Pros and Cons of Common Ecommerce Business Models
Thinking about launching your own online business? Learn about the pros and cons of these common ecommerce business models.
Traditional retail models no longer apply today. Businesses that want to succeed today can no longer open a brick and mortar store and expect a captive audience.
New tools allow businesses to streamline and automate. If you’re an Amazon seller, check out our list of apps and tools to see if any can help your business.
Use a combination of these different business models to maximize your revenue!
Drop Shipping
With this model, you sell products and have another business fulfill the order. This can be a wholesaler or a manufacturer. Many sellers use online marketplaces like Alibaba to fulfill orders, but long ship times may deter some customers.
For instance, you’d set up an ecommerce store or list an item on a marketplace like Amazon. When someone purchases from you, you’d send the shipping information to the business, who would then pack, ship, and provide you with the tracking number.
Pros
- Low startup cost because you don’t have to purchase, store, and ship products
- Lower risk because you don’t have to worry about having old or dead stock due to changing trends or updated models
- Add products to your ecommerce store quickly
- Sell a variety of products across diverse categories since you don’t need to warehouse products (food, toys, fashion, or other perishables)
- No need to handle shipping logistics
Cons
- You’ll have to rely on the other business to pack and ship the correct products in a timely manner
- You’ll have to sell the products, effectively providing marketing and advertising for other brands in addition to your store
- A lot of competition because of the ease of entry and low startup cost
- No control over order fulfillment (stock, packaging, tracking, etc.) and stock on hand
- Less control over customer service since you rely on information provided by another business
- Generally lower profit margins than other business models since you’re not buying in bulk
Wholesaling
With this model, you’d sell mainly to other businesses instead of the end consumer.
Some wholesalers may sell to customers. Businesses like Costco and Sams Club sell using both business to business and business to consumer models.
You’d need to contact the manufacturer or distributor to open an account. Requirements will vary. For instance, some may require physical storefronts while others may want a website. Others may have a minimum order quantity.
Pros
- Larger volume of sales since you’re selling to other businesses
- Recurring sales to businesses since they’ll want to restock
- Other businesses or retailers will advertise your products
- Set minimum order quantities so you don’t have to deal with a lot of individual orders
- Businesses will seek out your products once you’re established
- There’s usually less competition because of the high initial capital investment required
- Established customers may be able to purchase on terms like NET30
Cons
- Requires large warehouse to store inventory
- Need a large capital investment so you can get good prices
- Requires employees to handle warehousing and support
- Selling on credit introduces its own risk
White Labeling (or Private Labeling)
White labeling is the practice of rebranding or relabeling another company’s products with your own label. The white label usually includes some minor changes, though this may not always be the case.
You may be able to find domestic suppliers in the US willing to put your label on their products.
Having a white label today is much easier than it was even a decade ago. The relative ease and low cost of getting products manufactured in China and shipped to the United States make white labeling popular for many businesses.
Amazon sellers may be more familiar with the term Private Labeling, which is a similar practice.
Pros
- You have control over distribution and pricing of your products
- You can add value to the product by bundling it with other products
- Your marketing efforts will nurture your brand
- Cheaper and easier to white label than to develop a new product that requires research, design, and factory retooling
- Less risk than manufacturing and marketing a new product since you’re selling a product that already has a proven demand
- Can quickly expand your product catalog to offer complementary products
- Higher profit margins than dropshipping
Cons
- Low cost of entry means anyone with access to more capital can compete with his own private label product
- You depend on the manufacturer to deliver products as ordered (miscommunication and quality control)
- Potential to have long lead times, missed deadlines, and other issues related to shipping and customs
- Need to develop a brand: logo, marketing, website, and packaging
- More policing of your brand and products on different marketplaces
- Supplier may sell your product to other private labelers if you’re not careful
- You’ll be competing against established brands in your niche
- Be careful of intellectual property infringement
Manufacturing
Manufacturers create the products to sell, generally to distributors and wholesalers.
Many manufacturers are now based outside of the USA because of the lower cost of doing business. Domestic and foreign manufacturing each have their own challenges.
Many of the advantages are similar to distributors, like recurring sales, marketing, and minimum order quantities.
Many people also manufacture or produce in small batches and sell direct to consumers via marketplaces like Etsy and Amazon.
Pros
- Generally larger volume of sales to wholesalers and distributors
- Set your own price for products and implement MAP
- Less competition since the cost of entry is so high
- Control over quality assurance
- You have control over the supply of products
Cons
- Requires large capital investment for building, machines, and employees
- Higher operational expenses
- Changes in trends or consumer demands may lead to high retooling costs if products are specialized
- May have to deal with MAP/UPP enforcement
Online Marketplaces
The growth and popularity of online shopping have changed how people buy and sell.
Many businesses have now moved to online sales, forgoing traditional brick and mortar stores. Lower operating costs and a larger online audience make ecommerce more appealing.
Many third-party sellers on Amazon, Walmart, or other marketplaces now use a hybrid business model. Businesses may sell as a third party through one marketplace while doing wholesale on another. Check out these popular marketplaces and the fees they charge sellers to see if one is a fit for you.
Some ecommerce sellers are able to use third-party services to do anything from sourcing, fulfilling, and providing customer service. These services free businesses from costly warehouse space and employees.
The fierce competition amongst marketplaces today means that businesses need to be flexible to succeed. And using only one business model may mean losing out on potential revenue streams.
Here are some other models online retailers use:
- Sell as a vendor through Amazon Vendor Central and as a third-party seller on Amazon or another marketplace
- Resell using a combination of online and retail arbitrage
- Benefit from reverse logistics (refurbishing, liquidations, thrift stores)
- Establish an ecommerce store for Private Label, drop shipping, and distributing
- Sell handmade products on platforms like Etsy
- Offer subscription-based businesses that offer both service or consumer goods
- Sell artistic designs through print-on-demand websites like Amazon, Teespring, or Threadless
- …and other combinations!
As new technologies are developed, new opportunities will arise for people with entrepreneurial spirits. The explosive growth of Shopify and similar ecommerce solutions have simplified starting an online business. Or start selling on marketplaces like Amazon and eBay without the need for a storefront.
If you want to start an online store for free, there are a few free ecommerce solutions that you can try. Or sign up for a marketplace like Amazon or eBay for free to start selling today.
The ease of starting a business has only made competition tougher, requiring businesses to automate, streamline, and cut costs. The result is that customers have access to a wider variety of products, better prices, and improved customer support.
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