not be an easy or possible task, especially when your customers expect that they are purchasing real handmade goods. And, not to mention the quality might slip out of your hands when it comes to manufacturing.
- Limited product offerings
The most important thing to bear in mind is that not all products can be handmade. This limits you from the variety of products you can offer to customers as it’s based on your skills and available resources.
Although manufacturing requires a great financial investment upfront, this method is ideal for those people with a unique idea or a variation of a currently existing idea. There are two types of manufacturing: private label and white label.
Private label product is produced by a manufacturer and sold under the business’s name. The business has full control over everything about the product.
White label product is produced by one manufacturer and sold to various retailers under their brand names.
- Lowest cost per unit
Manufacturing usually has the lowest cost per unit and offers the greatest margins on your product.
- Brand and price control
You will have the opportunity to build your own brand. Along with that is the ability to set your prices for your product.
- Quality control
When you manufacture your product you’re in more control of the quality of your final result.
- Minimum order quantities
The costs for initial orders can be quite high and there will be required minimum quantities, which might exceed your plan of inventory
- Trouble with manufacturers
There’s a risk that you have to deal with a scammy overseas manufacturer, which will get your business into trouble.
- Time constraints
Manufacturing can be a long process of prototyping, sampling, refining, and production. Moreover, if you plan on using an overseas manufacturer, language, distance, and cultural barriers might be some factors that you need to consider.
Purchasing products wholesale is an ideal option if you want to develop quickly or if you want to sell a wide range of products and brands.
- Established products and brand familiarity
Typically, wholesale has lower risk as the brands and products are already validated on the market. You don’t need to test the water and risk your business
- Product differentiation
Selling already established products might go off track sometimes. As the products are available from multiple retailers, you’ll need to put more effort into differentiating yourself and convincing potential customers to buy from you.
- Price and quality control
Selling other brands means you have little control over the price and the quality of the products. Some brands will restrict you from discounting their products.
- Inventory management
You will likely have to purchase a minimum order of each product.
Print on demand
This is a way to sell made-to-order products that feature your designs. You simply just design and, when a customer makes an order, a third-party printing service will create, pack, and ship the order. When using this method, everything from printing to packing to shipping is handled by your printing partner.
- Create products quickly
Streamlining the workflow offers you more time to create products, which affects the time to market.
- Shipping and fulfillment
This is handled by your supplier, which offers you more time to focus on other tasks.
- Lower cost upfront
It’s easy to make changes to your products, including adding and removing products, testing new ideas, and creating products for niche markets since you don’t hold any inventory.
- Less control over shipping
Since shipping is handled by a third party, you will have limited control over that activity, especially when it comes to time, service fee, and service quality.
- Limited customization
What you can customize depends on the vendor and the product.
Non-physical assets or media types that can be sold and distributed online are what all digital products are about. These products often come in the form of downloadable, streamable, or transferrable digital files, such as (MP3s, MP4s, PDFs, NFTs, videos, plug-ins, templates, etc.)
- Lower overhead costs
You don’t hold any inventory or attach any shipping charges.
Orders can be delivered instantly and repeatedly. As the business grows, automation can help free up time.
- Flexible business models
There is a wide range of paths you can take: a freemium model where you provide products for free with upgradable features, monthly paid subscriptions for access to exclusive content, or licenses to use your digital products.
- High competition
Probably, it’s easy to find free alternatives elsewhere to your digital products.
- Intellectual property rights
When everything is up online, you’re at risk of people stealing and reusing your products as their own.
This means you sell products directly to consumers, without the involvement of wholesalers, middlemen, or third-party retailers.
- Own the customer relationship
This model offers you the ability to build relationships with customers on your own. You will have full rights on managing the relationship with your consumers and from there, shape your business and strategies to be customer-centric.
- Collect customer data
The collected data can be used to personalize customer communications and experiences.
- Get feedback faster
Since you can communicate with customers directly, you can easily collect feedback to improve your offerings.
- Direct distribution cost
There’s no sharing in shipping or storage costs.
If you’re a new brand, you’ll have to market yourself. You don’t benefit from the distributor’s salesforce.
A subscription business model charges customers a recurring fee—usually monthly or annually—to access a product or service.
- Predictable revenue
Monthly recurring subscription helps you forecast sales, plan, and understand how much to reinvest for business growth.
- Cash flow
Receiving cash every month upfront means more cash flow.
Regular purchases give you deeper insight into customer behavior to make personalized and enhanced offerings
Products become dull if they don’t change often. That’s why Netflix adds and removes movies every month. You need to constantly keep products fresh and people interested to maintain their subscriptions.
Choosing the right E-commerce business models
There are several different types of e-commerce business models and delivery methods to choose from. Deciding on a business model can be tough so here are a few questions that can help you navigate the journey.
- What are you selling?
You need to understand what is out there in the online marketplace and what you are interested in tapping into. Whether it’s a physical product, digital good, or a service, knowing your online business idea and understanding your products to the core is essential.
- Who is your customer?
Understanding your customers and their needs is the vital key to success. Customers’ behavior, habits, and insights are the most important factors that influence your products or service offerings.
- What is best for your product?
Depending on your product or service type, different models will suit you better than others. Find the model and method that works for you, for your level of expertise, experience, budget, and the amount of time and effort you have.
Choosing the best e-commerce business model for you is the key to your long-term success. After that, you now have a clear strategy and can now be on your journey of starting an online business.
Understanding the best e-commerce business models and their pros and cons is extremely vital for you to start your business. BBCIncorp can help consult and assist you in forming your company with ease. Contact us now to know more.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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