Ecommerce Business Model

By Angus  |  6 Mar 2015 16:00:00

This post is aimed at those with a complete blank slate as far as their ecommerce venture is concerned. At this stage your opportunities are essentially limitless, although it is likely that you will have a certain amount of preconceived ideas based on your interests and experience.   

Because the choices made here will be crucial in determining the success of your business, the aim of this post is essentially to cover the range of potential business models, some which you may not have considered, and then to discuss the relative advantages and disadvantages of each.  

B2B or B2C?

The first question to ask ourselves is to whom we wish to sell. I will start by saying that selling to both businesses and consumers is a perfectly valid strategy and can be a great way of increasing overall sales. To begin with, you will have to focus on one of these markets as this decision will inform other aspects of your business model and ensure that your strategy is clear.    

The advantages of selling to businesses are that orders will be larger meaning that you should have to make less sales overall to make a profit. With the high cost of PPC advertising and the low typical conversion rate for new ecommerce businesses, this can be a tempting avenue to go down. Large orders can also be a bonus when you are selling large and heavy items where shipping costs can really eat into profits.

The disadvantage is that often these markets can be even more saturated than many B2C markets and there are usually less ways to differentiate your offering when it is designed to fill a need rather than a want. As a result, competition is based largely on price which when you haven’t got scale is not a great position to be in.

B2C is a more popular model, its biggest advantages being that it is the easiest to set up and in theory, has a much larger pool of potential customers. You have to be more creative, and often have to spend more to get sales in B2C markets, but with this comes the opportunity to sell for a higher profit margin per item, and crucially to create a brand, with all the long term benefits that this entails.    

What Type of Product to Sell?

Even if you have just begun thinking about getting into ecommerce, it is probable that you have at least decided on the type of product you will be selling. Whatever the idea you are coming into this venture with, it will be classifiable as a physical product, a digital product or a service.

As you might expect, physical products are the most popular, however some of our most successful merchants are those that sell downloadable items.

The reasons for this are fairly obvious and very attractive. Firstly, there are no fulfilment costs to worry about, such as shipping, storage, insurance and breakage. Best of all though is that there are no unit a cost, as once a digital item is produced it can be sold indefinitely. For these reasons, the profit margins are excellent and an ongoing sales effort is less necessary.

I accept that this kind of business model isn’t viable for all due to the fact that it requires specialist knowledge or an exceptional talent that can people are willing to pay for, and of course there is always the risk of piracy.

Finally, there is also the option to sell services. Whilst most merchants who sell services typically want a website as an online presence to advertise their skills and generate enquiries, there is no reason why you shouldn’t have an ecommerce website that allows taking part, or all of the payment upfront.

How to Procure Your Products?

For some merchants making the product themselves is at the core of their business model. This can make for unique and highly desirable products that can be sold at a premium; however it also requires a significant time commitment and can present a problem when it comes to increasing the scale of your business.

For those looking to outsource production, your options are manufacturing, wholesaling and drop shipping.

Manufacturing may be essential if you are bringing a new product to market, but as you would expect, following this route into ecommerce requires the largest investment of these options. This is also the highest risk option, due initially to the chance that your product may not arrive as you expected, and also because there is always the possibility of ending up with obsolete stock as if you do not successfully judge the level of demand for your product.

Wholesaling represents a safer bet, especially if you are buying well-known brands, because the demand is usually established. The potential reward however is not as high as with manufacturing, often because there is a middleman involved.

Drop shipping is an interesting option for a new ecommerce venture and comes with the unique advantage of not requiring any investment. Drop shippers will produce and ship a product for you whenever you receive an order, thus allowing you to focus solely on acquiring sales during the start of your business.

Whilst this sounds simple, it is not always easy to make a good profit with this approach. If you negotiate well with your drop shipping partners then you should be able to build in an acceptable margin, however it is important to recognise that drop shipping companies will often be providing a large number of merchants so what’s important is that you really market these products well to attract the custom.      

This said, another great benefit of drop shipping is in allowing you to test the level of demand for new products with no risk and to be able to provide a wider range of products to your customers.