Whether you’re starting a side-hustle or a full-time gig, you have a lot of important choices to make when establishing your eCommerce business. Aside from what you want to sell, selecting an eCommerce business model is one of the most critical decisions you’ll make in the early days of your entrepreneurial journey.
If you’re not sure where to begin, or even what an eCommerce business model should look like, this guide will give you a high-level overview of different models to consider when mapping out your plan for success.
What is an eCommerce business model?
An eCommerce business model is your framework for making money and offering value to your customers. Creating a successful eCommerce site starts with outlining a plan for how you intend to serve your potential customers and generate a profit for your business.
Let’s take a closer look at some of the basic eCommerce business models that work in 2021.
There are pros and cons to each model based on your product, target market, financing, and overall business goals. You can think of these models as the structure around which you build out the more detailed nuances of your business strategy.
Ecommerce business classifications
eCommerce businesses broadly fall into four main categories based on how your business and your typical customer are described.
B2B eCommerce refers to businesses that sell to other businesses. This could take the form of a digital product like software or a physical product like office furniture.
A B2C business sells products or services to individual consumers. This is the most common business category and one that the majority of entrepreneurs target when setting up their eCommerce site.
A C2C eCommerce website allows customers to buy, sell, or trade items with one another. There’s no business involved and customers can act as buyers and sellers simultaneously. Some well-known examples of this model are eBay, Etsy, Poshmark, and Facebook Marketplace. It’s not uncommon for newbie business owners to begin selling products on C2C platforms before launching their own eCommerce site and transitioning to a B2C model.
In the C2C category, businesses pay consumers for a service or product. Although the concept can seem a bit backwards initially, influencers are a notable example of a C2C model that’s exploding in popularity as businesses pay individuals for exposure to their audience. This term can also be used to describe sites like Freelancer and Upwork, where independent freelancers sell their services to businesses.
10 types of eCommerce business models that work in 2021
Dropshipping can be an appealing eCommerce business model for those new to the industry because it comes with low risk and low start-up costs. Dropshippers sell products on their eCommerce site, but a third party is responsible for holding the inventory, as well as packaging and distributing customer orders. A dropshipper essentially serves as a middle man, connecting shoppers to these third-party manufacturers.
Since dropshipping businesses don’t pay for inventory until it’s sold to a customer, the upfront costs and financial risks are minimal. This model also frees dropshipping business owners from the hassles of managing inventory and organizing shipments. When the eCommerce business model is this attractive, however, it’s perhaps no surprise that competition is high. It can be a challenge for new business owners to stand out and establish a steady customer base.
Profit margins also tend to be low, since the only revenue dropshippers earn is the difference between the cost they charge their customer and the fee they pay to their third-party supplier to take care of the logistics. Lastly, outsourcing to a third-party means dropshipping business owners have limited ability to manage customer satisfaction. If customers are unhappy with the products or shipping experience, there’s often little the business owner can do to change the process and improve their reviews.
Print-on-demand leverages a similar strategy to dropshipping and can be a smart eCommerce business model for creatives. In a print-on-demand model, your business sells products featuring your custom designs. These products can include everything from clothing like T-shirts and leggings to phone cases, posters, and throw pillows. When a customer places an order, you rely on a third-party printing service to print the selected design on the customer’s chosen product, as well as to package and ship it to the customer.
Like dropshipping, print-on-demand can be a low-barrier-for-entry business model for entrepreneurs who are new to eCommerce, since you don’t need to pay for any products upfront. The only costs you need to cover are the fees owed to your third-party printer when you place an order.
However, print-on-demand comes with similar drawbacks as dropshipping, such as minimal control over your customers’ shipping and unboxing experience. It also tends to be a competitive market, but it’s possible to stand out by creating unique designs. In addition, since you don’t need to allocate funds to upfront production, you can also gain traction by funnelling your start-up budget towards a strong marketing and advertising strategy.
- Private labelling
Private labelling is an ideal eCommerce business model for entrepreneurs who have a compelling idea for a product, but no desire or resources to actually manufacture it themselves. These business owners instead contract a third-party manufacturer to create custom products that they can label, market, and sell under their own business’s name.
Private label businesses are involved in the design, production, and packaging of their products, giving them better control over branding compared to the dropshipping model. Ordering large volumes of products directly from a manufacturer also gives these entrepreneurs the potential to pay a low cost per unit, driving up their potential profit margin.
On the flip side, however, this also means that private labelling can require a high upfront financial investment, so it’s best for entrepreneurs who are confident their products will sell well (a feat that can be tricky for new brands that need time to establish trust and familiarity with consumers).
Success in private labelling also usually involves conducting significant research in the early stages of your business to find a reliable manufacturer who can consistently make products that meet your specifications and standards at the lowest possible price.
- White labelling
White labelling is a similar concept to private labelling, however, rather than selling products exclusively made for your business, it involves adding your branding to generic products the manufacturer sells to multiple retailers.
Like private labelling, white labelling gives the business owner control over packaging but, in contrast, the business owner usually can’t design the product to their specifications. White labelling is generally more affordable than private labelling since it involves less customization. The lead time for getting your products to market is often reduced as well since the manufacturer doesn’t design your products from scratch.
Since white labelling means selling a product other businesses are also selling, it can be more challenging to establish a unique selling proposition for your brand. White label business owners typically need to focus on distinctive marketing strategies and distribution channels in order to differentiate themselves from their competitors.
As with private labelling, it’s also important to thoroughly assess customer interest before getting started. Many manufacturers have production minimums, which could leave you paying for products you can’t ultimately sell if you overestimate demand.
