8 e-commerce business models with examples

If you decide to start an e-commerce business, you will have to make many different decisions along the way. In addition to choosing the product or service you decide to sell, you will need to choose the right business model.

In this article, we will introduce you to the main models to consider when starting a business so that you can make the right decision from the start.

It is very important to understand the essence of each business model in order to make the right choice for your business. Each method has its pros and cons. It all depends on the type of product you have chosen, the market, and your budget. Therefore, one business model may suit you perfectly, while another will be completely unsuitable.

What is a business model?

A business model depicts the structure of a company that ensures profits and increases customer interest in the business. Signs of a good business model include creating a value proposition for customers and pricing strategies. The business model also defines the target market and future costs.

Using a business model is essential for both new and existing companies. It helps companies better understand their customers, motivate their employees, attract investment, and create a sustainable competitive advantage by identifying growth opportunities.

Think of your business model as a living asset for your company. It needs to be continually improved to stay ahead of the curve and grow without obstacles. If you plan to raise funds or enter into partnerships, regularly updating your business model will show stakeholders that you can adapt and meet changing market demands.

Common types of business models in e-commerce

There are four main types of e-commerce business models that describe most transactions between consumers and businesses.

Business to Consumer (B2C)

The B2C business model refers to e-commerce between a business and a consumer. For example, when you buy a shirt from an online retailer, you are the consumer and the online retailer is the business. Although this concept can be applied to offline businesses, it is increasingly associated with e-commerce.

Business to Business (B2B)

The B2B (Business-to-business) model refers to any commerce between two businesses. For example, when a SaaS company sells software to another company. Wholesale companies typically fall under this category.

Some brands, being retailers, may use this model in addition to their main business. For example, a coffee brand may sell its beans to customers on its website (B2C), but also sell wholesale to coffee shops (B2B).

Consumer to Consumer (C2C)

A consumer-to-consumer business model is when a consumer sells a product or service to another consumer. For example, when you sell a used laptop on Facebook Marketplace.

Individual sellers often start selling on online marketplaces and then open an online store to build a brand and make more profit.

Consumer to Business (C2B)

The growth of creative business products and services has led to a sharp increase in the number of consumer-to-business (C2B) companies. This business model involves a consumer selling their goods or services to a business or organization.

If you are, for example, a popular personality or a skilled photographer selling photos online, then this model will suit you best.

Helpful tip: If you are interested in creating a business plan and are put off by the tedious paperwork, you can use a business plan template that can really help. Thousands of people use this template to create their own business plan. And by the way, you can use it completely free.

Examples of eCommerce Business Models

Business models can take many different forms, including different production and delivery methods. Let's look at some popular e-commerce business models that you can use to start your business.

1. Dropshipping

Dropshipping is the easiest option for starting a new business. It is perfect for those businessmen who prefer to minimize start-up costs and worry less about the percentage of profit. Dropshipping is also a great business model for those who do not want to deal with the issues of storing goods.

Pros:

• Low Start-Up Costs: The biggest advantage of dropshipping is the low start-up cost. With this model, you don’t keep inventory, so you won’t have inventory costs, which are usually the most significant expenses for a new e-commerce business.
• Low risk. Since you are not purchasing large quantities of goods for storage, you do not have to worry about not selling the entire batch of products.
• Sales optimization. Dropshipping partners will take care of all the collection, packaging and shipping of goods. The dropshipping model is very convenient and efficient, and also allows you to manage your business from anywhere in the world.

Cons:

• High competition. Dropshipping has simple and accessible conditions for entering the market, so many people use it. The competition is quite tough, which means it is difficult to stand out from the crowd.
• Low profit percentage. This makes it difficult to compete with paid advertising platforms, which means you will have to put more effort into creating content, service, etc. Low profit percentage means that you will have to sell significant volumes to get the desired income.
• Inventory synchronization: Since you work with other warehouses, there may be a situation where you place a supply request to a wholesaler, but the product is already sold out. Longer than usual delivery times can have a negative impact on the retailer.

Your profit in a dropshipping model is the difference between the price the customer pays and the price the dropshipper charges you. Typically, with dropshipping, your profit is small - around 20%.

