Introduction to ecommerce business models
In today’s business environment, there is no one business model that is a surefire winner. If it was that easy, we wouldn’t be talking right now. Instead, there are plenty of ways to successfully base and run an e-commerce business. However, not every e-commerce business model delivers in terms of sales, at least not in the volume every e-seller would like to see. Allow us to explain.
Each e-commerce business model has its own pros and cons, naturally. There is a number of ways to sell online with the help of different ecommerce business models. Your business model depends on what you sell so it’s extremely important to analyze your business, irrelevant if you are using e-commerce as an addition to your brick-and-mortar store or exclusively selling online. With that in mind, this post will highlight business models that allow for an immediate boost in your sales.
Buckle up, destination - e-commerce town, population - three.
You’ll often read and hear how dropshipping is a clear choice for those entering the e-commerce stream due to ease of implementation. And it’s true. Dropshipping is mostly risk-free and easy solution for budding e-sellers because it puts much of the work on your supplier or dropshipping partner. The product you sell is:
- and shipped to your customers by a third party.
The key to being profitable with dropshipping is the price difference between what you charge and what your dropshipping partners charge you.
So how does dropshipping relate to experienced sellers and to increase in sales?
Probably the biggest benefit of dropshipping is the ability to offer a sizeable selection of products without actually purchasing inventory up front and managing it. You don’t really buy anything until it is ordered and paid for. That way, a seller is not bound by the confines of its own storage (not to mention that you’re saving money) and can immediately react to market demand by ordering the adequate amount of product. The margins are low but dropshipping is also great for diversifying your inventory and testing products since all you have to do is add the new product to your store.
Be careful with dropshipping as there is no control over the shipping and fulfillment aspect and no insight into inventory status of your product. You might unknowingly end up selling something that is out of stock, thus increasing your customer service responsibilities and reputation consequences.
2. White labeling
Similar to dropshipping, you aren’t manufacturing the product but rather employing someone else to do so. The difference is, you now put your brand on it, just like a manufacturer would. It’s rather quick and easy, putting you on the top of the product chain and on an opposite side of the business spectrum compared to the dropshipping model.
Either manufacturing products overseas or importing them from overseas allows for a higher profit margin. Essentially, what you are doing is:
- creating a product for a low price and then
- selling it for a much higher price.
You have full control over the entire process of manufacturing, fulfilling and shipping the product, which essentially means a lot of work and spent time making everything is a-ok.This is a more advanced e-commerce business model that requires an initial investment, meaning it’s best suitable for veteran e-commerce companies with a good amount of staff that can handle the necessary product operations.
On the other hand, you can benefit from others by taking advantage of wholesalers (we’ll get to them in a couple of minutes) and dropshippers to retail your product for you. That way, you can easily create a supply line for your product and ramp up sales. Since you have your product sitting in a warehouse, there is no fear of missing out on momentary opportunities or running low on supplies. Equally important is that you have a product that differentiates you from the others, creating a long-lasting brand identity.
The approach to making your product yourself is usually reserved for very small (usually family) businesses or hobbyists. These can be anything from natural beauty products to art to handmade jewelry and fashion products. The beauty of manufacturing is that it allows for total control over both the brand and the quality of the product. It invokes a sense of uniqueness (especially for handcrafted items) and thoughtfulness among the customers looking for a niche product.
However, it takes a lot out of the pocket for the purchase of the raw material, storage, inventory and in some cases, labor force. Manufacturing also requires a lot of time and there is very little scalability due to the limitations of skills and available resources.
Wholesaling is some sort of a middle ground between dropshipping and white labeling. In this instance, you are buying in bulk and storing the product in a warehouse. Wholesaling provides better pricing due to the fact that you are buying in bulk, as opposed to one-off purchases like in dropshipping. Selling the items individually through your online store allows you to enjoy better margins than with drop-shipping. The process is fairly simple and straightforward, providing a lower risk e-commerce business model with a couple of benefits:
- brands you are dealing with are already established and accepted on the market, providing access to fast sales;
- you don’t need to stock large quantities as compared to white labeling.
As long as you find the right supplier and determine favorable rates, there is no limit on what and how much you can sell. However, this model also requires an up-front investment for purchasing the goods and storage facilities for housing the product. In addition, selling in bulk to B2C companies means lower margins, thus creating a need to achieve a certain level of sales to make up for those lower margins.
Your business model is only one step, a cog in an entire business strategy machine whose goal is to stay competitive and profitable. Which model is the best for your company is something we cannot tell you. We are helping out as much as we can but you need to go through that door alone. Out of the three e-commerce business models presented, there isn’t a clear winner as it all depends on your company’s needs and capabilities.
Dropshipping is good for small businesses who want to save money on storing and shipping fees while being able to follow and address market trends by ordering optimal amount of product. For bigger stores, white labeling is a good choice, especially if they have a unique product. The profit margins are higher, but so are the responsibilities. Another viable option for small and medium businesses is wholesaling which allows instant brand recognition and a low-risk operation through bulk buying, but also lower margins.
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