An e-commerce business model explains whom your online business is selling products or services to, whether that’s other businesses, individual consumers or government agencies. Most types of — dropshippers, subscription services, wholesalers and many others — fall into one of those categories.
Here’s what e-commerce business models are and how to figure out which one is right for you.
What are some e-commerce business models?
defines whom you’re selling products or services to. There are several types of business models that can work for an e-commerce business, brick-and-mortar operation or both. Choosing one can help your e-commerce business position itself in the market and reach customers in an effective way.
Here are six common options:
Business-to-consumer (B2C)
It can be easier to get started with a B2C business compared with other business models, since your potential customer base is so large. But dealing with a large number of customers can mean addressing a large number of complaints and returns. And it may be hard to convince buyers to come back for additional purchases when there are so many other sellers out there.
Business-to-business (B2B)
B2B, or business-to-business, is a model in which one business sells to another business. For instance, you might sell raw materials or parts that manufacturers use to build B2C products (this is called a B2B2C model). Or you might offer a service, like , that caters to businesses instead of individuals.
One of the upsides to a B2B business model is that you often receive repeat orders or — for service businesses — collect recurring revenue from a client. However, you may have a smaller customer base, since you’re selling a more niche product. Your business clients may also want to negotiate on prices and payment methods.
Consumer-to-consumer (C2C) or peer-to-peer (P2P)
Generally, peer-to-peer e-commerce business models work with a site or platform that helps sellers find customers but also takes a percentage of their sales. These can be less stable business models than more traditional ones, like B2B or B2C sales.
Business-to-government (B2G)
Business-to-government e-commerce businesses are rare. This model is for vendors who sell their services directly to the government. You’ll generally need to be a well-established business to compete for government contracts. But if a majority of your company is owned by people of color or people meeting other demographic requirements, you may be eligible for the SBA 8a program, which can give you a leg up.
Direct-to-consumer (D2C)
A direct-to-consumer business model eliminates a traditional intermediary. Mattresses, for instance, have historically been sold from manufacturers to department, furniture and mattress stores; then, those stores have sold the mattresses to the people who’ll actually sleep on them. But in the last decade, D2C mattress companies have used e-commerce channels to start selling these products directly to individual customers.
A direct-to-consumer business model hinges on , since your customers will need to find out about your products in a new way. You’ll also likely need to work with a to store inventory and get orders shipped out to buyers on time.
Consumer-to-business (C2B)
In a C2B business model, businesses rely on individual consumers not just to use their products, but to produce value. An example might be a social video company that doesn’t produce its own content. Instead, when digital creators upload videos to the platform for free, the company places ads on them — generating revenue for itself and perhaps sharing some with the creators.
What are some types of e-commerce revenue models?
Your business model defines who your customers are. On top of that, you’ll need a revenue model — a plan for how your business will make more money from those customers than you spend on inventory, warehousing, shipping and other costs.
Here are some common types of revenue models for e-commerce businesses.
With a subscription e-commerce business, customers sign up to receive products in regular intervals. Subscriptions can help businesses develop recurring revenue streams and maintain longer customer relationships than businesses that rely on one-off purchases.
Subscriptions have worked for many different types of businesses — from toothbrushes and razors to cleaning products, meal kits and clothing. If your product is something that customers will use frequently and need to replace, reuse or may run out of, a subscription e-commerce business model could work for you.
With white-labeling, you buy wholesale products and then brand them with another logo, label and packaging. This can be a good B2B business — you might apply another company’s branding to your products to create employee gifts or trade show giveaways. It can also be a B2C business if your products can be customized for specific celebrations, like bridal parties or baby showers, or with sentimental colors, like school colors.
However, when you white-label goods, you may have to buy in large quantities and maintain . This can increase your startup costs and introduce additional complexities, like maintaining warehouse space.
On-demand printing or manufacturing
With an on-demand e-commerce business, you create a product at the time the customer orders it. This way, you’re not stuck with stock that you’re not sure you can move. You can also potentially offer lots of customization for your customers.
On-demand manufacturing — also called print-on-demand — can sometimes mean orders have a longer lead time to get to customers, because they’ll have to wait for their product to be made instead of simply being shipped from your warehouse. It’s important to be upfront about your timeline, although you may be able to charge customers more for rush orders.
is an e-commerce business model in which you don’t actually keep any inventory in stock. Instead, you list goods for sale, then work with warehouse partners who keep your goods in stock and manage all of the operations once the orders have been placed.
Dropshipping can allow you to experiment with what you sell without having to pay upfront for stock that may not end up getting traction with your customers. But when you don’t manufacture products or manage shipping yourself — dropshippers may sell products they haven’t even seen — quality control can become challenging. Make sure you have a plan to address customer complaints, returns and exchanges.