Dropshipping is low risk in terms of potential financial loss because you don't stock up on inventory in advance and don't have to worry about shipping. The added risk comes from the low profit margin and high level of competition. The low profit margin means you'll have to sell a lot of units to make a good profit.

Example of successful dropshipping

Subtle Asian Treats is a dropshipping business on Shopify that sells cute plush toys and AirPods and iPhone cases. It was founded by a young Malaysian entrepreneur, Tze Hing Chan, who decided to join the bubble tea trend that was popular in Asia.

The brand attracted thousands of bubble tea fans by providing people with a unique selection of products at an affordable price. Tze Hing Chan also did a great job with his audience on social media. He reposted content from his followers and attracted customers with all budgets.

Additional information on the topic

• What is dropshipping?
• How to Start a Dropshipping Business: The Complete Guide.
• Best Dropshipping Products to Sell.
• Dropshipping: Organization and Supply Chain.
• How Does Amazon Dropshipping Work? A Quick Guide.

2. Manufacturing of hand-made goods

Making your own products is a common approach among creative entrepreneurs. Whether it's jewelry, fashion, or natural beauty products, producing new products yourself allows you to precisely control the quality and develop your own unique brand. However, it comes at a cost in terms of time and some limitations.

The main costs associated with producing handmade products include purchasing raw materials, storing inventory, and paying labor. It should be noted that not all products can be handmade. The choice of products is limited by your skills and available resources.

This option is suitable for those who are creative and have their own unique ideas, who can physically produce the goods themselves and who have all the necessary resources for this. Handmade goods production is also suitable for people who want to maintain full control over the quality of the products and their brand, and also want to reduce costs at the initial stage.

Pros:

• Low Start-up Costs: When you make your own products, you typically don't need to produce large quantities of items to keep on hand, as you would with manufacturing. This allows you to enjoy relatively low production costs, which for many e-commerce businesses make up the bulk of their start-up costs.
• Control over the brand: Producing handmade goods means that you can create any brand you want without any restrictions.
• Price Control: Hand in hand with brand control comes the ability to set prices for your products freely.
• Quality control: When you produce handmade products, you can carefully control their quality so that they meet your and your customers' expectations.
• Efficiency: Manufacturing your own products provides maximum flexibility for your business, allowing you to change the specifications and even the product itself at any time.

Cons:

• You're wasting a lot of time. Depending on your specific product choice, creating handmade goods can be a labor-intensive process, leaving you with less time to focus on growing your business.
• Small scale production. Manufacturing products can be a challenge as your business grows. While you may be able to turn to a manufacturer to help you scale up, this may be difficult or impossible if your customers want handmade products.
• Limited product selection. As mentioned, the selection of potential products is limited by your skills and the resources available to you. It is up to you.

An example of successful production of handmade goods

Old World Kitchen started as a family-run business selling door-to-door goods in their local area. The company went through many stages of growth before Etsy came along to take the business online.

The company specializes in handmade kitchenware. It wanted to expand further, but to do so it needed full control over pricing, branding, and quality control, which Etsy couldn't offer.

After switching from Etsy to Shopify, the brand saw a dramatic increase in conversions. The company was able to partner with other brands and raise prices while still staying true to its ethos of selling handmade goods.

Additional information on the topic

• How I Create and Sell Handcrafted Goods in My Spare Time.
• Handmade Goods Business: 14 Things You Can Make and Sell Online.

3. Own production

Producing your own product is suitable for those who have a unique idea or a variation of an existing idea. It is also suitable for those people who have already chosen a market niche for their product and are confident that it will sell. This is very important, since own production requires large financial investments at the initial stage.

There are two directions in production: private label and White Label concept.

Private label products are created by a manufacturer and sold under the company name . The company controls everything from what goes into the product, how it is packaged, and what the labels look like. Private label is best for brands that want to create unique products.

The White Label concept means that products are created by one manufacturer and sold to various retailers under their own brand names . These are typically generic products that can be sold to a wider segment of consumers.

