How will your brand do business online? We share the top ecommerce business models that are driving serious revenue right now.
If you’re starting an ecommerce business, you’re definitely onto something. Global ecommerce sales are expected to reach over $8 trillion in sales by 2026, making up 24% of all retail sales. In other words, consumers today are doing their shopping online.
Source: eMarketer
One of the first questions you need to ask yourself when starting your ecommerce venture is: What kind of business model are you going to choose? For your inspiration, we’re about to share the top 7 ecommerce business models that are working extremely well right now as you read this.
But first, you might be wondering...
What Is an Ecommerce Business Model and Why Do You Need One?
Simply having a great idea for an online business isn’t enough. You want to make sure that your business is set up to make a profit. An ecommerce business model is your strategy for success, asking the questions:
- What are you going to sell?
- Who are you going to sell it to?
- How will you sell it to them?
- How are you going to price your products and services?
- What expenses will you have?
- What will make you stand out from the crowd?
Choosing the right ecommerce business model will ensure that you are offering value to your customers, which will allow you to attract new customers and keep them loyal to your brand. A good business model will give your brand a competitive edge and ultimately drive maximum profit.
Read: How to Improve the Ecommerce Customer Experience
4 Most Common Categories of Ecommerce Business Models
Ecommerce businesses normally fall into one of four main categories. These types have to do with the relationship between the seller and the buyer.
Business-to-Consumer (B2C)
Business-to-consumer ecommerce, or B2C for short, is a business model wherein a business sells its products or services to individual customers. Most online retailers fall under this category, hence its alternative name: retail ecommerce.
This online business model is exploding in popularity, mostly because of how easy it is to get an ecommerce store up and running. Startup costs for an online store are low, and with many user-friendly ecommerce platforms available, you don’t have to be a coding wizard to create a functional and beautiful website.
The downside to the B2C ecommerce model? You’re up against a lot of competitors. To succeed in retail ecommerce you have to find a way to really stand out.
"You can’t just open a website and expect people to flood in. If you really want to succeed, you have to create traffic"
Joel Anderson, CEO of Walmart
To learn more about B2C ecommerce, check out this article.
Business-to-Business (B2B)
The business-to-business ecommerce model is just what it sounds like, one business selling to another business instead of to any individual customer. B2B ecommerce is rapidly growing, with sales expected to reach $1.8 trillion.
Think of an office supply ecommerce store. Its customer base would consist of offices that need a consistent supply of printer ink, paper, and other essentials to keep their own business running.
With this online business model, there’s often much greater customer loyalty, making it possible to generate a recurring income. On the other hand, startup costs for a B2B ecommerce venture tend to be very high, and finding customers can be significantly trickier than in other ecommerce models.
Consumer-to-Business (C2B)
An individual is selling to a business. At first, that might sound a little strange. But the perfect examples of the C2B ecommerce business model are all around us: freelancers. In 2022, there were 70.4 million freelancers in the USA, and that number is expected to rise to over 90 million in the next few years.
There are a few major benefits to freelancing online: you get to pick and choose your clients, and you have a lot of freedom when it comes to when and where you work.
However, cash flow can be extremely inconsistent for freelancers, and there’s often a constant need to search for new clients.
Consumer-to-Consumer (C2C)
When an individual sells a product or service to another individual online, that’s known as C2C ecommerce. This normally entails the seller listing their products or services on a third-party platform that takes a cut of the sales.
Imagine you want to sell a rare record you found in your basement, so you list it on eBay. This would be a great example of consumer-to-consumer ecommerce.
The C2C online business model is appealing because there are very few upfront costs involved in selling your product on a marketplace platform. In saying that, your profit margin might get hurt a little by the fees taken out of each completed sale.
7 Proven Ecommerce Business Models
Now that we’ve learned the most common types of ecommerce businesses, let’s get a little more specific. Here are the most effective ecommerce business models as of today and how they work.
Dropshipping
Dropshipping makes it possible for anyone to start an online store with incredible ease. The dropshipping business model looks like this:
- The customer places an order for a product from your ecommerce store
- You pass the order along to your supplier
- Your supplier sends the product to the customer
With this online business model, you won’t get stuck with unsold inventory – the inventory is all handled by your supplier. They’ll also take care of the packing and shipping. That’s a lot of responsibility taken off your shoulders as a business owner.
But dropshipping has its downsides. With so many people running this type of online store, you’ll be up against a vast amount of competition. And because profit margins in dropshipping are often low, you’ll need to sell a lot of products to be successful.
