The Types of eCommerce Business Models Explained
It’s no secret that international eCommerce businesses have been on a steady rise for quite some time now. Just for 2019, global online purchases have been estimated to around $3.5 trillion, which means that people like to do a lot of online shopping.
eCommerce has become an almost indispensable part of our lives. It has proven to be extremely versatile, and more than capable of multidirectional expansion. That also means that it has become the perfect business platform for new and daring entrepreneurs.
According to eCommerceceo.com, “eCommerce business models of all types are thriving”, with “sales from online stores” expected “to increase 78% by 2020”. And while all of this sounds very exciting, eCommerce still has a lot of space for improvement. For example, “eCommerce represents less than 10% of all retail sales” in the US, reports Bigcommerce.com.
What does this tell us? Customers nowadays take full advantage of the fact they can shop whenever and wherever they want – and as online shopping is on the rise that means plenty of new opportunities for people that choose to enter this market. Of course, this doesn’t mean that setting up an online business is an easy feat, but it’s certainly worth doing it, and it pays out a lot if done right.
But to do it right, you would also need to know the basics of eCommerce. This demands a more thorough knowledge of the online market, a good business plan, a little bit of intuition, and, of course, a good grasp of the products and/or services you want to offer.
But, there’s also one more thing, which is the types of eCommerce business models themselves. And that’s precisely what we’re going to talk about in this article.
So, continue reading to find out the types of eCommerce businesses, and the product and service model options that come along with them!
Types of eCommerce Business Models
As we already know, eCommerce is a vast field of online retail practices and exchange and it can be articulated through different models. When starting an online business from scratch, it’s important to get to know the basic models of eCommerce and to also familiarize yourself with the details surrounding them.
One of the best things about having an online business is that you can either choose one model or more models according to which you can build your enterprise. All of them have their own quirks, both good sides and bad sides, which is why it’s not uncommon for businesses to embody more than one type of eCommerce model at the same time.
Maybe you already have an idea in mind about how you want your business to look like or how it needs to be organized. So, you only need to find the right type of eCommerce business model to make it actually happen.
Every type of enterprise has a more or less suitable business model. This also means that if you find the right one, you’ll minimize the possibility of risk for your business and enhance its inherent strengths. That’s why next we’re going to give you an overview of the basic types of eCommerce business models. So what are the main types of e-business models?
Main Types of eCommerce Business Models:
While every business that accepts electronic payments (or commercial transactions conducted electronically on the Internet) is technically considered eCommerce by definition, this definition of eCommerce can be too broad to be of any help. In addition, this is not how most people think about eCommerce.
That is why this article will focus on two specific areas of eCommerce:
- B2B – Business to Business
- B2C – Business to Consumer
Additionally, we’ll go into more detail on the types of plans you can use to generate revenue and elaborate on:
- Direct to consumer (D2C)
- White Labeling and Private Labeling
- The Rent and Loan Model
Business to Business (or B2B) eCommerce Model
The B2B or business-to-business eCommerce model is one that encompasses products that businesses provide or sell to one another. This means that the other business might be the so-called ‘end-user’, but they also just might resell the goods to a customer or client.
B2B business models are present in almost every type of industry. Often they are providers of some sort of service, but, there are also examples such as supply companies, software companies, manufacture, etc.
Bigcommerce.com notes some pretty good examples of the B2B eCommerce business model, like the FlexfireLED company that manufactures and distributes linear LED strip lighting products, and Knobs.co, a company that sells cabinet and bathroom hardware. Another example is Restaurantware, a company that provides eco-friendly catering supplies.
Some of these businesses also sell to consumers, but they have realized their full potential through B2B sales. FlexfireLED, for example, owes 80% of its revenue to B2B sales.
The online market has proven to be a very adequate and valuable field for this model precisely because “orders are processed digitally” and “buying efficiency is improved for wholesalers, manufacturers, distributors and other types of B2B sellers”. In fact, according to Frost & Sullivan, a global business-to-business eCommerce market is expected to reach $6.7 trillion by 2020!
Defining Characteristics of the B2B Model
Since the B2B model requires more decision-makers when the time for transaction comes, as well as more intermediaries and more in-depth sales information, it also means that the sales cycle will be longer. Customers are companies, a larger and more complex clientele that would definitely want more information about their long-term purchases, which are also often done in large quantities.
Also, entrepreneurs with B2B businesses have to think about making long-term contracts and deals with customers, which explains why the lifetime customer value is so significant to the B2B model. After all, the survival of your business might depend on the long-term relationship with a particular client (or clients).
The B2B model also requires a larger startup cost than the B2C model. This has a lot to do with the manufacturing costs and the number of products that need to be initially delivered to the contractor/client/company, which are usually much larger in number than in the B2C model.
