When most people think of ecommerce, they might imagine going to a website and purchasing products. In reality, ecommerce can encompass so much more. The ecommerce industry has grown to include a vast array of business models and delivery methods. One ecommerce business might look totally different from another.
Learning about the types of ecommerce can help you determine what model is right for your business.
Types of ecommerce
Fundamentally, ecommerce means a company selling products online. Just like in the non-digital world, there are many ways an item can get sold on the internet:
- Business to Consumer (B2C). In B2C businesses, the visitors of the online store are individual people and the business sells or curates its own products. Brands like Allbirds and Kylie Cosmetics are classic examples of B2C businesses. Often, B2C and Direct to Consumer (DTC) are used interchangeably in ecommerce. But DTC is just one type of B2C ecommerce.
- Business to Business (B2B). When one business sells to another business online, it’s known as B2B ecommerce. B2B sites usually cater their shopping experience to much higher order volumes from the customer (think: 1000+ items instead of 1 or 10). Often, they also often come with a higher level of “white glove” customer service and more options for custom orders.
- Consumer to Consumer (C2C). This is an old idea becoming new again. C2C businesses are online marketplaces that allow consumers to sell their own goods directly to other consumers. eBay is the most famous example of this. For a long time, there haven’t been many C2C businesses due to the popularity of the biggest sites (such as eBay and Etsy) and free alternatives such as Craigslist and Facebook Marketplace. However, a new generation of businesses have shown the value in a more bespoke C2C experience, including Poshmark and Grailed.
Types of B2C ecommerce business models
The world of B2C has multiple business models to choose from. The consumer may not even always know which type they are buying from, but as a store owner, choosing the right B2C business model is crucial to your success.
Direct to Consumer (DTC)
- Advantages: Since they own their production process,DTC businesses typically have strong margins, good product quality control, and a competitive price point.
- Disadvantages: Owning your manufacturing can be a huge undertaking. This means setting up a production line, factory, or kitchen to make your products.
Subscription ecommerce businesses are similar to typical DTC ones, with a twist: you can only purchase their products by signing up for a subscription service. This is different from a DTC business that has a “Subscribe & Save '' feature.To be a true subscription business, you need to require your customer to opt in to a recurring purchase. Subscription businesses are popular in consumable product categories, such as supplements (BIOHME) or food (Sakara).
- Advantages: By having recurring charges, subscription businesses can have a high customer lifetime value (CLTV)—if they are successful at retaining customers.
- Disadvantages: Subscription businesses aren’t a fit for many product categories that are reusable.
White label and private label
Some businesses prefer not to do their own manufacturing, but still want to create a unique product. They turn to a white label/private label model. In this model, the ecommerce business contracts a supplier to create a product that meets their needs. The supplier manufactures it, then the ecommerce business adds their own branding and sells as their own. This is common in highly specialized categories where the manufacturing takes niche expertise and the product requires strong branding focus. For example, many skincare brands are white label businesses. If a supplier makes a product exclusively for your business, it is ‘private labeling’, and if it’s not exclusive, it’s ‘white labeling’.
- Advantages: Since a supplier takes care of the manufacturing, the ecommerce business itself is much simpler to operate, and the business owner is able to focus primarily on branding.
- Disadvantages: When the ecommerce business doesn’t own the supplier, they typically have less margin and less quality control than they would if they manufactured it themselves. They also have to make an upfront investment in having the supplier design and sample the products.
E-retailers are trusted curators and intermediaries of other brand’s products—the digital equivalent of physical grocery stores or shopping malls. In this business model, the ecommerce business purchases its products from other brands at a wholesale price and then sells them to customers. The value they add is in the bespoke curation of products and in the shopping experience itself. Much like their brick and mortar counterparts, this works best in categories where taste and selection is key, such as food and fashion. Modern examples of these types of businesses are Goop, Culture Kings, and The Breakfast Pantry.
- Advantages: The business has the opportunity to offer a wide product selection without developing every product.
- Disadvantages: No product of your own makes it harder to distinguish your brand. Managing inventory of wholesale products purchased can also be challenging.
What if you didn't have to deal with managing inventory or the risk of purchasing it upfront at all? That’s the promise of dropshipping. In this business model, you don’t produce your goods or even store inventory. A third-party partner handles all the storage and fulfillment, you just tell them when orders come in. Technically, dropshipping is a modified type of either white label or e-retail ecommerce businesses. A “traditional” white label or marketplace ecommerce business still holds its own inventory, whereas a “dropshipping” white label or marketplace ecommerce business does not.
Dropshipping typically happens behind the scenes—the customer doesn’t usually know that a product was dropshipped. For example, a large department store with a robust ecommerce site may not hold all of its inventory directly, preferring to dropship items from smaller vendors. In this instance, the department store forwards the order and customer information to the vendor directly, who fulfills it from their own warehouse stock.
- Advantages: Since inventory doesn’t have to be purchased up front, this is the most logistically light and least capital-intensive business model. This makes it attractive for many first-time business owners.
- Disadvantages: Dropshippers typically have low margins, and are reliant on their supply partners for ensuring their operations run smoothly.
“B2C wholesale” might sound like an oxymoron, but that’s not totally the case. There are many businesses that traditionally only served other businesses, but realized that with ecommerce, they could open up their products to the general consumer. These sites often have the features of a B2B site (large selection, large volumes, highly customizable orders, detail-focused product pages), but are open for customers to make smaller-sized orders. Examples include ULINE, Alibaba, and Swish.
- Advantages: These businesses benefit from the operational efficiencies that come with large order sizes. This model can also provide diversification for existing, offline-oriented B2B businesses.
- Disadvantages: Customers of B2C wholesale sites are highly price-sensitive, so the businesses that win usually have a cost advantage (such as massive scale).
How to choose an ecommerce business model
If you’re planning your own ecommerce business, the number of models might seem overwhelming. But choosing the right model comes down to a few simple questions.
What does your audience want?
Great businesses start with an audience and their frustrations or desiresin mind, and let that dictate the products. For example, if you’re passionate about helping new mothers stay healthy through organic meals, find a group of them, and ask them questions like:
- Do they love shopping for food or do they just want to tick it off their list?
- Do they value variety in their food or consistency?
- Do they prefer to buy in bulk?
- Do they buy the same types of things over and over, or does it always change?
- Are they willing to pay extra for a more premium product?
All these questions will help inform whether you need one product or many, whether you can do a subscription model, and whether you’ll be able to afford a lower-margin option such as a marketplace or dropshipping.
What resources do you have?
New business owners might default to an optimistic outlook. But when determining your business model, it helps to be highly pragmatic and even skeptical. Some business models, such as DTC and private label, require more cash up front and more time to operate. Other business models, like marketplace and dropshipping, benefit from great supplier contacts. By taking stock of your supplier relationships and the cash you have available to invest, you can make a clear-eyed decision about the business model that’s right for you.
What are you best at?
This ultimately may be the most important factor. Great businesses are built on a competitive advantage, and that starts with the owner. Your greatest skills can be your competitive advantage, which can inform your model:
- If you know product development for your industry, DTC may be the best fit.
- If you are a branding or social media expert, white/private label may be the best fit.
- If you are best at the customer experience (from ecommerce website to unboxing), dropshipping or marketplace may be best for you.
- If you have a sustainable cost advantage, B2C wholesale may be best for you.
The ecommerce industry is now a fairly mature one with many differentiated approaches. That means there are plenty of existing companies to learn from. By studying existing businesses, as well as your audience and your own capabilities, you can identify the business model that’s best for you.