Let’s talk about types of e-commerce business models. Due to the explosion of e-commerce, the shopping habits of consumers have been fundamentally changed over the past few years. To put it simply, e-commerce is changing the way people do business and shop on a global scale. It just makes people more reliant on digital transactions. E-Commerce simply transforms the way the market operates, making it easier for businesses and individuals to buy and sell products without a geographic limitation.
Global e-commerce sales and statistics
With people significantly relying on online shopping — global e-commerce sales hit over $3.5 trillion in 2019. The fact is, online retailing will take over a larger segment of the retail market in the future. To be more specific, retail e-commerce sales worldwide should reach over $6.5 trillion in 2022.
If these numbers seem attractive to you, and you are thinking about setting up an e-commerce business, then keep reading. In this article, we are going to take a closer look at the different types of e-commerce businesses, both by business and revenue model – and help you gain a better understating of how the entire e-commerce market operates.
Types of e-commerce business models
If you are opening an online business, remember that the two most common participants in e-commerce are consumers and businesses. Whether you are a beginner or a serious seller, chances are you will fall into one or more of these categories.
Business-to-business (B2B E-Commerce)
B2B e-commerce stands for business-to-business electronic commerce. This is an e-commerce business model, where goods or services are traded among businesses via online channels. In other words, this is a business model in which businesses sell products or provide services to other businesses online.
Despite not being the most common form of e-commerce, many manufacturers, distributors, and wholesalers engage in the B2B model. Take wholesalers, for example. They sell products to retailers (other businesses) that then resell the products to end consumers (individuals who buy and use the product.)
The main feature of this business model is that it provides great revenue, but the market is not very large. For instance, if you have a business as your customer, it will order more products as it has a much larger budget than that of an individual. However, the sales cycle will be a lot longer because there are typically many people within the decision-making process.
Business-to-consumer (B2C E-Commerce)
Business-to-consumer e-commerce is the first thing that comes to mind when someone thinks of an online business because it is the most common business model. This is a business model, where companies sell products or provide services directly to end customers (individual people.)
You engage in a B2C transaction as a consumer whenever you buy something in an online store. The decision-making process for such a purchase is much shorter than that for a B2B purchase. Specifically, it is much easier for an individual to choose to buy a new dress or a pair of shoes online than for a company to purchase goods in large quantities.
B2C online merchants serve a wider audience, which means that the market is larger than that of B2B e-commerce. This contributes to the main disadvantage, which’s the need to determine who your consumers are. With a lack of comprehensive understanding of your consumers and the market, your products or services will go unnoticed and fall behind your competitors.
Consumer-to-business (C2B E-Commerce)
Individuals following the B2C business model sell products or provide services to companies. In the C2B model, individual people bring value to companies. This can be something like hiring a freelance content writer to create written material for your business website.
As these are typically individual people trying to attract the attention of businesses, they tend to use various methods to get their name and work out there. For example, they build their own portfolio websites to showcase their work and reach potential clients.
Furthermore, most people who engage in the C2B e-commerce provide services instead of products to businesses because they are unable to offer the number of products their business customers would need.
Consumer-to-consumer (C2C E-Commerce)
C2C e-commerce involves transactions between individuals in an online environment. Individuals sell products like motorcycles and cars to each other online.
This is an e-commerce business model, where a customer buys a product from another customer using a third-party site or platform such as Etsy and eBay. These third-party sites or platforms are present in the process in order to manage quality control, facilitate transactions, and protect customers.
But this e-commerce business model is not scalable and, as a result, many successful C2C sellers decide to establish an online business and participate in B2C transactions.
Types of E-Commerce business models by revenue
Who is your customer is only one factor defining your business. The way you source and distribute your goods is another piece of the puzzle. So, now, we are going to discuss how you can handle inventory management and source products for your online store as it will have an enormous effect on your revenue.
Wholesaling
Most wholesalers do not manufacture their own merchandise. Instead, they source their products from manufacturers. To put it another way, wholesaling is the act of purchasing goods in bulk from a manufacturer at a discounted price and selling them to a retailer (usually a business) for a higher price. As wholesaling typically involves selling products from one business to another, it is a B2B practice.
Because of the large quantities of products bought from the manufacturer, the wholesaler needs to manage inventory and stock. The wholesaler needs to purchase goods in large quantities and store them in a warehouse and, therefore, they need to invest a lot of money in the beginning. However, the advantage of wholesaling is that the wholesaler has more control of product quality and delivery.
Dropshipping
Dropshipping is undoubtedly the simplest form of e-commerce since it does not require a business to keep products in stock. With dropshipping, purchasing products in bulk and storing them in a warehouse isn’t needed. Instead, dropshippers order products from their suppliers only after they receive an order themselves. The dropshipper then pays the supplier, and the supplier packs and sends the order directly to the customer.
In other words, this is a low-risk business model, where an online store sells items to consumers, but the merchandise moves directly from the supplier to the end consumer without being stored or handled by the dropshipper. This may be the perfect option for businesses with limited capital to invest up-front and a low-risk tolerance.
Private labeling
Small businesses may not have the capital to invest in manufacturing their own products. If that happens, they can find a private label manufacturer that will manufacture products under their brand name. This allows the retailer to design their products to their exact specifications without having to invest a lot of money in their own production.
For instance, a hair salon wants to create its own branded line of shampoos and conditioners for its customers to buy and take home. The hair salon will not participate in the manufacturing process of its shampoos and conditioners. Instead, it will find a third-party private label manufacturer and pay to have them manufactured and delivered.
White labeling
Unlike private labeling, while labeling includes choosing a product that’s already being successfully sold by another business. However, it can be customized with the seller’s package and label. A white label manufacturer manufactures a generic item that can be customized with the seller’s package and label.
In case you opt for white labeling, make sure that the white label manufacturer, you want to work with, offers high-quality products. If you want to have a look at the differences (pros and cons) of white label vs private label dropshipping and reselling, make sure to read our blog post dedicated entirely to it.
Subscription
This requires a customer to pay a recurring price at regular intervals for access to a product. Products like disposable items, supplements, kitchen supplies, and pet food are constantly in demand. Therefore, they have the potential for a subscription service.
Businesses that use the subscription model offer automatic, recurring orders of items that require regular replenishment. This offers convenience and peace of mind for the customer and a continuous income stream for the seller.
How to choose an e-commerce business model for your online business
Before choosing an e-commerce business model for your online business, you need to research the market you are about to target. More importantly, be absolutely honest about what value you can bring to it. Finally, determine who you are selling to and how you want to source and distribute your products.
Another important thing you should do is to identify what is best for your product. For instance, if you are interested in manufacturing your own products, subscriptions and wholesaling may be the perfect fit. On the other hand, if you don’t want to deal with inventory and delivery, then you may want to consider dropshipping.
If you’re still interested in dropshipping and starting finances, you can find out more in our ‘How Much Does It Cost To Start A Dropshipping Business‘ article. Moreover, if you’d like to see the various eCommerce marketplaces for online sellers, our latest blog post will inform you of all their pros and cons, including fees, potential profits, and more.