Ecommerce has offered customers a convenient way of shopping. Global ecommerce retail sales surged 25.7% in 2020 to $4.213 trillion. By 2022, global retail commerce will exceed $5 trillion, accounting for a fifth of overall retail sales. By 2025, total spending will exceed $7 trillion, despite a slow growth. Ecommerce can be lucrative given the income potential it offers.
If you want to start an ecommerce business, you need to decide what business model you would want to engage in. But before diving in, you first need to understand the different business models to help you decide on the kind of online store you will put up. In this article, you will learn about the different ecommerce business models.
Ecommerce Business Models
- Direct to Consumer (D2C)
- White Labeling
- Private Labeling and Manufacturing
Ecommerce Business Models
If you are planning to venture into ecommerce, you need to find the right business model to get your feet wet in the industry. Here’s a look at the ecommerce business models you can choose from to help you get started with your online store.
In dropshipping, you only set up the storefront and accept payments through credit cards, PayPal, etc. You will be responsible for marketing and selling products. In this method, you serve as a mediator by connecting manufacturers and buyers. Your partner supplier will be the one to handle fulfillment so you are free from the hassle of inventory management, warehouse stocking, packaging, and fulfillment.
Examples of products that can be drop shipped include cell phone accessories, grooming tools, niche products, custom office supplies, face masks, to name just a few. These products are easy to ship and require low level of customer support. With dropshipping, you can focus on improving front-end customer experience and build your customer network.
Pros and Cons of Dropshipping
Most startup ecommerce businesses choose dropshipping, thinking it will be easy and fun. Since you don’t handle inventory, there shouldn’t be any problem. However, this isn’t the case. While it can solve many problems for many ecommerce businesses, it also has its own set of challenges. Here are the pros and cons of dropshipping.
1. Low Startup Cost
Maintaining a warehouse for your stocks and inventory requires huge capital. Dropshipping eliminates this risk since you would not have to purchase an extensive inventory and hope that it sells. With dropshipping, you have zero inventory and you can instantly generate revenue.
2. Low Overhead
Being an ecommerce seller requires huge investments in terms of inventory, storage, and fulfillment. If just one product does not sell as expected, you could end up with tons of unsold inventory and the loss of your investment.
3. Sell and Test More Products
Without having to worry about physical inventory and its associated costs, dropshipping will let you update your inventory, quickly, easily, and cheaply. If you know that a product is selling with your partner, you can offer it right away to your customers without waiting for it to arrive in your factory.
Cons of Dropshipping
1. Less Control Over Order Fulfillment and Lead Times
While you won’t worry about inventory and warehousing, you will still be responsible for customer service. If your partners screw up, you will still be the one to handle customer complaints. So make sure that you partner with a high-quality supplier.
2. Reliance On Other People’s Stocks
With dropshipping, you can offer new products immediately or stop selling slow-moving products. However, the drawback of this is that you don’t have control of your supplier’s inventory. If they run out of stock, you also run out of stock. This will result in longer lead times and lost customers.
3. Less Profit
Another major drawback of dropshipping is that you will most likely pay more for each item you sell compared to paying less for a huge inventory which could lead to less profit. If you want to maximize your earning potential from dropshipping, you’ll have to sell more products than you would have to if you are the owner and warehousing the stock yourself.
4. Poor Customer Service
If your partner delivers products late, damages them, delivers wrong items, and screws up the entire order, the customer will take it out on you. You don’t have the personal touch on inventory management so you have to resolve the complaints and issues yourself by dealing with your supplier to solve customer problems.
Direct To Consumer
This ecommerce business model does not involve any middleman. You sell products and services directly to consumers. Direct to consumer offers a low barrier to entry ecommerce strategy. It eliminates the barrier between consumer and producer so that the latter will have greater control over its brand and reputation.
Direct to consumer ecommerce business model builds customer loyalty quickly as the seller can personalize their user experience. It can help build a sense of attachment with the brand when the goods are directly sold to the consumer. This is a good stepping stone for startup brands because it can help build strong brand loyalty and it bypasses third-party retailers.
Pros and Cons of Direct to Consumer Ecommerce
Like any other ecommerce business models, direct to consumer has its pros and cons.