Pros:

• Very low unit cost. Often, manufacturing will provide the lowest unit cost, giving you the highest percentage of profit on sales.
• Brand Control: Manufacturing your own product means you can create your own brand.
• Price control. With the ability to create your own brand comes the ability to set your own prices for your products.
• Quality control: Unlike dropshipping or wholesale purchasing, when you manufacture your own products, you have more control over the quality of the end result.

Cons:

• Minimum order quantities. The initial costs required to purchase your first batch of goods can be quite high. Depending on the cost of your product and manufacturer, your investment in inventory can easily reach thousands or tens of thousands of dollars.
• Manufacturer Issues - Nothing is as bad for your business as issues that arise on the manufacturer's side.
• Time-consuming. Getting your first batch produced can be a lengthy process, as it involves prototyping the product, sampling, and refining it before mass production begins. This process can be even more challenging if you plan to use an overseas manufacturer, as language, distance, and cultural barriers may arise.

When producing your own products, the profit percentage can vary greatly depending on the specific product, manufacturer, and number of orders. However, generally, producing your own product will yield the highest profit compared to other methods such as wholesale purchasing and dropshipping.

Additional information on the topic

• How to find a manufacturer or supplier to implement your product idea.
• Dropshipping on Alibaba.

4. Wholesale trade

Buying products in bulk is a good option if you want to quickly start an eCommerce business or sell different products and brands. Wholesale offers a wide range of opportunities as there are many products available for wholesale purchase.

Pros:

• In-demand products. Wholesale is generally less risky. You're dealing with brands that have already established themselves in the market, so you don't risk wasting time and money developing products that no one wants.
• Well-known brands. Selling established brands can help position your business in the best possible light. This builds trust with buyers.

Cons:

• Product availability and selection. Selling established products can work both for and against you. Since products are available at many retailers, you will have to fight hard to differentiate yourself and convince potential customers to buy from you.
• Price control: Selling other brands means that you will have to play by their rules to some extent. Some brands will regulate their prices to prevent price cuts on their products.
• Inventory Management: When buying in bulk, you will likely have to purchase a minimum order of each item. The minimum order amount will vary depending on the type of product and the manufacturer, but you will still need to build up your inventory and manage it wisely to ensure you always have the product in stock.
• Working with suppliers: If you supply many different products, working with multiple supply partners can be challenging because each supplier has different requirements.

The profit margin for wholesale is usually higher than dropshipping, but not as lucrative as manufacturing. Wholesale can be considered a safe middle ground between manufacturing and dropshipping. While each case is unique, the profit margin for wholesale products that are resold at retail prices is typically around 50%.

Wholesale does have some risks, however. Perhaps the biggest risk is how to differentiate yourself from the many other retailers that offer the same products.

Example of successful wholesale trade

Pernell Caesar Jr. and Rod Johnson founded BLK & Bold, a coffee company that helps local communities by donating 5% of all profits to programs that help youth, improve their skills, and eliminate homelessness.

BLK & Bold uses wholesale and direct channels to increase its sales. Most of the company's wholesale partners are coffee shops, restaurants, offices and centers, as well as hospitality businesses such as boutique hotels, Airbnbs and classic hotels.

The company sells a variety of proprietary roasted blends, organic specialty coffees and seasonal teas, and also offers custom-made coffee or tea.

Additional information on the topic

• How to create a wholesale channel and collaborate with other retailers.
• A New Way to Wholesale on Shopify.
• The history of "chocolate for the soul".

5. Print on demand

Print on demand is a way to sell products that are custom made using your design. You simply create a design, and when a customer orders a product with that design, you send that print to a print shop, who creates, packages, and ships the order.

Similar to dropshipping, this model makes it easy to start selling online. You don’t have to pay for the product until you make a sale, so the upfront financial outlay is very small. This saves money that you can use for marketing and advertising strategies.

With print on demand, everything from printing to packaging and shipping is handled by your printing partner.

Pros:

• No long wait. Once you have created the design, you can immediately sell the product in your online store.
• Automated delivery. Delivery and fulfillment of the order is handled by your supplier. Once you make a sale, you are responsible only for the high quality of service to your customers.
• Lower start-up costs. Since you don't build inventory, you can easily add and remove products, test new business ideas, and create new products in different market niches.

