What eCommerce business model is best for you?
The most important two words in that question are: For you.
There’s a range of ways to structure an online business - dropshipping, Amazon FBA, your own online store, to name a few - but there is no best way to do it.
However, it’s highly likely that there is an eCommerce business model that’s best for you.
Best for your level of experience. Best for your budget. Best for the amount of time you have. Best for your risk tolerance.
Choosing the best eCommerce business model for you is the single most important factor in your long-term success.
You can choose a great product, source a reliable supplier, and use smart marketing tactics. But without the right foundation for your business, you’re going to face an uphill battle.
In this article, I’m going to cover all of the ways that you can set up your online store and share the pros and cons of each business model so that you can make an informed decision.
For an extra dose of inspiration, I’ve also included examples of real online businesses that have been highly successful using each of these models.
In short, if you want to make money online and create a lucrative side hustle, or a way out of your full-time job, you need to start with the right business model.
The first step in building your business structure is identifying who your customers are.
It’s important to ask yourself this question as it will determine how you set up your business.
Your customers will typically fall into one of two categories: Consumers or businesses. You’ve probably heard the acronyms B2C (Business-to-Consumer) and B2B (Business-to-Business).
If you’re setting up an online business then, unsurprisingly, you are considered to be a ‘business’.
Almost all eCommerce stores use a B2C or B2B model.
There are some exceptions, which I will get into, but usually you will fall into one of these two categories.
That means your customers are either consumers or other businesses. However, there can be crossover. Some B2B businesses also sell directly to consumers.
For example, a peanut butter business will sell its product to stockists, such as supermarkets (B2B), but might also have an online store where they sell to customers directly (B2C).
So this is the first thing you have to consider: Who are you selling to?
Business-to-Consumer eCommerce means you’re selling to individual customers - everyday people who shop online.
It’s the most traditional retail model and probably the easiest for someone who’s new to eCommerce.
B2C eCommerce is experiencing rapid growth as more customers choose to shop online, rather than visiting brick and mortar retail stores.
There are all sorts of eCommerce growth predictions, but all anticipate that online sales will increase dramatically over the next few years.
Business-to-Business eCommerce means you’re selling to other businesses.
If you’re selling products such as office supplies, business software, computers and electronics, you might want to consider targeting other businesses as your primary customers.
Also, if you create and manufacture your own product, you may choose to sell wholesale to other businesses, such as traditional retail stores.
B2B eCommerce is said to be experiencing strong growth and is expected to be worth up to $6.6 trillion by 2020, which is much more than the B2C market.
There are other eCommerce business classifications such as C2C (Consumer-to-Consumer). Selling household items via auctions on eBay is an example of C2C.
C2B (Consumer-to-Businesses) has also emerged as a possible business model. An example of this is an Instagram influencer selling their “influence” to businesses.
However, the most common eCommerce business models are definitely B2C and B2B.
Which model does your business fit into?
Now that you know who your customers are you can start thinking about how you want to structure your business.
You would have heard of eBay, Amazon and Shopify, and you’ve probably heard of dropshipping.
But how do you know which business model and online marketplace is best for you?
I know it can seem overwhelming. That’s why I’m going to focus on the FIVE best eCommerce business models. That way, you will have all of the information to choose the best one for you.
By “best”, I mean the business models that are consistently leading to successful businesses.
These are the business models that smart sellers are using to build and grow online businesses that are financially viable.
There are always people promising shortcuts and hacks online, but this is real advice for people who want to build a real business.
So let’s look at the SIX best eCommerce business models....
Dropshipping is one of the most popular business models if you’re just getting started with eCommerce.
Why? Because the cost of getting started is so low. You don’t need to buy stock in bulk. You don’t have to pay for a storage facility. And your supplier can take care of the shipping.
So what do you have to do?
You will need to invest in setting up your own online store. It is possible to dropship via Amazon, eBay, or any other marketplace, but the amount of competition and fees makes it extremely hard to turn a decent profit.
You can go down that route if you wish, but I recommend starting with your own online store.
You can use a platform like Shopify, WooCommerce, or SaleHoo Stores to easily set up an eCommerce store.
It doesn’t have to cost a lot of money and it means you have your own platform independent from the crowded online marketplaces.
Dropshipping via an online store is a good option for people who:
Curren is an online watch store that uses the dropshipping model and attracts thousands of visitors every day.
The next eCommerce business model I recommend is creating a private label product and selling it via Amazon FBA (Fulfilled by Amazon).
The reason I recommend selling your own branded product on Amazon is because it’s becoming much harder to sell generic products without engaging in prohibitive price competition.