Then you also have to take in account warehouse space, and shipping costs, and it all adds up to a more costly startup business model. However, there’s a high average order value, which, if increased, can also increase the profitability of your eCommerce store and make up for the initial large start-up costs.
So, let’s wrap it up – what characterizes the B2B model?
- Large start-up cost compared to other eCommerce models.
- Longer sales cycle (customers take longer to decide to buy from you).
- Large order quantities, high average order value and lifetime customer value.
An interesting find from a 2015 Google research on B2B eCommerce models is that almost half of B2B buyers are, in fact, millennials! This means that more and more young people are entering the arena of eCommerce. And, being born in or around the period of the digital revolution, these generations are going to be more adept at locating their businesses online and expanding the field of both the B2B eCommerce model and eCommerce in general.
B2B can be a very successful eCommerce business model in its own right, as has been proved time and again. However, if your enterprise allows it, you don’t need to limit yourself to this model only. Maybe your venture has the potential to incorporate the other eCommerce models, which by no means exclude each other.
Quite the contrary: combine them together and they can provide even more opportunities and possible directions for your enterprise.
That being said, let’s look at the next eCommerce business model in more detail.
Business to Consumer (B2C) eCommerce Model
A lot of B2B businesses also function as B2C ones. But what is B2C in fact?
Well, as its name says, it’s a type of eCommerce model that is probably the closest to what people imagine when you mention the noun ‘business’ or ‘online business’.
The B2C model explains the relationship between the product provider (the company) and the user of these services and products (the customer or consumer). This is the most traditional model of retail where a particular type of business sells its goods to a customer. When done online, from a brick and mortar business it becomes an eCommerce one.
B2C is an incredibly vast and adaptable field of commerce. After the digital revolution, the B2C model has very successfully found its place in the eCommerce sector as well.
The B2C model is everywhere and there are countless examples of it. One fine example for the eCommerce B2C model is Dermstore, a very successful US company that sells skincare, hair care, and beauty care products online.
Another successful eCommerce business is Fashion Nova, an online clothing store for men and women.
Another example is Zappos, an online shoe and clothing retailer.
Defining Characteristics of the B2C Model
As we said, the B2C model is one that targets individual customers/consumers.
They usually don’t represent a high-stakes purchase, and the sales information doesn’t need to be as in-depth as in the B2B model for the clients to make their decisions. Of course, there are exceptions to this rule for e-stores selling goods that are a bigger investment.
The important thing is that consumers themselves are making the decisions – without any intermediaries or many decision-makers, as is the case with the B2B model. This, in turn, means that their sales cycles are shorter than the one in the B2B business model, because it takes less time to make a purchase and less time for the transaction to occur.
Precisely because the B2C model targets individual consumers, it doesn’t require a large market initially, nor does it require a lot of manufactured products, to begin with. With B2C, it’s easy to start small. You don’t need a large warehouse to store products – in the beginning, you can use your garage! Also, as opposed to the B2B model, you don’t need to ship large quantities of products to other businesses, you can only have a small set of designed and manufactured products.
Because it’s so versatile as a model, B2C is also very open for niche markets. Niche markets allow you to target specific products to specific audiences. You can have different niche markets within the same model, which can greatly increase the possibility of generating bigger company revenue. You can target different demographics for different products, determine product quality and price your products according to the particularities of the niche.
And while you may very well start small, that doesn’t mean that’s where you’ll stop. If your online business starts to scale, you can develop a set of marketing strategies that will help you market your products to a larger audience (niche marketing can be a very useful part of the equation here).
So, let’s wrap it up – what characterizes the B2C model?
- Lower risk-failure threshold (a smaller start-up cost when compared to B2B)
- Significantly shorter sales cycle compared to the B2B model.
- Options for niche marketing.
- Marketing strategies that can be oriented towards a mass clientele.
Maintaining a good relationship with customers is one of the tenets for the success of the B2C eCommerce model. After all, customer satisfaction is what keeps the business running. Whereas the B2B model generally relies on advertising their products and services for its value and quality, the B2C model is always more interested in building a more personal connection between the product and service in question and the customer. This often involves attempts to awaken some sort of emotional response from the customers in question.
Types of eCommerce Business Revenue Models (or Plans)
Okay, so far we’ve covered the basic and essential types of eCommerce business models. And now it’s time for the next step: how to execute these models, how to get to the actual revenue and generate profit?
Well, it turns out, here you can also choose between several different business revenue plans and see which one of them best suits your business model – and you don’t need to limit yourself to only one, of course!