Cons:

• You have little control over shipping. Shipping costs can vary for different items. Your options may also be limited if you want to create custom packaging.
• Limited customization options. What you can offer your customers ultimately depends on the seller and the product. It is the seller who determines the printing method, the available sizes, and the types of products you can put your print on.

Print on demand is also a great business model for creative people because there are no restrictions in this segment. You can sell products such as:

• sports bags;
• yoga leggings;
• face masks;
• watch straps;
• canvas prints and posters;
• decorative pillows;
• blankets.

Print-on-demand products typically have low profit margins, depending on your pricing strategy and audience size. But it's a good low-risk business model for those new to e-commerce or looking to explore new revenue streams for their existing business.

An example of successful use of print on demand

Liz Bertorelli, founder of Passionfruit, really wanted a French bulldog. In 2013, she set a goal: if she could earn an extra $5,000, she would get a dog.

Despite having a full-time job at the time, she started Passionfruit, an online print-on-demand t-shirt company, to quickly achieve her goal.

Additional information on the topic

• Print on Demand: A Low-Risk Way to Sell Custom T-Shirts, Books, and More.
• Canvas for creativity: Top 10 products you can sell (without having inventory).
• 10 companies that print on demand for your prints.

6. Digital goods

A digital good is a non-physical asset or type of media that can be sold and distributed indefinitely online. Such goods often come in the form of downloadable, streamable, or transferable digital files such as MP3s, PDFs, NFTs, videos, plugins, and templates.

The initial costs of creating a digital product can be high, but the costs of selling it are relatively low. Once an asset is created, it can be delivered to customers very cheaply.

Pros:

• Lower costs. You don't have to deal with warehouse issues or pay for shipping.
• Large quantity of goods sold. Orders can be delivered instantly, which saves you from having to deal with their fulfillment. As your business grows, you can easily automate order processing, which will give you more free time.
• Wide range of products. You can use different features: freemium model, when you provide products for free with paid additional features; monthly paid subscriptions; licenses for the use of your digital products. You can build a business exclusively on digital products or add them to an existing business.
• Good Future Prospects: You have a huge opportunity to grow your business with e-learning, an industry that will be worth $374 billion by 2026.

Cons:

• High competition. People will likely find free alternatives to your digital products. To succeed, you will need to consider the niche you are targeting, provide new products, and know how to build your brand. It is useful to conduct a SWOT analysis of your competitors to gain additional advantages.
• Piracy and theft: You run the risk of people stealing and using your products as their own.
• Restrictions on sales: For example, you cannot sell digital products through Facebook and Instagram due to their business policies.

Since your income does not depend on owning physical assets, a digital goods business does not require a large financial investment at the start. This also means that you can set lower prices than your competitors. Additionally, there are no recurring costs for goods and services, meaning you keep most of the profits for yourself.

Additional information on the topic

• Profitable Digital Product Ideas (and How to Sell Them).

7. Direct to Consumer (DTC)

The DTC (direct-to-consumer) business model means you sell products directly to consumers, without wholesalers, middlemen, or third-party retailers like Amazon. It's a new business model that's gaining momentum as the multichannel retail model slows down.

Think about the latest fashion brands: Warby Parker, Barkbox, Bonobos, Casper. What do they all have in common? The DTC business model. Even brands like Apple and Tesla are using mobile commerce as their primary channel for DTC sales.

These brands eliminate the need for shoppers to research and choose from hundreds of competing online marketplaces and intermediaries, making the entire purchasing process easier for them.

Pros:

• Direct communication with customers. When someone shops at Nordstrom and buys a Canada Goose jacket, they become a Nordstrom customer, not a Canada Goose customer. The brand cannot communicate with these customers, send them email updates, or contact them in any way. Direct selling will help you build a large audience and keep your customers engaged.
• Collecting customer data: Direct selling allows you to collect first-party data that you can use to personalize your communications with customers.
• Higher profits. You don't have to share profits with third party distributors.
• Fast feedback: Since you can communicate with customers directly, you can easily collect feedback to improve your products and analyze the customer experience.