Wholesaling and warehousing
Wholesaling and warehousing is typically a B2B or B2G business model. With wholesaling, you often keep a significant amount of inventory on hand and require buyers to purchase from you in bulk. You may manufacture these products yourself or act as the intermediary between manufacturers and niche buyers.
How to design an e-commerce business model
can help you define your e-commerce business and revenue models — or, in other words, who you’re selling to and how your business will make money. Here are a few questions to get you started:
- Who are your customers? You should know your audience, but it doesn’t have to be narrow. Developing multiple revenue streams can help your business weather industry downturns or changes in consumer behavior — just don’t overextend yourself trying to sell to everyone.
- How often will they buy your products and services? Are you selling something that customers will need on a recurring basis, or will most of your sales be one-offs? If you’re pursuing a subscription business, make sure you have the resources to order enough inventory and pack shipments on a regular basis.
- Will you keep inventory? If you want to sell high volumes of goods without on hand, print-on-demand and dropshipping may appeal to you.
- How much control do you want? If you want to be heavily involved in quality control and the production of your products, dropshipping may not appeal to you.
- How many products will you offer? Do you want to provide customers with many color, size and package options? The more options you offer, the more you’ll have to manage your suppliers.
- How much bandwidth do you have? If your e-commerce business is a side gig, you may not be in a position to take on government contracts or large B2B orders.
An e-commerce business sells goods, services and funds over the internet. Starting an e-commerce business is a lot like starting any company — you’ll need to create a business plan, get licenses and permits and set up dedicated finances. You’ll also need to choose an e-commerce website builder, source your products and market to online customers.
Define your e-commerce business idea
The first step in starting any business is to hone your idea. Online business ideas can include selling physical or digital products as well as professional services. Whatever you choose, you’ll want to define your e-commerce business model and write a business plan that outlines your niche.
During this process, you’ll start to ask a lot of questions: How will you get your products or services to your customers? What sort of licenses or permits do you need? How much will it cost to get your business up and running — and how will you foot that bill? Your should answer these questions and provide a road map for the comie-commeng months.
Set up your business
Once you’ve solidified the your e-commerce business idea, the next step is to set your company up for success.
This includes back-office steps like:
- There are benefits and drawbacks to each of these entity types, so talking to an attorney may be helpful as you choose the one that’s right for you.
- Naming your business. Consult your local secretary of state’s website as well as the U.S. Patent and Trademark Office to ensure that you’re not choosing a name that belongs to another company. Check to see if your potential business domain name is available as well.
- Applying for an employer identification number, or EINYou can get an EIN from the IRS for free online or by mail, fax or phone. Not all businesses need an EIN, but having one can help you separate your personal and business finances.
- business checking account NerdWallet recommends all business owners have a dedicated bank account for their business.
- Getting licenses and permits your city or state requires. This probably includes a business license, and if you perform services, you may also need an occupational license. Check your state or local government website for requirements for your area.
Source or develop your products
Next, you’ll need to source the products you’re going to sell. If you’re selling physical products, you may need to make them yourself or work with a manufacturer.
Are you going to order products in bulk and keep in stock? Or will you rely on , in which products are manufactured or sourced at the time the order is placed? In general, dropshipping may keep your overhead costs lower, but it can be more difficult to manage. Maintaining inventory requires more upfront spending, but you’ll have the power to pack and ship orders yourself.
If you’re selling professional services, you might just have to describe and list what you offer on your business website. Still, you’ll need to figure out how much to charge and decide how many clients you can see each day or week.
Set up your e-commerce website
will be your storefront. It’s where your customers will learn about you and your business, browse your products and make purchases.
The easiest way to set up a website is to use an online store builder. These platforms can walk you through the process of launching your site, from buying a domain name to managing your inventory to taking credit card payments.
Popular e-commerce website builders include . The best platform for you fits into your budget and is appropriate for your skill level. Most offer the option to pay a professional designer or developer if you don’t want to build the website on your own.
Figure out order fulfillment
Order fulfillment is the process of getting customers’ purchases in their hands.
Most e-commerce website builders offer shipping label printing, which is the first step in the fulfillment process. Some also offer the ability to add shipping costs onto customers’ orders at checkout. If easy shipping is important to you, make sure to prioritize it as you choose an e-commerce website builder.
If you choose to handle order fulfillment yourself, research shipping rates so you have a sense of how much it’ll cost. Remember, too, that may connect you to customers across the world. If there are places you’re not willing to ship to, make that clear on your website.
Market your e-commerce business
Now that you have your products or services listed on your online store and your website is up and running, you’re ready to start serving customers as long as they can find your products.