Here are the advantages of direct to consumer
1. Cheaper Entry Into The Marketplace
Direct to consumer ecommerce eliminates the high overhead costs associated with operating a physical store, and developing and updating products. With platforms like BigCommerce or Shopify, you can easily set up an online store.
2. Higher Profit Margins
Since there will be no middleman in a D2C ecommerce business, you can look forward to getting maximum revenues and investing more in your marketing and sales strategies. Third-party suppliers usually get a huge chunk of your profits which could mean lesser income for you.
3. Direct Control Over Your Brand Presence
In a D2C business, you will be the one communicating with customers. In addition, you will be the one in charge of distributing your products using your own channels. This level of transparency can help you build a consistent brand identity throughout the entire customer journey. Furthermore, you get access to valuable insights into what customers want and the flexibility to act on them quickly.
Cons of Direct To Consumer
Despite the advantages mentioned above, direct to consumer is not a perfect model. Here are some of its flaws:
1. Difficulty in Scaling
While entry into this type of business is relatively easy, the ability to scale can be challenging. The increase in order volume can be difficult to manage independently as well. This can be particularly challenging if you start out with limited manpower and resources.
2. Complex Internal Management
Managing a direct to consumer business model entails more than just getting goods to the buyer. You will also need to manage relationships with suppliers, inventory levels, payment portals, and address customer service needs. Moreover, you need a strong organizational structure and internal expertise which may not be that cost-effective for most D2C business owners.
3. Increased Competition
Because it has low barriers to entry, more and more businesses are starting to do it, making the market more competitive As the marketplace becomes more saturated, it becomes more difficult for your business to stand out from the crowd. With strong competition, having a distinct identity and value proposition becomes important in building a loyal customer base.
In white labeling, products that you are selling are manufactured by a third-party distributor. However, you are branding and selling the product under your own name and logo. In white labeling, you choose a product that is already successfully sold by another company but sell it under your own package and label.
White labeling is very common in the beauty and wellness industries but more difficult to encounter in other niches. This can be helpful in boosting your brand visibility and gives you an opportunity to take advantage of the knowledge and expertise of the distributor.
Pros and Cons of White Labeling
White label products offer businesses some advantages and disadvantages
Here is what white labeling can offer to businesses
1. Increased Supply
You can double your production using the resources of the manufacturer. Using the resources, you can expand into new markets and cultivate new customers as well. You can get a product to the market fast allowing you to have your share of the piece of the pie.
2. Minimal Initial Investment
Developing a product from scratch can be time-consuming. However, by partnering with a white-label company, you will not have to worry about manufacturing your own product. Whether it’s sunglasses or a mobile phone case, your partner will have it in their stock and ready to fulfill any orders you may have.
3. Rapid Brand Growth
White label allows businesses to be better prepared in expanding their market share. You can use a white label company to test the waters in other niches. It is so easy to use white labeling as a testing ground because your partner can produce a large number of products at a lower price. The manufacturer can give more time and resources for research and development allowing you to expand your product offering to buyers.
Cons of White Label
However, white label is not a perfect solution. It also has its disadvantages.
1. Inconsistent Quality
Quality control can be a huge issue with white label brands. You have your own quality control measure which your partner may not be following. As a result, the product they are producing may not have the same quality that you expect. With white labeling, not all products are created equal.
2. Less Control
With white labeling, you do not have control over the production process. Conversely, your partner will not have control over the marketing, distribution, and sales of the product. For a successful partnership, you need to be willing to give up some control over some aspects of your business.
3. Mass Market Strategy
White labeling has often been used as a mass market strategy which may require a sizable, established following to gain from the benefits. You will be dealing with generic products that may not give you competitive advantage. More often than not, white label products are used for getting additional revenue streams and increase market share rather than new market strategy.
Private Label and Manufacturing
In this business model, you will hire a third-party manufacturer to create your desired product based on your unique ideas and design. Unlike white labeling, you have exclusive rights to sell your own goods. Once manufactured, you can have the manufacturer either ship it directly to the buyer, an online marketplace, or back to you for handling and fulfillment.