So, if you’re interested in learning about business models to consider for your next venture, next, we’re going to talk about the essentials of business revenue plans and point you to the most popular and desired options out there.
- Subscription Services
The subscription business model has been around for centuries, and it’s not going away anytime soon. Subscription services have shown themselves to be a very convenient business model that has successfully migrated to the online sphere.
It’s great for both the customers – because it saves them money – and for the company – because it generates loyal customers that bring long-term revenue and lifetime customer value.
This revenue model asks customers to subscribe to a particular service or a delivery of products for a period of time (it could be monthly, quarterly, annually). Depending on the type of policy the company enforces, consumers can terminate their subscription either immediately or when their contract ends.
One exampe that belongs to this type of business revenue model is Harry’s, a brand that manufactures and sells men’s grooming products.
Other types of subscription services are Menlo curated (clothing) subscriptions from the Five Four Holding company, the Dollar Shave Club we mentioned a couple of times before, and Blue Apron – one of the most famous weekly meal delivery subscription services.
Stitch Fix is a similar example, a type of fix delivery service which provides you with pieces of clothing for a set time. It works by way of choosing what you like from the bunch you receive, and you only pay for what you decide to keep. The rest you can return, which is free and very simple to do.
Building a Subscription Service Business
There are a lot of services that offer to help you in building a subscription-based business, and Subbly is one very fine example.
Subbly is a subscription eCommerce platform for entrepreneurs and marketers which makes opening your own subscription business a breeze. You can build your own website in minutes and easily accept credit and debit cards. With no coding skills required, companies like Subbly are making it a lot easier for entrepreneurs to start a subscription business.
What’s more, with Subbly, not only can you build your desired subscription business easily, but you can also have a team of developers always at your disposal.
If you’re interested in learning more about this eCommerce business model, in particular, we have a few detailed articles that go in-depth about the most important things you need to know about subscription commerce.
You can also find advice for people starting a subscription box business, and plenty of examples of the best quarterly and monthly subscription boxes around. Feel free to check this and much more on our blog!
Subcategories for eCommerce Subscription Types
Since subscription eCommerce is itself a pretty encompassing commercial arena, there are many types of subscription businesses to go around with. But, all in all, there are three main types of eCommerce subscription services:
The box/curation subscription service explains the type of subscription eCommerce business model where curated products are being delivered to customers on a regular basis.
The element of surprise is the key feature here, and this is especially important if the subscription company is constantly coming up with new products. This means that the longer the customers renew their subscriptions, the more personalized their orders become.
Box/curation is considered the most frequent type of eCommerce subscription service.
If you’re interested in this type of eCommerce subscription, you can read more about how to start a subscription box business on our blog.
Access subscription explains a special type of subscription service that gives the customers an additional access to a range of products once they subscribe. This also includes discounts and similar types of perks, where customers can benefit from lower prices, or members-only privileges.
The replenishment type of eCommerce subscription allows customers to receive products at regular intervals for lower prices compared to retail. This type usually works best for everyday, household items like cosmetics, health and beauty products, baby essentials, etc.
Perhaps the most famous example of this type of eCommerce subscription is Amazon’s Subscribe & Save, which, with its free shipping and discount, warehouse prices, helps buyers to save up to 15% on auto-deliveries.
- Direct to consumer (D2C)
The D2C plan is pretty straightforward – it describes the process through which you as a manufacturer or brand owner directly ship your products to customers, without any other mediating factor between you.
This way you get to sell your products at lower prices than other more traditional retailers. It also gives you more control in the whole end-to-end process, aka the creation of the products, the advertising involved and, of course, the shipping and distribution in the end.
The benefits of taking out the go-betweener are obvious. More and more contemporary businesses decide to use this method for creating and maintaining loyalty in customers without any middlemen.
The D2C business plan gives you tons of flexibility: by not following the more traditional retail practices, it allows for a variety of models of distribution. For example, there’s the option for opening pop-up shops, shipping the products directly to the clients, and partnering up with brick-and-mortar retailers.
Cbinsights gives a fine insight into some of the most successful and pretty well-known brands that are following this plan nowadays.
Among them are the Dollar Shave Club and Harry’s, famous for delivering razors and all the other necessary grooming essentials right to your door. Then there’s also Casper, the super-successful US mattress company, and Everlane, the clothing brand that gets more and more momentum as we speak.
It seems that one of the places where the future of business models lies is definitely the D2C business plan, which has found a way to stand shoulder to shoulder with huge, seemingly unbeatable brands, from all sorts of consumer fields. We can confidently say that the D2C plan has a bright future ahead, with, of course, a space for growth and improvement along the way.
Wholesaling is when retailers (brick-and-mortar or eCommerce) sell their products in bulk, which renders their price lower than the usual store prices.