- Influencer marketing, in which you pay popular social media creators to plug your products.
- Social media content or paid social media ads.
- Optimizing your business website for search engines.
- Sending email campaigns to past and future customers.
Tips for starting an e-commerce business
As with launching any business, starting an e-commerce business can feel overwhelming. Here are some tips for managing the transition.
Start simple
If you’re not certain e-commerce is the right path for you, set up an online store with low overhead first. This may mean starting with the free version of an e-commerce website builder, ordering a small amount of inventory or selling only one or two types of products.
Starting small can limit how much you need and make it easier to pivot if your first idea doesn’t land. As your business starts to get traction, you can trade up to a more robust and expand your product line.
Cultivate a loyal customer base
Your e-commerce business needs customers who appreciate your products enough to buy them more than once and, ideally, customers who will promote them to their networks.
Invest in multichannel selling
Remember that selling in person is a channel, too. Craft fairs, local shops and industry or trade events may help you connect with new customers while generating some revenue.
A version of this article originally appeared on JustBusiness, a subsidiary of NerdWallet.
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:
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 DTC
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-retail
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.
Dropshipping
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
“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.
Final thoughts
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.
Ecommerce Business FAQ
- Choose a business model: Decide between setting up an online storefront, creating a custom ecommerce solution, or using a third-party platform.
- Select a product or service: Research the market and decide what you will sell.
- Create your website: Design an attractive, functional website that meets the needs of your customers.
- Promote your business: Use social media, email marketing, search engine optimization, and other tactics to generate traffic and interest.
- Monitor and optimize: Analyze data to improve your sales, customer service, and overall strategy.
What are the 4 types of e commerce?
- Business-to-Business (B2B)
- Business-to-Consumer (B2C)
- Consumer-to-Consumer (C2C)
- Consumer-to-Business (C2B)
Is ecommerce a profitable business?
Yes, ecommerce can be a very profitable business. Many businesses are able to generate significant profits from their online sales, especially if they offer products and services that are in demand. Businesses with a well-developed online presence can also benefit from digital marketing, which can help them reach a wider audience.
Is ecommerce a good business to start?
Yes, ecommerce can be a great business to start. It offers the potential for low start-up costs and the ability to reach a wide customer base. Additionally, the digital nature of ecommerce makes it easier to track sales, manage inventory, and process payments, which can make running an ecommerce business easier than running a traditional brick-and-mortar business.
You have a lot of choices to make when starting a business. Outside of the product you choose to sell or your marketing strategy, one of your biggest decisions is what business model to pursue.
Ahead, get a high-level breakdown of the eight major business model choices so you can make the best decisions right from the beginning.
It’s important to understand each of these methods in order to make the right choice for your small business. There are pros and cons to each business model and, depending on your product, market, and cost structure, one may be more suitable for you and your business than the others.
Table of Contents
What is a business model?
A business model is a company’s core framework for operating profitably and providing value for customers. Features of an effective business model explain the customer value proposition and pricing strategy. The model identifies the products and services a company offers, its target market, and future expenses.
Why are business models important?
Business models are essential for both new and established businesses. They help companies understand their customers, keep employees motivated, attract investment, and provide a sustainable competitive advantage by identifying growth opportunities.
Think of your business model as a live asset for your company. It’s healthy to update it regularly to stay on top of upcoming trends and obstacles. If you’re planning to raise capital or partner with someone, active business model innovation shows stakeholders you can adapt and meet changing market demands.
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Common business model types for ecommerce
There are four main ecommerce business model types:
Business to consumer (B2C)
The business-to-consumer (B2C) business model refers to commerce between a business and an individual consumer, like buying a shirt from a brand’s website. B2C business includes ecommerce and brick-and-mortar.
Business to business (B2B)
Business to business (B2B) refers to any commerce between two businesses. Wholesale transactions typically fall under this category. You can include business-to-business offerings as either an ecommerce business or a brick-and-mortar. For instance, a coffee brand can sell its beans to shoppers on its website (B2C), but also sell in bulk to coffee shops (B2B).
Sell wholesale and direct to consumers with Shopify
Only Shopify comes with built-in features that help you sell B2B and DTC from a single store or platform. Tailor the shopping experience for each buyer with customized product and pricing publishing, quantity rules, payment terms, and more—no third-party apps or coding required.
Explore B2B on Shopify
Consumer to consumer (C2C)
The rise in the creator economy led to a spike in consumer-to-business (C2B) companies. This business model refers to when a consumer sells their own products or services to a business or organization. If you want to become an influencer or a photographer selling photos online, this is the type of business model you’d use.