The Different Ecommerce Business Models You Can Choose

If you are starting an ecommerce business, you may be wondering which type of business model to go for and what the differences are between certain models.

This post covers all of the most popular ecommerce business models that you can choose from and lists their pros and cons (but there isn’t one that is best overall, just the one that is best for your business!).

1. Retail Ecommerce

This can go by many names such as traditional ecommerce or DTC (direct to customer), with the basic premise of this model being:

You buy/manufacture, store and ship the product to the customer, basically, you do everything in-house.

This is the model that is adopted by the majority of ecommerce businesses but there are pros and cons to this model:

Pros

  • Gives you more control over your business, such as shipping times as you aren’t as reliant on third-parties
  • Allows you greater quality control as you can check products before they are shipped
  • Larger profit margins per product as you are buying/producing in bulk

Cons

  • Larger start-up costs as you need to buy/produce products and possibly store them
  • Can be left with unsold stock, tying up capital, which can reduce your ability to quickly react to a changing market
  • Can’t be run remotely as you need to process orders, returns etc

2. Dropshipping

An ecommerce business model that has seen a huge rise in popularity in the last few years.

Unfortunately, this growth in popularity has been down to ‘influencers’ in the space pushing it as a get-rich-quick scheme, which it isn’t!

On paper, this looks like the perfect business model as:

  • You partner with a supplier
  • List their products on your website
  • Market them directly to customers who place an order on your site
  • This order is then passed to your supplier, who packs and ships the product directly to the customer
  • You pocket the profit

Sounds awesome doesn’t it? But as with all the models on this list, there are pros and cons:

Pros

  • Lower start-up costs as you just need a website and marketing budget
  • Gives you more flexibility in terms of what you can sell and you aren’t left holding unsold stock
  • Can be run/managed from anywhere as long as you have an internet connection

Cons

  • Super competitive and profit margins are low as you don’t have the benefit of bulk buying stock
  • You are completely reliant on third parties for your business, giving you little control over your business
  • Shipping times can be very long, which customers don’t like

Dropshipping can be a great way of testing the water to see whether or not ecommerce is for you and also testing out different product types/niches to see what sells but isn’t exactly scalable and sustainable over the long term.

3. Print-on-Demand

Print-on-demand is similar to dropshipping as you partner with a third-party company to process and ship all of your sales for you but there is one big difference.

With normal dropshipping, you are generally promoting generic products that anyone else can easily do, which is why competition is so high and profit margins so low.

With a print-on-demand business, you are selling your own designs that are applied to different types of products such as:

  • Clothing & Accessories
  • Mugs
  • Phone cases
  • Homewares
  • Artwork

And the designs belong to you, you just partner with a company that can produce the products and ship them but what are the pros and cons?

Pros

  • Low start-up costs as you just need designs, a website and a way to market your products
  • Profit margins can be higher as you are selling unique products
  • Can be run/managed from anywhere as long as you have an internet connection

Cons

  • You are completely reliant on third parties, with quality control being the biggest potential issue
  • Shipping times can vary depending on the product, production and partners location
  • Limited potential products, this depends on the supplier but you can only sell products they produce

Print-on-demand does remove some of the negatives of normal dropshipping but still has its drawbacks, this model can work really well for people/businesses who have an existing audience.

4. Digital Products

Selling digital products has also become very popular over the last few years due to the advancements in tech that has made it easier to deliver products directly to customers online.

When it comes to digital products you can sell, there are many different options include downloadables, services and software, with some options being:

  • Ebooks
  • Stock images, videos and audio
  • Online courses
  • Virtual assistant
  • Plugins, themes and apps

There really are many different digital products that you can sell online and you can choose to just do digital products or combine them with physical products and/or services, they really do offer a lot of flexibility but what about the pros and cons?

Pros

  • Can have very low start-up costs but this does depend on the digital product
  • Profit margins can be very high as you have unlimited quantity without having to store & ship them
  • Has the potential to scale without massive additional costs

Cons

  • Can be very competitive on some products, meaning margins are slim
  • Tax and VAT can be an administrative headache
  • Potential piracy and copyright issues, which can be very difficult to combat, especially in international markets

Digital products can be a really good model but you need to be aware of things like Taxes and VAT before you start selling to make sure that you are operating legally.

5. White Labeling

White labeling allows you to add another level of branding to your business and there are two ways this can be done:

  1. You buy generic products from your supplier and then apply your own branding
  2. You partner with the company and they apply the branding to the product as part of the production process

This allows you to stand out from the crowd and even though you may be selling the same product, you can use your brand to ‘add value’ to that product, depending on your relationship with your supply partner, you may also be able to have exclusive variations such as colors or specs just for your brand.

White labeling can be a really good way to start your own branded line of products but does come with some pros and cons:

Pros

  • Allows you to stand out from the crowd in what might be a competitive market
  • Can result in higher profit margins due to the ‘value’ your brand has

Cons

  • Start-up costs can be higher due to the products needing to be branded
  • Can easily be undercut by generic or competitor-branded products
  • You don’t have any input in the product development

White labeling can be great way to get some traction with your brand, as long as you choose a good product and partner but you don’t have much of a moat around your business.

6. Private Labeling

Private labeling is a step up from white labeling as rather than having generic products rebranded, you are partnering with a manufacturer to produce your own products and this may be a product that you have designed yourself or an improvement on an existing product.

This is as close as it gets to being a fully-fledged company that develops, produces and sells a product without having to do everything in-house.

So what are the pros and cons of private labeling?

Pros

  • You are selling your own products, which can have better product margins
  • You have more control over product development and quality
  • Gives you an advantage over the competition who are selling generic products

Cons

  • Start-up costs can be high due to getting everything set up to produce your products
  • You have to find a good, reliable partner
  • You have to have copyright and trademark protection to stop people from ripping of your products

Private labeling is usually more of an end goal for retail businesses who want to sell their own product and already understand the market, it might not be viable for new businesses due to the high start-up costs.

7. Wholesale Ecommerce

Another ecommerce model that can go by different names is wholesale (can be called trade selling or B2B) and this model moves you further up the cycle as you sell to businesses rather than the end customer.

The two most common types of wholesale ecommerce businesses are:

  1. Importers – these are companies that deal with manufacturers in other countries and import the products in bulk and then sell them on to businesses (can be physical or online) in their country
  2. Manufacturers – the are companies that make the product and then sell it on to retailers or other wholesalers, the manufacturing facility can be based in the country you operate or overseas

You may think that wholesalers need to be big businesses but in some niches, this isn’t the case and they can be quite small but it does come with some pros and cons:

Pros

  • You generally sell in bulk
  • You aren’t dealing with the end customer and B2B sales have different laws/rules
  • Building a repeat customer base is easier as long as the product and service is good

Cons

  • Start-up costs can be high due to needing to buy large amounts of stock or set up manufacturing
  • Profit margins per product are smaller due to selling in bulk
  • You have to be aware of trends and upcoming trends and stock accordingly

Wholesaling can be a great business and it can be combined with a DTC business so that you have retail and trade customers, in many cases wholesale ecommerce business have developed from a retail business as they have begun to grow.

Conclusion

There are many different ecommerce business models that you can consider for your business and it comes down to you and your goals as to which one is going to be best and this can depend on:

  • How much money you have to start, run and market your business
  • How tied to the business you want to be
  • What your goals for your business are

And no-one can make that decision but you, which is why having a clear idea for your business is so important, especially when you are just getting started.

Hi, I'm Paul, the Owner and Founder of EcommerceGold.
I ran my own Ecommerce Business for over 7 years and now help others start their own online retail empires!

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