A Quick Guide to Different Types of eCommerce Business Models — Pros and Cons

There’s no doubt that eCommerce has revolutionized the way we buy things. Since credit cards first saw wide usage in the 50s, the world has never looked back. Innovations in online banking further facilitated the cashless shopping trend that would later fuel the eCommerce market.

In 2019, online retail sales amounted to $365 billion in the US alone. The worldwide figures for that year are even more astounding with $3.5 trillion in sales. Most forecasts predict that the eCommerce industry is going to nearly double in the next two to five years.

When you factor in the global pandemic that has closed down countless brick-and-mortar stores then you start to see unmatched growth potential — matched with a proven track record at that! With all that being said, not all eCommerce businesses are created equal.

There are multiple types of business models that eCommerce companies can be classified under. Learning about the differences between them will help you find the right one for your business so that you can leverage that insight and use it to grow the company.

After all, only 1 out of every 24 eCommerce companies make more than $1,000 annually. This isn’t a result of saturation. Rather, it actually comes down to the fact that many eCommerce businesses don’t strategize prior to launching.

That’s good news for you since it means that you can surpass older eCommerce sites in a relatively short amount of time if you put the right strategies into play. Let’s start by learning about the four main models for eCommerce businesses.

The Big Four

B2C

B2C stands for business to consumer and it’s by far the most popular eCommerce model. It also holds the largest market share in the industry since it’s essentially the virtual equivalent of retail stores (which is why you should minimize loading times to maximize impulse buys.)

In fact, the B2C model is so lucrative that brick-and-mortar establishments such as Walmart and Target have been heavily investing in digitizing their companies so they can keep up with Amazon — who accounted for 44% of all US eCommerce sales in 2017.

When retail giants like Walmart invest billions into getting a slice of the eCommerce pie, that’s a clear indicator of market strength and worthwhile ROIs. Amazon is one of the best B2C examples because it managed to surpass its C2C competitor, eBay.

Another factor that drove entrepreneurs to take the online route with B2C eCommerce is the fact that it has less overhead than a physical store. Web hosting is far cheaper than the rent you’d pay to a mall — and less operating costs mean your net income will be higher.

Lastly, the reach of B2C websites is also very appealing to those who are looking to start their own business. Opening a store in a mall gives you access to all the shoppers in the immediate area whereas a website can target consumers on a global scale.

B2B

The B2B business model differs from B2C eCommerce in that you’re selling directly to other businesses rather than to consumers. Alibaba is the first name that pops into the head of most people when they think about B2B companies.

While Alibaba does use other eCommerce business models such as C2C, B2B has always been its primary income stream. Still, Taobao — owned by Alibaba — is the largest C2C site in China so their presence in other sectors of eCommerce is nothing to scoff at.

There are some drawbacks to the B2B sector. For one, it’s harder to find a product that resonates with businesses. When targeting consumers, you can get away with high prices or luxury items that are superfluous to everyday life.

In contrast, when trying to sell to businesses, you’ll need to find a product that solves a major problem in a cost-effective manner. Flexfire LEDs became so successful because the product it provides is something that companies across multiple industries need.

While they do sell to consumers, 80% of Flexfire’s revenue comes from B2B sales. B2B may be a tough nut to crack but it’s very lucrative once you get past the shell. After all, Alibaba beat Amazon’s GMV by an average of four times over in both 2015 and 2016.

It’s worth noting, however, that Amazon makes almost five times more profit than Alibaba. This reflects the general consensus amongst online retailers that the B2C model has better margins than its B2B counterpart.

Another popular player in the B2B space is BulkBookstore which lets companies buy books in bulk at wholesale prices. There are currently over three million titles on their website that are available for purchase — with free shipping at that!

C2B

C2B is the Uno reverse card of the eCommerce world. It flips retail on its head as it’s the consumers providing a product or service to businesses rather than the other way around. The freelancing website Elance — now UpWork — was one of the first big players in the C2B space.

Most C2B transactions fall under the services category as it’s easier for consumers to provide a service to a business in comparison to a product. Social media influencers who use their online presence to attract attention to a company are common in the C2B sector.

Stock photos are a popular C2B product that businesses regularly purchase as they are often needed for marketing campaigns and product listings among other use cases. Websites like Shutterstock, Getty, and Alamy have made it easy for photographers to monetize their craft.

Affiliate marketing also falls under the general C2B umbrella. In fact, referral programs are what helped PayPal grow their user base so rapidly during the earlier stages of the company. While paying people to get friends to sign up may seem extreme, it certainly worked for PayPal.

