After taking an in-depth look at the various types of e-commerce business models and marketplaces in part one and part two of our guide. We now turn our attention to how the top e-commerce business models operate in practice and the different approaches employed by them to take an idea from conception, all the way to your front doorstep.
With the umbrella of e-commerce business covering any product or service sold online, the logistics of each niche requires careful consideration and a well-formulated strategy if an online business is to prove to be successful.
The majority of e-commerce business is offered by companies that also have bricks and mortar establishments, a prime example being IKEA which has both an online catalog and also giant real-life stores. These stores will generally be an extension of the bricks and mortar business’ operations. But for the pure player existing only online and starting from scratch, they must first decide what exactly they are going to offer to the consumer.
Finding an opportunity and creating the most effective means to seize it, is the underlying aim that drives any businesses, regardless of what form they take. Be it books, dog toys or software, a successful e-commerce business will identify a gap in the market, source the inventory and ensure orders are managed efficiently through to fulfillment.
The entire world of e-commerce business can be broken down into a few broad spheres, based on which direction the business is facing.
The traditional e-commerce business models:
B2C – A business selling a product or service to a consumer.
B2B -A business supplying products or services to another business, generally in larger wholesale quantities.
C2C – Marketplaces such as Craigslist and eBay allow consumers to sell directly to each other.
C2B – Reverse auction sites and affiliate marketing means consumers can offer services directly to businesses, also includes freelancers offering services such as web design or content writing.
B2B2C – Manufacturers sell directly to consumers through online catalogs, cutting out the middleman, lowering prices for customers and increasing profit margins for the manufacturer.
After working out what product or service to offer and who exactly you are going to sell it to, comes the difficult part, logistics. With e-commerce business totaling sales of $453 billion dollars last year in the US alone, it is easy to see that this is indeed a very large and multi-layered pie. There is no easy, universal answer as to what the best strategy is to grab a slice, it very much depends on the sector, product and ultimately how your own business operates.
The perfect approach for a new e-commerce business that lacks the financial clout to manufacture its own product. Instead, the product is produced by a third party and the vendor then white labels it with their own brand, which they must focus on building and marketing.
This strategy can be applied to any of the traditional business models, but it is not without its risks. Once a manufacturer is chosen and the product is made, the business is committed to the stock, which means they will need to be very confident that they can ensure high standards are maintained by their manufacturer.
B2C businesses will try to find a supplier offering their product at a price point typically at least 50% that of the retail price. They will then directly target consumers through their sales and marketing teams or online e-commerce store.
This is a strategy that requires heavy financial investment and can lead to operational difficulties for smaller businesses. They need the capital to sink into the inventory, the capacity to store it, the infrastructure to market the product and then the wherewithal to receive and efficiently fulfill the orders placed.
If a warehouse also operates as a distribution center, it can ease the burden on a business that has bought in bulk but is too busy or understaffed to handle shipping. The product is stored in a warehouse and listed on the company’s e-commerce store until an order is made, it is then shipped directly from the warehouse to the consumer.
One of the top e-commerce business models in terms of popularity is FBA – Fulfillment by Amazon. Where a business ships their product in bulk to an Amazon fulfillment center, which will then pick, pack and ship your product, once a sale has been made.
With no inventory required, there is a reduced risk for the retailer, who only purchases the product from the supplier after the order has been made. This allows for greater control over the branding of the product’s delivery and transactional information from the sale. By not being tied up with existing stock, it is much easier to test new products and suppliers.
The downside is the retailer will be hugely dependent on their supplier and will have to carry out a lengthy and meticulous vetting process of the manufacturer. Are they selling to others in large quantities? Are they available 24/7? Will the delivery process become too convoluted and inefficient?
The potential products are sourced from a manufacturer and sold at a commission by the ‘retailer’ who never handles the product, nor holds any inventory. Once they have created their e-commerce store, they can add a wide selection of goods from different distributors, with no financial commitment on their part.
The low barriers to entry lead to an oversaturation in many markets, with slim profit margins and low-quality products the reality. Shopify and Ali Express have made it possible to open your own e-commerce business in just a few hours. Like most get-rich-quick schemes, it is often too good to be true. It takes time, networking and some exclusivity with your supplier to make drop shipping a truly profitable venture.
E-commerce business, in its different guises, comes fraught a wide range of potential pitfalls, but by choosing the right approach for your business, these can be avoided. Very little success comes from diving straight into a new business, without doing the proper research, planning and ideally receiving expert guidance. It can be boiled down to three steps, choose a product, figure out your place in the market and work out the most efficient way to bring it to the customer’s doorstep.