And while wholesaling is usually seen in the B2B type of business model, it’s present in B2C too, especially when businesses want to attract customers that want to buy in large quantities and save up in the process.
Arguably the most famous example nowadays of the wholesaling plan is the Alibaba company that does wholesale transactions with businesses around the globe.
While the profits may be huge, the tricky side of wholesaling is that:
- If you decide on it, you have to be ready for a large initial investment.
- You’ll also have to have warehousing facilities,
- keep track of inventory,
- account for the orders of your clients and customers,
- have all their shipping information neat and available.
It’s certainly a lot of work but it’s not without its benefits.
Ecommerceceo.com gives us another example of a successful alternative to the leviathans of wholesaling. DollarDays is an eCommerce venture that offers an enormous variety of high-value and high-quality products (more than 260. 000 of them, in fact) that are going by very low prices compared to other retailers.
Most of their customers are non-profit organizations, betterment organizations, schools, and small businesses. They also incorporate the models of ‘case prices’ and ‘piece prices’, meaning they can both sell to the more general public, individuals, and also larger organizations and retailers, which “gives them a higher profit margin than a strictly wholesale model”, according to eCommerceceo.com.
- White Labeling and Private Labeling
The so-called ‘white-label’ business plan is one where there’s one company that makes a product, and then another one that does the re-branding and the subsequent distribution. It’s like putting your name/brand to an otherwise unknown product that has been obtained from a distributor.
White label products are often used in wellness, cosmetics, and beauty product niches. A very famous example is the Dollar Shave Club which uses their own rebranding for some of their white-label products.
The ‘private-label’ plan is when a manufacturer is being specifically hired from a retailer so as to create an exclusive product. This is suitable for creative retailers with loads of new and exciting ideas who don’t necessarily have the means or the money to make them themselves. This plan allows for flexible product delivery: you can either do it through direct shipping to customers, through the company that has ordered the final product, or through middlemen of the likes of Amazon and others.
Another aspect of its flexibility is the change of suppliers in case you run into some difficulties with how they create and deliver the product you’ve ordered.
This is one of those plans that doesn’t require too much money when starting up. It’s also a good testing ground if you ever want to become a manufacturer yourself in the future.
Both the white-label and private-label are attractive plans when it comes to capping startup investments and production costs, but also when your super-creative and innovative mind has that little bit of extra business edge.
Dropshipping is a very convenient business plan for eCommerce business models and it’s also one of the fastest-growing ones.
It’s a very simple business plan, based on having an eCommerce store that offers a set of products. These products are, in turn, supplied through wholesale or some type of manufacturing, and they’re sold on the eCommerce site for a commission.
AliExpress is a typical example of a dropshipping type of business – it takes products from numerous manufacturers around the world and serves as a go-betweener in the relationship of manufacturing companies and the customers themselves.
The trick is that with this kind of business plan a lot depends on your supplier. And while this is a great thing when it comes to obligations that have to do with obtaining warehouse space, packaging and taking care of inventory, it also puts you in danger of potential bad supply service.
In the end, customers will take you as being responsible if something goes wrong with the order – like slow shipping and problems with customs, or if the product quality is low and fails the customer’s expectations.
Dropshipping became quite popular when eCommerce platforms started to emerge on the internet.
- Rent and Loan Model
Rent and loan business revenue models aren’t as frequent as the other ones on our list, but they can definitely pay out big time.
According to this model (or plan), individual customers or users, but also companies or other types of affiliations, can rent out products or services from a company for a specific annual, weekly or monthly cost.
An example of this type of business is Rent the Runway, a subscription fashion service that allows you to rent as many designer clothes and accessories as you want, for a monthly fee.
Over and Out!
With a variety of eCommerce business models on the table, and as many business revenue models and plans, it’s easy to become overwhelmed and uncertain as to which model and revenue plan will suit your particular business best.
Every one of these models and plans has its own sets of benefits and flaws, which means you need to do a thorough analysis of your own business and the business plan you want implemented to make the right decision.
It’s important to keep several things in mind when trying to fit your business in the right niche:
- Where does your product stand compared to other similar or identical products on the market? What sets it apart and why do you think the customers should choose it as the best possible choice of all?
- What are the unique things about your product/service, and what are its limitations?
- Do you know your customers? What particular demographic, age group, and other types of social groups do you want to serve and offer your product to? Cracking the codes to your potential customers’ desires, habits, behavior, preferences, etc. is crucial when designing and improving your products and services. It will also help you save money.
In the end, opening a business requires you to have initial capital, do your research, listen to constructive feedback, learn from your mistakes, and most importantly – never give up!