A private label (or branded) product is a product that carries your own brand. You can simply source a generic product from a supplier and ask them to print your brand on it. Or you can work with a manufacturer to create a unique product. Private label products typically sell for more than generic products as they have a point of difference. A brand inherently adds value.
Fulfilled by Amazon is Amazon’s fulfillment service. For a fee, you can store your products in Amazon's fulfillment centers, and they will pack, ship, and provide customer service for these products on your behalf. It means you have less responsibilities and more time to work on other areas of your business, such as sales and marketing.
There are more costs involved in this business model. You have to create a brand and, potentially, manufacture a product. It’s also best to purchase products in bulk to get the best price. And you also have to pay for the Amazon FBA service, as well as any seller fees on Amazon.
While it costs more money, there are definite benefits to creating a branded product and selling on Amazon. You can sell your product for more money while building your own brand. And you gain access to Amazon’s massive customer base.
Selling a branded product via Amazon FBA is best for people who:
Amazon inventory management systems become even more crucial if you are selling using Fulfillment by Amazon (FBA). Amazon FBA provides sellers access to Amazon's expansive distribution network.
This eCommerce business model is for sellers who don’t want to launch a branded product, but do want to make good profit margins on an established online marketplace like eBay, Amazon, Etsy, Rakuten etc.
Wholesale sourcing means you negotiate with suppliers to purchase products in bulk. This means you have to have enough money to place a large order - and you’ll need to be confident that you can sell all the stock.
It also means you’ll be able to negotiate a better purchase price, which means your profit margin for each sale will be higher.
You’ll also have to arrange for a place to store the bulk stock, unless you opt to use Amazon FBA (see above).
While this business model requires significant investment upfront, you’ll be in a better position to make more money in the long run.
So while I didn’t recommend using dropshipping via Amazon or eBay above, I do think established marketplaces are a good option if you’re sourcing wholesale products.
The extra profit margin you will make will help to pay the fees to whichever eCommerce platform you choose to use.
The other benefit of buying stock in bulk is you can take advantage of faster shipping times.
Most online sellers tend to use suppliers in China, or other countries that have lower production costs, but this means shipping can take several days.
If you’re living in the United States and you’re keeping bulk stock in your garage, you can offer same-day or overnight delivery to your customers, which is a massive selling point.
Sourcing wholesale products and selling via an online marketplace is best for people who:
This eCommerce business model is for sellers that are serious about investing time and money into building an online business.
It’s used by many major retail and eCommerce companies that make millions of dollars a year.
It’s essentially the same as business model #3, except you sell your products via your own online store.
This means you’re sourcing products at the cheapest possible price and selling them for the highest possible amount - without having to pay extra fees to Amazon or eBay.
Earning more money is a major benefit of this business model.
However, you need to be fully invested in making your business successful. Not only do you need the cash to buy products in bulk. You also need to build your own online store and have the know-how to drive enough traffic to your site. Then you need to know how to convert the visitors to your site and make sales - consistently.
It’s riskier than the other business models as if you can’t convert enough customers, you’ll be stuck with excess stock.
But if you have the ability to make sales, the payoff is big!
Sourcing wholesale products and selling via your own online store is best for people who:
In my opinion, this is the gold standard eCommerce business model. This is the road you take if you’re serious about building a brand and a business that makes serious money.
But it’s also the business model that requires the most money, time, and work. As the saying goes, success is on the other side of hard work.
This business model requires you to create your own brand and private label product (see above) and to then launch and sell it on your own platform.
It’s the most independent business model, which means you real all the rewards. You also take on all of the responsibility.
You need to find a reliable supplier/manufacturer who can produce your branded product and negotiate a fair price for purchasing stock in bulk.
You also need to build your own website using an eCommerce platform like Shopify, WooCommerce or SaleHoo Stores.
You have full control over the design and branding of your store, which is better than being restricted by the strict listing policies of established marketplaces.
However, it’s completely up to you to attract customers to your website and make sales, which is easier said than done.
Selling a branded product on your own store gives you maximum control of branding, marketing, website design, and sales.
Done right, you can build a successful brand and business on your own platform, independent from the powers that be at Amazon, eBay and other marketplaces.
Selling a private label/branded product via your own online store is best for people who:
Sky Organics is natural lifestyle products brand that has been featured on major media companies such as Men’s Health, BuzzFeed and the Today Show.
A business model that has had a rapid rise in recent years is selling products via subscription.
You’ve probably heard of success stories such as Dollar Shave Club (razors), Blue Apron (food ingredients/meals), and Birchbox (makeup).
With this business model, you need to identify a product that consumers want or need on a regular basis - usually monthly - and then convince them to sign up to a subscription.
