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When you’re starting an e-commerce business, it’s important to have a strong e-commerce business model in place. Your business model helps determine how you’re going to reach and retain customers, stand out in the marketplace — and how customers are going to get a hold of your products.
With the understanding that business models are fluid — and you'll likely tweak yours continually as your business grows, this guide explains five different types of e-commerce business models, along with some different business-to-market relationships, so you can make the best choice for your e-commerce business.
What is an e-commerce business model?
An e-commerce business model is how your e-commerce business is structured conceptually in order to reach customers and drive sales. There are several types of e-commerce business models that enable different kinds of companies to position themselves in the market and reach their customers in an effective way.
There are two layers to finding the right e-commerce business model. The first layer determines how you’re setting up your company — it defines to whom you’re selling and how you’re positioning what you have to sell. Then comes figuring out your actual e-commerce business model — the way your business plans to find and capture customers and how they’ll interact with your product.
Types of businesses-to-market relationships
Before you choose the e-commerce business model that will enable you to sell your products to customers, you’ll need to figure out who your customer is. For instance, are you selling directly to consumers, or are you supplying something to another business or a government entity?
Business-to-consumer, or B2C, is the most common type of business model and what people generally think of when they think of commerce. Here, you as the business are selling directly to the end customers, aka whoever is using your product. This is a traditional sales model, which you’ll carry out online as an e-commerce retailer. Because of the sheer volume of consumers, you can decide how targeted or broad you want your demographic base to be.
B2B, or business-to-business, is a model in which one business sells to another business. For instance, maybe you sell a service that helps other businesses market to their customers.
One of the upsides to a B2B business model is that you often receive repeat orders, or, if you’re a service business, you may find a lot of recurring revenue from a monthly charge. One thing you must consider in a B2B model is that you’ll likely have a smaller customer base since you’re selling to niche businesses. Additionally, sales cycles are generally longer, and you also will likely have to wait longer to get paid by your customers. B2B customers often are extremely price sensitive.
Consumer-to-consumer (C2C) or peer-to-peer (P2P)
C2C is synonymous with P2P, or peer-to-peer business models. This is a new model that’s facilitated by the advent of technology that enables consumers to interact directly with each other. For instance, a consumer might use a platform to sell something they own directly to the end-user. The consumer isn’t a business, like in B2C, but rather a participant in this peer-to-peer network.
Generally, peer-to-peer e-commerce business models work with a site or platform that takes a small commission of sales from the direct transactions. These can be less stable business models than other traditional setups like B2B and B2C.
With the rise of platforms that enable people to provide services, the consumer-to-business, or C2B, model has emerged. This is, in essence, a way for a solopreneur to provide a service or good to a business — say, graphic design or writing services.
Business-to-government business models are rare. They’re for vendors who sell their services directly to the government for government contracts. If this type of business model isn’t on your radar, it’s likely not a fit for you. But B2G is worth mentioning since government contracts can generate quite a bit of revenue for those who can secure them.
E-commerce business models
There are a few core types of e-commerce business models that online businesses use to reach customers and drive sales.
Subscription e-commerce business models have risen dramatically in popularity. With a subscription, your customer signs up to receive products in regular intervals. Subscriptions enable businesses to develop strong recurring revenue streams and maintain customer relationships for longer than many other businesses that rely on one-off purchases.
Subscriptions have worked for many different types of businesses — from toothbrushes and razors to cleaning products, meal kits and clothing. If your product is something that customers will use frequently and either need to replace, reuse or may run out of, a subscription e-commerce business model could work for you.
With white-labeling, you choose a product that’s already manufactured and sold. However, you’d brand the merchandise with your company’s name, design a label and packaging and then sell the product. When you white-label goods, you may have to buy in large quantities. There’s a higher risk for dead stock this way, and you’ll also need to consider warehousing this inventory.
White-labeling isn’t the best fit for every business, especially those that create specialty products with proprietary formulations. However, it can be good for those who are looking to build a brand. White-labeling is common in the beauty industry where some formulas are created at a central lab and then rebranded by various companies.
3. On-demand manufacturing
If inventory space is a concern for you, you might want to consider on-demand manufacturing as an e-commerce business model. In this type of model, you create the good when the customer orders it. This way, you’re not stuck with stock that you don’t know whether you can move. You can also potentially offer lots of customization for your customers.
On-demand manufacturing (sometimes called print-on-demand or POD) can sometimes mean orders have a longer lead time to get to customers because they’ll have to wait for their product to be made versus plucked off a shelf. It’s important to know whether your customer is willing to wait and be sure to be upfront about your timeline.
An extremely popular e-commerce business model is dropshipping. With dropshipping, you don’t have to worry about housing inventory, keeping track of it or even shipping it to your customers. You’ll work with a warehouse partner who will keep your inventory and manage all of the operations once the orders have been placed. That can free you up to think about the other elements of your business, including merchandising, branding and marketing.
There is a fee to working with a warehouse for a dropshipping business. But, if you’re selling at a volume that you simply can’t sustain in your office alone, dropshipping is an option. It also allows you to experiment with what you sell without having to pay upfront for stock that may not end up selling.
5. Wholesaling and warehousing
With wholesaling, you often keep a significant amount of inventory — a big upfront investment — and require buyers to purchase from you in bulk. You’ll need a lot of space to keep your products, but if you have the real estate, you can offer many types of goods, which can give you a competitive advantage. Volume is the name of the game with a wholesaling business.
Wholesaling used to be exclusively for B2B businesses, but it’s expanded into allowing customers to purchase directly from wholesalers. This generally happens by providing an option for customers to buy in smaller quantities. These transactions often bear higher profit margins, since you’re selling goods individually or in smaller packs.
How to decide
It’s possible that one of these business models may jump out to you immediately as the right one for your business. If not, here are a few questions to ask yourself to help you find the right e-commerce business model:
How quickly and frequently do your customers expect to receive your product?
How often are customers looking for new products to be added to your line?
How much capacity do you have for inventory, and how much inventory do you want to keep, if any at all?
How many options do you want to offer to customers?
How conscious are you of the price of shipping?
How much do you want to control the production of your product?
Do customers value something extremely unique from your e-commerce brand?
Are you selling physical products or digital goods?
How do you want to acquire your products?
Remember — your business model is a comprehensive strategy. It’s not just what you’re selling or how your customers are going to get it, but encompasses things including your market positioning and point of differentiation, the actual quality of your product and your customer experience. Just like most things in business, the more customer data and feedback you can collect, the better chance you have of locking in a business model that’s going to bring you the most success.
A version of this article was first published on Fundera, a subsidiary of NerdWallet.