Innovative ecommerce enterprises have revolutionized our shopping habits and redefined what is possible. Ecommerce accounted for 6% of retail sales in the United States in 2013, and experts project that by 2025, ecommerce sales will account for roughly 22% of total purchases in the United States.
Ecommerce is a business concept that allows businesses and customers to buy and sell products online. There are numerous ecommerce business models to select from, and it is now easier than ever for creative founders to use them to turn their ideas into reality. If you want to innovate and defy expectations — if you want to stand out from the crowd online — you’ll need to understand which business model works best for you and how you can leverage that into more success.
If you’re launching an ecommerce firm, you’ll almost certainly fall into one of these four broad groups. Each has advantages and disadvantages, and many businesses operate in more than one. Knowing which bucket your concept belongs to might help you think imaginatively about your opportunities and risks.
B2C businesses sell directly to their end-users. Anything you buy in an online store as a consumer — from wardrobe and household supplies to entertainment — is done as part of a B2C transaction.
The decision-making process for a B2C purchase is much shorter than a business-to-business (B2B) purchase, especially for lower-value items. Because of this shorter sales cycle, B2C businesses typically spend less marketing dollars to make a sale while having a lower average order value and fewer recurring orders than their B2B counterparts.
B2C includes both products and services as well. B2C innovators have leveraged technology like mobile apps, native advertising and remarketing to market directly to their customers and make their lives easier.
In a B2B business model, a business sells its product or service to another business. Sometimes the buyer is the end-user, but often the buyer resells to the consumer. B2B transactions generally have a longer sales cycle, but higher-order value and more recurring purchases.
Recent B2B innovators have made a place for themselves by replacing catalogs and order sheets with ecommerce storefronts and improved targeting in niche markets.
In 2021, 60% of B2B buyers were millennials — nearly double the amount from 2012. As younger generations enter the age of making business transactions, B2B selling in the online space is becoming more important.
B2B2C stands for Business-to-Business-to-Consumer. It is a business model where a company sells its product or service in partnership with another organization to an end customer.
Unlike when you white label a product — where a company rebrands an item to present it as its own — the end customer understands that they are buying a product or using a service from the original company
Business-to-government (B2G) is an ecommerce model where a business sells and markets its products to government entities or public administrations — whether local, county, state or federal.
This model relies on the successful bidding of government contracts. A government agency will typically put up a request for proposal (RFP) and ecommerce businesses will have to bid on these projects.
While a more secure business model, B2G differs from other businesses or consumers. The bureaucratic nature of government agencies often leads to a much more glacial pace, which can limit potential revenue streams.
C2B businesses allow individuals to sell goods and services to companies. In this ecommerce model, a site might enable customers to post the work they want to be completed and have businesses bid for the opportunity. Affiliate marketing services would also be considered C2B.
The C2B ecommerce model’s competitive edge is in pricing for goods and services. This approach gives consumers the power to name their prices or have businesses directly compete to meet their needs. Recent innovators have used this model creatively to connect companies to social media influencers to market their products.
A direct-to-consumer business sells its own product directly to its end customers, without the help of third-party wholesalers or online retailers. As opposed to other business models such as B2B2C, there is no middleman between the consumer and the business.
C2C ecommerce businesses — sometimes referred to as online marketplaces — connect consumers to exchange goods and services and typically make their money by charging transaction or listing fees.
C2C businesses benefit from self-propelled growth by motivated buyers and sellers, but face a key challenge in quality control and technology maintenance. Online businesses like Craigslist, Walmart, Alibaba and eBay pioneered this model in the early days of the internet.
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)
A DTC model is one in which your business manufactures its own products and sells them directly to the consumer. Examples include Gymshark and DU/ER.
- 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 into 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, and then the ecommerce business adds its own branding and sells as its own.
This is common in highly specialized categories where the manufacturing takes niche expertise and the product requires a 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).
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 desires in 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 market is now pretty mature, with numerous distinct techniques. That means there are plenty of current businesses from which to learn. You may find the appropriate business model for you by researching existing organizations, as well as your target audience and your own strengths.