I’ve seen this done with everything from underwear, to chocolate, to toothbrushes, socks, dog products and more.
The key with the subscription model is that the product is perishable or usable - meaning it’s not going to last forever.
The main benefit of the subscription model is that it provides you with a predictable, regular income. Converting one customer can result in ongoing monthly income.
The challenge is in finding the right product and then convincing customers that they want it delivered to their door every month.
You will need to build your own website and have a means of collecting scheduled payments from customers.
Subscriptions are becoming increasingly popular and can be highly profitable with clever marketing and sales tactics.
One jaw-dropping examples: Dollar Shave Club was bought by Unilever in 2016 for $1 billion.
Selling products via subscription is best for people who:
Toothcrush is an eco-friendly toothbrush subscription business that sends bamboo toothbrushes to customers on a regular basis. It has thousands of subscribers in New Zealand, Australia and the USA.
Choosing the best eCommerce business model for you is the most important hurdle to get over at this stage of your business journey.
But you also should give some thought to your “product model”.
While your product model can change as your business evolves, it’s an important part of your overall structure when starting out.
A single-product eCommerce businesses simply focuses on selling one product. You’re essentially hedging all your bets and going all-in on your flagship offering.
This is a common way for people to test the market. It’s low-cost and low-risk and allows you to focus all of your efforts on sourcing and selling one product.
If you are successful with one product, you can always expand your offering.
If you fail, you’ve got nothing to fall back on and need to start again.
This model is best for people who are new to eCommerce and those who have invested in creating a new product that they really believe in.
It’s minimal, it’s simple, and it can be highly effective.
A single-category eCommerce business sells a range of different products in one niche.
It might start as a single-product business and then expand the range of products it has.
For example, if you were to start selling a revolutionary new travel coffee maker, you might also sell other coffee-related products like grinders, mugs, coffee beans, and more.
Your single category would be “coffee products” and your store could stock a range of items that fall into that category.
This model is more complex than the single-product approach as you have to source a range of items, potentially from a variety of suppliers.
Your budget for marketing, product photography and inventory is also stretched thinner the more products you have.
However, it also means you’re not relying on one product to bring customers and money in.
If one product is not selling well, hopefully you’ve got something else that is flying off the shelves to keep the cash flowing.
While it’s best for beginners to limit their product range, the single-category model is a good option for beginners and pros alike.
A multi-category eCommerce business sells a range of products across a range of different categories.
A big name store like Walmart is the perfect example of a multi-category business as it sells almost everything you can think of.
A one-person, eCommerce start-up is unlikely to use the multi-category model as it requires a lot of money, time and work to run.
However, a single-category business could slowly evolve into a multi-category one.
If we use the travel coffee maker example from above, just think how that store could expand into selling other travel-related items like car chargers, travel pillows, passport holders, cosmetics kits, and clothing.
Before long, that single-product business could be a multi-category business.
This model is best for those who have considerable experience in eCommerce.
However, it can also be used for those who are using dropshipping (low investment) to test a range of products to find the ones that work. A lot of people dropshipping via Amazon and eBay will technically be multi-category businesses.
However, I recommend starting small and targeted and growing your way into this category.
I hope you now have a clear idea of the best business and product models for your eCommerce business.
It’s really important to get this part right. Building the structure of your business on solid foundations will help you to get through the hard times and be successful.
If you want some extra help with choosing the right business model, take this short, simple quiz below.
Based on your answers, the quiz will determine which business model is best suited to your experience, budget, and risk tolerance.
Now that you have the structure of your eCommerce business sorted, you’re already leaps and bounds ahead of those who just dive right in without thinking.
Trust me, it’s much better to think about these things now than to find yourself getting confused and overwhelmed later.
|Business Model||Starting Costs||Experience Required||Time Investment||Risk Tolerance||Growth Potential|
|Dropshipping via online store||Low: Less than $100 a month||Beginner||Low||Low||High|
|Amazon FBA with branded product||Moderate: $1000-$5000 + Amazon FBA fees||Intermediate||Low||Moderate||Moderate|
|Wholesale sourcing and selling on eBay or Amazon||Moderate: $500-$3000 + eBay or Amazon fees||Intermediate||Moderate||Moderate||Moderate to Low|
|Wholesale sourcing and selling via online store||Moderate: $500-$3000 + ≈$100 a month||Advanced||High||High||Moderate|
|Selling private label product via online store||High: $1000-$5000 + ≈$100 a month||Advanced||High||High||High|
|Selling products via subscription||High: $2000-$10,000 + ≈$300 a month||Advanced||High||Moderate||High|