The Different Business Models of E-Commerce

With the advent of technology, businesses of all sizes have realized the immense potential of e-commerce for selling their products and services online. From small operations run by a single individual to massive corporations, a diversity of models of e-commerce have become the go-to option for businesses operating in nearly every industry you can imagine.

Growth in online sales is only expected to escalate in the coming years. In fact, it’s projected to experience a considerable increase in this decade. Unsurprisingly, in their efforts to get their slice of the pie, many businesses are rushing to incorporate emerging e-commerce models into their portfolios.

The future looks bright for e-commerce. But, I hear you ask, what type of e-commerce business model works best? In this article, we’ll be covering the different types of e-commerce businesses, and discussing the exciting potential advancements that may lie ahead for each.

What Are B2B, B2C, or C2C Business Models? What Are Some Examples?

B2B, or business-to-business: these e-commerce businesses sell products or services to other businesses. Think wholesalers and manufacturers selling to retailers.

• Pros: higher profit margins
• Cons: typically involves larger and more complex transactions and longer sales cycles

B2C, or business-to-consumer: these businesses sell directly to end consumers. Think Amazon, Target, or your favorite online clothing store.

• Pros: smaller, more manageable transactions and quicker sales cycles
• Cons: more competition

C2C, or consumer-to-consumer: when consumers directly sell products or services to other consumers, like in a real-life garage sale —think eBay or Facebook Marketplace.

• Pros: low barriers to entry
• Cons: requires robustly designed payment and shipping logistics; comes with a higher risk of fraud.

What Are the Different Types of E-commerce Business Models?

Different e-commerce business models vary in terms of relative investments necessary for inventory management, product development, and product sourcing/manufacturing. We’ll be going over the three most popular business models.

While this list is presented hierarchically in terms of potential profit, that’s not to say that the latter, more profitable e-commerce models are the best option under all circumstances. You might, for example, want to avoid having to create your own products, or you may not want to deal with storage, shipping, and customer service.

So, to explain the various models of e-commerce, let’s start with the simplest of the many e-commerce business models:

Dropshipping

This e-commerce model allows you to sell products without actually having to hold any inventory, manufacture any goods, or worry about shipping any products yourself.

How dropshipping works is quite simple: you partner with a supplier who holds the inventory and takes care of shipping the products directly to your customers. All you have to do is list the products on your online store, and when a customer places an order, you forward the details to the supplier. The supplier then ships the product directly to the customer, and you pocket the difference between the wholesale price and the retail price.

Dropshipping eliminates the need for a physical store, storage space, and a large capital investment in inventory. All you need is a website and some marketing skills to get started. The supplier takes care of the rest, including product sourcing, manufacturing, and shipping.

A word of warning, however: with dropshipping, you sacrifice control over product quality, shipping times, and customer service, and if your supplier messes up, it will reflect badly on your business. That’s why it’s important to choose your supplier wisely. Make sure to do your due diligence and choose a reputable supplier who can provide high-quality products, fast shipping, and excellent customer service.

With all of that said, at the end of the day, dropshipping is —essentially— a relatively low-risk and affordable way to start an e-commerce business. Overall, so long as you exercise sufficient discernment in the selection of your supplier-partners, dropshipping can be a profitable and nearly effortless e-commerce model.

Wholesaling and Warehousing

If you’re looking for a more hands-on approach, this might be the e-commerce business model for you. It involves purchasing products in bulk from manufacturers or distributors, storing them in a warehouse, and then selling them to retailers or directly to customers.

The biggest advantage of this model is that you have complete control over the products you’re selling. You can choose the brands, the products, and the quantities you want to carry. And, since you’re storing the products in your own warehouse, you can precisely control the shipping times and customer service.

Obviously, however, this model also requires a significant investment in inventory and storage space —you’ll need to have enough capital to purchase products upfront and enough space to store them. But, with careful planning and efficient inventory management, this can be a lucrative venture.

As far as developing business strategies goes, this type of e-commerce business takes a bit more effort than a dropshipping business. You’ll need to find a target market and figure out what products they’re interested in buying, in addition to building an online storefront, creating a brand, and getting the word out about your products. If you’re up for the challenge, wholesaling, and warehousing can be immensely profitable, rewarding, and fulfilling.

Private Labeling and Manufacturing

Private labeling and manufacturing are veritable holy grails among the business models of e-commerce. If you’re looking to create your own unique products and build a brand, this is the path for you. You will need to produce and brand your own products —either by yourself or by working with a manufacturer.

The biggest advantage of this e-commerce model is the high degree of control over product quality, design, and branding that it affords. You can create products that are unique to your brand and that you know your customers will love.

Note, however, that this model requires a significant investment of time and funding; product development, manufacturing, and branding will all need to be addressed. You’ll need to have enough capital to create prototypes, conduct market research, and get your product manufactured. On top of all that, you’ll need to focus on building a loyal customer base, creating a website and social media presence, and investing in paid advertising.

Mercifully, private labeling and manufacturing do afford a wide marketing advantage since you have complete control over your brand and can create a strong, consistent brand image across all your products and marketing materials.

If you’re ready to put in the work, private labeling and manufacturing can be a phenomenally rewarding e-commerce business. Of all the models of e-commerce, private labeling and manufacturing provide the highest potential for profitability and brand building but require lots of hard work and investment. Although, the best part? You get to call yourself a “manufacturer”! (Just don’t forget to make your products actually, you know, good).

What are the 6 types of e-commerce business revenue models?

The six types are transaction-, subscription-, advertising-, product-, and service-based, along with marketplace setups. Each with its own pros and cons.

1. Transaction-based: These businesses earn by charging a commission or fee for facilitating transactions between buyers and sellers. Think Etsy or eBay.
2. Subscription-based: Here customers pay a recurring fee, usually monthly or annually, for access to a product or service. This can include physical products like monthly boxes of beauty products or monthly deliveries of groceries, or digital products like access to online content or software. Think Netflix, Spotify, Canva, and Medium.
3. Advertising-based: Revenue is generated by displaying ads. These ads can come in many forms, including display ads, sponsored content, or sponsored products. Think Google or Facebook. The success of this revenue model relies on having a large, engaged audience. Without enough traffic, it can be tough to make advertising-based revenue models work
4. Product-based: This model involves selling physical or digital products directly to customers. Think Amazon or Apple. This revenue model can also include additional elements such as upselling, cross-selling, and post-sale services, which can increase the overall revenue earned from each customer.
5. Service-based: This model involves selling services directly to customers. Examples of this type of e-commerce business include online consulting, online tutoring, and online design services. Think Upwork or TaskRabbit.
6. Marketplace: This model, much like the transaction-based model, involves facilitating transactions between buyers and sellers but also handles additional services like payment processing and shipping. Think Amazon Marketplace.

E-commerce Business Models and Business Revenue Models Distinguished

It’s important to differentiate between e-commerce business models and revenue models.

E-commerce business models refer to the way a business sells its products or services online. E-commerce revenue models, on the other hand, refer to how businesses earn money from e-commerce activities. In other words, the e-commerce business model is about how you sell your products or services, while the e-commerce business revenue model is about how you make money from those sales.