Survey respondents that provide market data also qualify as C2B providers since they help businesses gauge consumer interest. They’re essentially the online equivalent of focus groups, albeit less reliable.

If you want to be successful in the C2B market then find something you’re good at and monetize it effectively. While UpWork may have led the charge, other websites like Fiverr and Guru are also in the business of helping people convert skills to income.

The demand for unique company logos in an increasingly saturated business world has made it possible for graphic designers to sell their art and turn their hobby into revenue. As software and hardware get cheaper, the only remaining barrier to entry are skills.

C2C

C2C used to be the most popular type of eCommerce business in the pre-Amazon era during eBay’s reign of dominance. Selling items on eBay was more casual than setting up a website and the increased accessibility grew its popularity.

While it may not have as much growth potential as B2C models, starting an eCommerce business in the C2C sector can be easier since you don’t have to invest as much time and money into creating a website.

Many eCommerce startups begin with a C2C model because it allows them to utilize existing platforms and thus become cash flow positive sooner. Once they have money in the bank and a steady income stream, the merchant can expand to the B2C sector.

Websites like Craigslist and eBay facilitated the adoption of C2C eCommerce during the late 90s and early 2000s. This was quickly followed by innovations in the payment processor industry such as the introduction of PayPal in 1998 which further simplified C2C transactions.

Other solutions like Venmo and Stripe have also gained traction for online payments. Recently, the C2C eCommerce market has become more accessible due to the widespread adoption of cryptocurrencies.

The majority of C2C transactions are in the buying and selling formats, but there are also some listings that focus on trades. Websites like The Freecycle Network embody the laid-back nature of the C2C sector.

Out of all eCommerce models, C2C is generally regarded as the riskiest since it can be difficult to get a refund when the seller is an individual rather than a company. Still, eBay and other sites tend to have strict policies to mitigate such issues.

B2G — The Fifth Class

B2G is less popular than the other eCommerce models and there are fewer companies working in this space. Essentially, the label encompasses all commerce between private companies and the public sector.

This could include governments themselves or other public administrations. In fact, B2G is sometimes referred to as B2A which stands for business to administration. The B2G tag is reserved exclusively for those who have the public sector as their sole client.

One of the key differences between B2G and other eCommerce models is the fact that most transactions in the space occur in a bidding format. Government agencies put out contracts known as tenders that various B2G companies bid on.

After multiple bids have been placed, the government picks which one to award the contract to. These contracts can happen at a local, state, or national level. Bidding wars aren’t uncommon due to the high yield that each contract could potentially bring.

99% of all B2G sales in the US go to the department of defense. Manufacturers of military equipment such as Lockheed Martin have been able to capitalize on this opportunity and turn it into a multibillion-dollar revenue stream.

B2G bids may be rejected by the General Services Administration — who handles the issuing of contracts on behalf of the US government — for various reasons. If a public institution has already enlisted the service of a particular company, then it may reject their bid.

There are also many incidences where a bid is rejected because the company submitting it still has an ongoing project with the government. They pass on these bids to ensure that the B2G sector remains competitive.

The GSA always aims to provide a level playing field for all the players in the B2G space rather than giving a handful of companies a monopoly on the entire market — as this would hinder innovation.

While military equipment makes up the vast majority of B2G transactions, there are hundreds of different B2G products and services that the GSA purchases annually. This includes IT equipment, software, construction, and medical equipment.

A prime example of this is the Colorado company Synergetics USA Inc. who manufactures both disposable and non-disposable medical products for the public healthcare system along with more sophisticated pieces of equipment such as bipolar electrosurgical generators.

In total, the GSA purchased $45 billion worth of products and services in 2017 alone, on behalf of local, state, and federal government institutions. This proves that, while less visible than other eCommerce divisions, the B2G sector is a thriving, lucrative market.

Types of eCommerce Business Revenue Models

Dropshipping

Out of all eCommerce examples, dropshipping is one of the simplest revenue models that a company can go for. Many merchants favor the dropshipping model because it doesn’t require as much manual input.

All you need to do is set up your online store and accept payments, then your supplier will handle the rest. This saves a lot of time that would be otherwise spent on packaging items, managing inventory, or finding a warehouse for your stock.

On paper, it seems like a total win since you can generate revenue without sacrificing a large amount of your bandwidth on the business or risking burnout. However, while there are definitely attractive aspects of dropshipping, no revenue model is perfect.