Private label is a good way to test a new product or concept and a good starting point should you decide to put up your own production facility in the future. Initial manufacturing costs may vary depending on the manufacturer you hired. If you have an idea for the perfect product but don’t have the cash to build your own factory yet, private labeling may be the best option for you.
Pros and Cons of Private Labeling
Let us take a look at the pros and cons of private labeling.
Check out the pros of private label e-commerce
1. Competitive Edge
With private label ecommerce, you get to market your products independently and choose your customer base yourself. You can also choose the market you want to focus on. Furthermore, you have complete control over the pricing models or ask your suppliers to modify the product in case of bulk orders.
2. Better Control Over Pricing
Products with private labels do not in any way influence the cost price but offers greater control over pricing. You can price your products depending on your marketing strategy and run your sales independently.
A private label business allows you to quickly make changes in the market and customer behavior. You can easily instruct the manufacturer to make the corresponding changes to the product.
Cons of Private Label
Here are the disadvantages of using a private label in your ecommerce business:
1. No Real Control Over Quality
Although you are the owner of the products, you are not the manufacturer and any issues with quality will be your liability. In the eyes of the buyer, you are both the producer and the owner, thus they will file a complaint against you despite not having any role in the problematic quality.
2. Problems With Building Brand Loyalty
If you are managing a business in a competitive market, building brand loyalty may be a problem. You will need to put in a lot of effort to woo potential customers. It may be difficult for you to compete with the giants in the market.
3. Lack of Support For Minimum Order Quantity
Minimum order quantities can be challenging if you are managing a small independent business. This may not be the case with medium and large businesses. So make sure that you monitor these metrics closely and ensure that you don’t over purchase or undersell.
In wholesaling, you will order goods directly from the supplier and will be responsible for the warehouse, managing inventory and stock, and tracking customer orders and shipping. You will work closely with the retailer to accommodate their needs. As a wholesaler, your sole responsibility is to fulfill retail orders to the best of your ability.
Being a wholesaler, your focus is on volume orders. In addition, you need to have access to large quantities of a specific good. You will sell to merchants and retailers but they will not ultimately be your customers. Wholesaling is designed for customers who are looking for budget-friendly options.
Pros and Cons of Wholesaling
Here are the pros and cons of wholesaling
Here are the main advantages of wholesaling:
1. More Discounts and Allowances
By buying large quantities of goods from manufacturers, you can receive cash and quantity discounts. This way, you can reduce buying costs and increase potential profit.
2. Less Marketing and Advertising
Unlike manufacturers and retailers, wholesalers do not need marketing because they buy from manufacturers and supply to retailers. Thus, marketing is the least of your worries.
3. Fixed Profit Margins
As a wholesaler, you do not have to worry about your profit because there is a fixed rate. So to increase your profit, try to increase sales volume.
Cons of Wholesaling
Meanwhile, here are the cons of being a wholesaler:
1. It Requires Huge Capital
One drawback of wholesaling is that you need sufficient funds to buy a large volume of goods. You need to maintain adequate stocks to prevent a shortage of products in the market.
2. More Storage Space
As a wholesaler, you will need sufficient space for storing your inventory. For this, you will need to rent a space which translates to huge storage expenses.
3. No Direct Interaction with Customers
Wholesalers do not sell goods to the final customers. That means you will not interact with them. Thus, you do not need to understand the interests and preferences of your audience.
These 5 business models give you some reasons why ecommerce can be a lucrative venture. Knowing the pros and cons will help you determine which is the right one for you.
Why is airisX ECommerce the Right Choice?
airisX works with a large number of companies that build and run their own ecommerce platforms/websites (self-coded or through Shopify, BigCommerce, Magento, etc.). We manage customer support teams/back offices support for some of the largest websites in the world today, including 4 of the top 20 largest apparel websites in the world.
airisX works as an multi-platform, omni-channel solution provider, covering: Amazon, Shopify, eBay, Walmart, niche websites, and many more. With deep industry experience, our team lives cross-border logistics and supply chains, marketplace platforms, revenue growth strategies (through a combination of branding, marketing, advertising, social and more), contract manufacturing, and sourcing. Contact us at email@example.com for your ecommerce business needs.