Here are a few important tips:
- Test products from different suppliers to check quality and delivery time
- Make sure your product has a high enough profit margin (at least 30%) by looking at how much the product usually sells for and how much it costs at the suppliers
- Make sure your store looks visually appealing and the checkout process is extremely simple for everyone (put yourself in the shoes of a user and ask friends if they would buy from your store)
- Focus on just one product and become profitable with it before adding more
Finding a winning product isn't always easy, and you definitely shouldn't give up too quickly if you don't see a profit right away. Try to further optimize your store, generate social proof, and test more ways of marketing your product.
Still, no matter how convinced you are about a product, don't persist with it if it doesn't work in the long run, and rather start over. What you like doesn't mean it will sell well.
Most successful drop shippers didn't have much success with the first product they sold.
Therefore, make sure to spend a lot of time on your product research. Once you have found a winning product, you can scale it quickly, build your own brand, and possibly finance other products or even stores with it.
Subscription
If you have a dog, you may have heard of Chewy before. Chewy allows pet owners to order their pet’s food, toys, and treats to be delivered to their door – not just once, but on a recurring, monthly basis. This is the subscription ecommerce business model in action.
The great thing about running a subscription-based business online is that it creates a continuous stream of recurring revenue. Your customers sign up to receive your product or service regularly, which makes their brand loyalty go through the roof (if your product is good).
The problem is that most consumers are a little commitment-phobic. Online shoppers are far more likely to make a one-time impulse purchase than they are to sign up for a subscription. Offering easy cancellation and free trial periods can help win the trust of new customers.
"If you’ve made sure your product is super-valuable to the customers and they get the message from you that their card is going to expire, has expired, or their payment otherwise failed to go through, they’ll drop everything and update their card so they don’t miss a beat with your product"
Lincoln Murphy
Direct-to-Consumer (DTC)
In the direct-to-consumer ecommerce model, your business sells its own products directly to the individual customer with no middlemen involved. DTC brands are in charge of selling, packaging, and shipping their products themselves.
Direct-to-consumer online businesses are able to build strong, one-on-one relationships with their customers. When online shoppers buy from a DTC brand, they feel confident that they know what they’re getting and that the right support will be there if something goes wrong.
Running a DTC business online means you’ll have access to a lot of valuable data about your customers. When used correctly, this data can be used to personalize the customer experience and increase brand loyalty.
White Label
With white label ecommerce, an online business purchases a generic product from the manufacturer that has no branding elements attached to it, and then they brand and sell that product as their own.
White labeling makes it quick and easy to start an ecommerce business. Instead of having to come up with a unique product idea, you can choose one that’s already trending and simply customize it to reflect your brand.
Similar to dropshipping, the biggest disadvantage to white labeling is the amount of competition you’ll have. White-label products can be bought and rebranded by many different businesses, so marketing the product creatively will be vital to your success.
On top of that, you have to come up with a certain cash amount upfront before you make a profit. After all, your product has to be produced and stored in a specific quantity before it goes to the customer.
For this reason, white labeling is often used as a subsequent step of dropshipping (you are already successful with the product and know it will sell), by companies and individuals with a larger budget, and by personalities with a wide reach, where the probability of sales is very high.
Handmade
If you’ve got a skill for hand-crafting products as well as an entrepreneurial mindset, this ecommerce business model is perfect for you. From handmade soaps to jewelry, making your products yourself can be a very lucrative ecommerce strategy.
Selling handmade products puts you in full control of your brand – you can be sure that you’re offering high-quality items to your customers at a price of your choosing. One of the main disadvantages of hand-making your products is that it takes a lot of time and effort.
Wholesale
A wholesale ecommerce business sells products to its customers in bulk, offering a discounted price for purchasing large quantities. The most common type of wholesale business model entails selling to a retailer, who will then re-sell your products at a profit. But there are also wholesalers who sell directly to consumers (take Costco as an example).
The costs of starting up a wholesaling business are significant, as you’ll want to have a large amount of inventory at hand from the very beginning. But the wholesale ecommerce model has the benefit of building brand loyalty – as retailers sell your products, they’ll want to restock them.
Digital Products
The beauty of ecommerce is that it allows businesses to sell digital products. In contrast to physical items, digital products are downloadable or streamable digital files like PDFs, MP3s, software, or plug-ins.
Online businesses that sell digital products don’t need to handle inventory or ship orders. This makes selling a relatively effortless process. It also allows you to sell your products at a low, competitive price.
Digital products often require a significant initial investment of time, effort, and money to create. But once you’ve got your product to sell, it can generate unlimited revenue for your business.
How Will Your Business Sell Online?
Choosing the right business model for your ecommerce brand shouldn’t be taken lightly, because your decision will shape the entire future of your company. Careful consideration should be given to the products you’ll be selling, who you’ll sell them to, and how you’ll sell them.
Because we want to help you build a successful ecommerce business, we’ve conducted an in-depth study of the best ecommerce platforms out there to get you started on the right foot. Feel free to check it out and also browse our other articles for more business tips.