The main drawback of dropshipping is the fact that you’re putting your brand on the line despite having limited control over product quality and shipping times. If your distributor sends a poorly made item or is late when delivering the shipment, you’ll take the fall for their shortcomings.

Many suppliers also abuse the anonymity that they get when working with dropshipping businesses. If something goes wrong then the negative reviews will go on your online store, not the record of the supplier.

The cardiovascular system is a good analog of eCommerce. You could get by without putting too much effort in but at the end of the day, regular exercise is the key to good heart health. The same holds true for your business — constant work is required to achieve the best results.

Still, some people feel that the potential rewards of dropshipping are well worth the risks associated with it. The most common strategy is to use Shopify to set up an online store at a low cost then utilize a PPC approach centered around FB ads to drive traffic to the site.

Wholesaling and Warehousing

Wholesaling and warehousing models aren’t as popular with startups as it requires a large amount of upfront capital to set up. The higher initial investment means it’ll take longer before you get a return.

You’ll need to pay for the warehouse space, handle customer orders, and manage inventory all by yourself, in addition to actually growing sales. This could leave some merchants spread too thin if they go it alone.

That being said, you’ll end up with better margins when selling products en masse. The only way to justify the larger setup cost is through high-volume sales on Amazon and other websites with millions of shoppers.

This revenue model is better suited to teams rather than solopreneuers since it will be easier to deal with the multiple facets of the setup process if you have all hands on deck. While the cost is higher, the ROI can also be greater with proper execution.

Private Labeling and Manufacturing

Inventors looking to get into eCommerce usually go for the private labeling and manufacturing route. Those who have a great product idea may not have the money needed to build their own factory.

Some actually do have the necessary capital but would rather focus on product development instead of micromanaging the manufacturing chain. Regardless of the reason, the private labeling approach can reduce the execution risk with regards to manufacturing.

Once you have your prototype, you can contract a manufacturer who’ll produce the items — ensuring you’ll keep up with customer demand. The manufacturer can then ship the products to either an Amazon warehouse, the consumer, or to your warehouse if you have one.

One of the great things about outsourcing the manufacturing process is the fact that you can easily switch to a different supplier if you find any issues with regards to product quality. The startup costs are also far lower than what you’d pay for your own factory.

This means you’ll get a quicker ROI and can test products without sinking a lot of money upfront. The private labeling and manufacturing route is a relatively low-risk way to see whether or not you can make a viable business out of your concept.

White Labeling

White labeling is similar to private labeling but there are some noteworthy differences. First of all, rather than coming up with your own product, you’ll pick one that’s already selling well. All you have to do is find a company that offers white-label options.

Once you find a willing company, you’ll need to design your label and package. Finally, sell the product through whatever means you prefer — with the most common being the familiar combination of Shopify and FB ads.

White labeling is most common for eCommerce companies in the beauty and wellness niche but there are some success stories in other industries as well. The main risk with white labeling is overstocking. If you order stock then fail to sell it, you’re stuck with excess inventory.

This issue is amplified by the fact that most white label companies have a minimum order size. While some people decide to roll the dice, we’d recommend conducting thorough research on the demand of the product before placing an order with your hard-earned cash.

Subscription

Subscription-based revenue models have become increasingly popular in recent years. Dollar Shave Club is arguably the most successful subscription-based eCommerce company. The brand is famous for sponsoring YouTube videos to advertise their product.

Only five years after founders Michael Dublin and Mark Levine launched their website, the Californian company was acquired by Unilever for a whopping $1 billion — a true testament to the lucrative potential of subscription-based eCommerce businesses.

Grooming, beauty, health, food, and fashion tend to be the most popular niches for subscription companies. The recurring nature of this model ensures that the business has a stable income stream even if customer growth stagnates.

New customers can easily be acquired through content marketing, newsletters, and cold emails. Existing customers can also be encouraged to increase the frequency of deliveries on their subscription to further boost the revenue of the company.

Conclusion

As you can see, there are quite a few business model types to choose from. Be sure to carefully analyze the various types of business models so you can find the right one for your company. A little strategy goes a long way.

Regardless of which revenue format you go with, knowing your market and putting in the hours needed to launch the brand to great heights is crucial. Nothing comes easy, but eCommerce is often a journey worth taking.

That’s all for now, stay safe, and get your eCom on!

Author’s Bio:

Petra Odak is a Chief Marketing Officer at Better Proposals, simple yet incredibly powerful proposal software tool that helps you send high-converting, web-based business proposals in minutes. She’s a solution-oriented marketing enthusiast with more than 5 years of experience in various fields of marketing and project management.

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