Cons:

• Direct Distribution Costs: No ability to share shipping or storage costs with partners. DTC businesses need to invest more to keep their business running smoothly.
• Difficulty in finding an audience. One of the advantages of working with retailers is that customers can find your products more easily. If you are a new brand, you will have to market yourself. You also will not be able to benefit from the distributor's experience or sales staff.

By dealing directly with your customers, you retain control over your products and their performance. While it may take time and money to build robust distribution channels, direct sales are a smart business model for building a loyal customer base and increasing profitability over the long term.

An example of a successful DTC business model

Handcrafted leather shoes and the Made in Italy label go hand in hand. Consumers who wear them have traditionally accepted their high price tag, thanks to an industry overflowing with distributors, agents, resellers and retailers.

It wasn't until 2013 that Milan-based shoe startup Velasca set out to disrupt the industry by connecting consumers directly with the manufacturer.

Velasca was born from a casual conversation in the back of a taxi between co-founders Enrico Casati and Jacopo Sebastio. Since then, the company has grown into a thriving DTC brand, selling hundreds of thousands of shoes in more than 30 countries.

Additional information on the topic

• DTC for Consumers: Benefits and 12 Examples for Business [Shopify Plus].
• Drinks delivered to your door: How funding helped this brand grow 500% during the pandemic.
• How a Handcrafted Shoe Brand Disrupted an Industry with a DTC Business Model.

8. Providing subscriptions to products and services

The subscription e-commerce market is projected to reach $473 billion by 2025. A subscription business model charges customers a recurring fee — typically monthly or annually — to access a product or service. Subscription models help companies capitalize on ongoing relationships with customers. If they continue to see value in your offering, they will continue to pay for it.

Whether you're in e-commerce or online education, you can start a subscription business in many industries, including:

• Streaming services.
• Monthly subscriptions.
• Communities of interest.
• Food services.

A recurring subscription model can lead to increased revenue and stronger customer relationships. The longer customers use your product or service, the more valuable it becomes to them.

Pros:

• Predictable income. Monthly income helps you forecast sales, plan inventory, and analyze how much money you need to grow your business.
• Guaranteed Profits: Receiving monthly payments up front means increased cash flow (and peace of mind) for your startup.
• Loyal customers. Regular purchases help you better understand your customers, which allows you to constantly improve your products. And this makes customers come back for more.
• Easier opportunities for additional sales. The more customers use your product, the more trust they have in you. This makes it easier to sell additional products, since they already know that you provide quality products or services.

Cons:

• High risk of audience loss. One of the downsides of the subscription business model is customer churn. You have to constantly maintain interest and attract people so that they continue to pay you.
• Product Variety. Products become boring if they are not updated. Netflix adds and removes movies every month. Trunk Club promises to constantly invest in changing styles. To maintain a subscription business, products need to be new.
• Small problems are big problems. Most services provide their customers with the same thing, at the same time, every month. While it may seem like a small thing, if your subscription system develops even a small flaw, it can quickly turn into a big problem if you don’t fix it in time.

An example of successful provision of subscriptions for products and services

Subscription businesses come in many forms. B2C e-commerce retailers can incorporate a subscription model into their offering, like John's Crazy Socks, a popular online sock brand. The company, founded in 2016 by 22-year-old John Cronin, has now grown into a multi-million dollar business.

The brand offers a subscription to the "Sock of the Month Club", in which John, the company's founder, creates a list of select, high-quality socks for subscribers each month. Everyone who signs up for the paid plan and becomes a member of the club receives a thank-you note from John, candy, and discount cards for future orders. Additionally, 5% of each subscription goes to support Special Olympics.

Additional information on the topic

• How to Start a Subscription Business: A Quick Guide.
• How to Start a Subscription Business: Lessons from a Successful Korean Beauty Business.

Finding a successful business model

For most products, one of the above business models will work. But depending on your product or niche, you may not have a choice in which e-commerce business model to use.

Much depends on the type of product you plan to sell. Some products automatically fall under certain business models. However, the model you use to sell will partially determine and shape your entire business plan for the future.

Try out different business models as a launching pad to create a foundation you can build on. Then continue to wow customers and keep your audience engaged. Soon you will be able to see the effectiveness of one of the business models, avoid many common business mistakes, and run your business the right way.