Wholesaling is an eCommmerce business model that involves selling products in bulk. Wholesalers typically sell to other retailers, making this a B2B business model. Some wholesale business owners make their own products, but many source them from a manufacturer and act as a middleman between the manufacturer and the retailer. You make a profit by selling the products to a retailer, while the retailer, in turn, sells the products to their customers at a higher price.
Wholesaling has the potential to offer a high profit margin if you can negotiate a good deal from the manufacturer, but it also requires a number of early investments and there are many logistical details to manage. You’ll need to take on the financial risk of purchasing inventory upfront, manage relationships with manufacturers and retailers, as well as have a place to store your inventory. Like with white labelling, wholesaling often means competing with other businesses that sell the same products, which means you’ll need to find other ways to set your business apart from competitors.
- Digital products
A digital product is a nonphysical product or media type that can be sold online. You may sell these products to customers or to other businesses, so this model can be B2B or B2C. Products can include everything from music and ebooks to instructional courses and software, and they usually come in the form of digital files that your customers can download or stream.
Although the initial time investment of creating a digital product can be high, selling it to customers is typically much cheaper and simpler than selling a physical product. You never need to worry about storage, running out of products, or winding up with excess inventory you can’t sell.
With a digital product eCommerce business model, you also don’t need to pay for shipping and customers can usually receive the product instantly after they make a purchase on your eCommerce site. You can also potentially automate the process of sending digital products to your customers after they make a purchase, which frees up even more of your time and makes it easier to scale as your business grows.
One of the main challenges digital product entrepreneurs face is competition, particularly since customers can often acquire similar digital products for free. It’s important to give careful consideration to your niche and plan a marketing strategy that demonstrates why your product is worth paying for. Theft is also a concern for entrepreneurs using this business model, as it can be challenging to stop people from resharing your digital product for free once they have access to it.
If you have a passion for creating fashion, beauty, household, or other handmade products, then you might want to consider a maker model in which you sell directly to your customers.
Aside from the raw materials needed to make your product, it can be easy to keep start-up costs low in this model. Plus, you can often make products in response to demand, rather than ordering a minimum supply to have on hand.
This eCommerce business model also gives you full control over your branding, pricing, shipping, and product quality. The long-term potential for profits is high since you don’t need to share your revenue with any third parties. You’ll also have a direct line of connection with your customers, which can help you respond to feedback and adapt your business plan strategically over time.
The downside to the maker model is that making your own products by hand can be time-consuming and create limitations on how much you can scale up production (and how high your profits can climb), even if consumer demand takes off. Shipping and storage costs can also be higher if you’re handling them yourself, rather than going through a third party who can potentially negotiate bulk discounts and pass the savings onto you.
As its name implies, rental eCommerce involves renting or loaning products to your customers rather than selling them outright. In this model, your customers rent a physical product for a set period of time for a fixed cost and then return it to you. You can rent everything from dresses and cameras to audio equipment and instruments.
Although you’ll still need to purchase inventory when you first start your business, this model can reduce your product costs in the long term since you’ll be renting the same products to new and repeat customers over and over again, rather than constantly needing to purchase or make new products.
Naturally, rental eCommerce comes with some drawbacks as well. Most notably, you’ll be responsible for repairing any damages caused by your customers. Even if most customers treat your products well, you’ll still need to budget for routine maintenance and cleaning between rentals.
Also, the most popular items in the rental eCommerce market will need to be upgraded and replaced over time. For example, clothing goes out of style and cameras become outdated as new technology is released.
- Subscription goods
In a subscription eCommerce business model, your customers pay a recurring fee to have your product delivered on a regular basis. Customers typically pay the fee monthly or annually to receive your products at pre-scheduled intervals, whether it’s a meal kit or a box of beauty products.
A subscription model is a convenient way to sell physical products because it’s easier for you to anticipate how much stock you’ll need from month to month. This model can also mean a more steady and predictable income stream, with many subscription-based businesses using automated billing to regularly charge their customers.
One of the main challenges encountered by subscription-based businesses is keeping customers interested. It can be tricky to strike the delicate balance between delivering customers the familiar products they’ve grown to love over time, while also introducing enough variety to keep them feeling excited to receive your products and motivated to continue renewing their subscription.
- Subscription services
Subscription services tap into a similar eCommerce business model as subscription goods, but rather than send customers a physical product, your customers pay for regular access to a service. It could be a membership community, for example, or a video streaming service like Netflix.
Many business owners in this space also leverage a freemium model. This strategy allows customers to sign up for a free version of your service, which has a more limited scope, in the hopes of converting them to a premium plan that grants access to exclusive content and additional features.
Like subscription goods, a subscription services model can offer more reliable income and it also allows you to capitalize on good customer relationships. If you continue to provide great service and value, your customers are likely to keep renewing.
However, finding the right niche and developing a product that appeals to consumers in a subscription format can be a challenge. As with subscription goods, business owners in this niche sometimes run into difficulty if customers get bored of the service. You’ll need to continually strategize how to keep your customers engaged over the long haul.
How to choose your eCommerce business model
Start by thinking about your target market, the product you want to sell, and what sets your product apart from competitors. Consider how much money you can potentially invest in the early stages of your business, your strengths as an entrepreneur, and how you hope your business will grow over the short and long term.
If you answer these key questions, one of the eCommerce business models outlined in this article will emerge as the logical choice for your business. By using these models as a foundation, you’ll be off to a strong start in creating a successful eCommerce business, building a base of loyal customers, and achieving your entrepreneurial goals.