Picking an eCommerce Business Model

B2B (business to business), B2C (business to consumer), drop shipping, direct sales, wholesale: You may be familiar with some of these terms, but what do they actually mean and more importantly, why do they matter?

It is imperative to understand how these models differ from one another and how they impact what and to whom you sell to.

Three basic eCommerce business models

  1. Direct Sales / B2C (Business to Consumer)- Any product sold directly to the customer is considered direct selling or B2C. This means  there are no middlemen between you and your customer. Most eCommerce startup businesses are B2C
  2. B2B (Business to Business) / Wholesale- Products that are bought or manufactured and then sold in bulk to a distributor are considered those involved in a business to business (B2B) transaction. The company or person(s) your products are sold to (in bulk) will turn around and “distribute” them in smaller quantities directly to consumers (B2C). [su_spacer size=”18″]For example, if you wanted to sell your products to Wal-Mart, you wouldn’t just sell one unit, you would sell large quantities like a 1,000 or 10,000 units.The main advantage of B2B selling is that you don’t have to deal with the end-user and you are paid up front regardless of the product’s success in individual stores. Also, it’s much easier to get repeat business from a distributor than from a customer. Challenges of B2B selling include finding a distributor and being able to meet demands such as offering flexible payment options, guaranteeing them an MEP (minimum advertised price) and even potentially giving them exclusive rights to a product.
  3. Drop Shipping – Drop shipping sounds like one of things that’s too good to be true, and this can indeed often be the case. However, if you can find a legitimate drop shipping supplier and beat out the competition, it can be a very lucrative business model. In fact, before the market became oversaturated, drop shipping turned a lot of people into overnight millionaires. [su_spacer size=”18″]Here’s how it works:

    1. Customers visit your eCommerce site and purchase a product. You receive payment [su_spacer size=”10″]
    2. You contact your supplier (the drop shipper) and instruct them to ship the product directly to the customer. You pay them using the money you got from your customer. [su_spacer size=”10″]
    3. The supplier (drop shipper) puts your company name and logo on the box and ships the product directly to the customer. The customer remains oblivious to the fact that you are simply the middleman in the entire transaction. [su_spacer size=”20″]

Your profit = What the customer paid on your site – What you paid the drop shipper

 

There’s almost no risk involved with drop shipping since you are not required to pre-purchase merchandise. You simply act as the broker who connects the buyer to the supplier- only the buyer remains unaware of this. In fact, if you’ve ever bought anything from Bestbuy.com, Sears.com, Macys.com, eBay or Amazon, then you’ve likely purchased from something from a drop shipper.

The problem with drop shipping is that it has become extremely competitive in the past few years and making a profit is quite difficult, especially in the short term. But it can be a profitable business model if you find the right source (I’ll explain how to find the best drop shipping sources in the following sections)

Summary of eCommerce Business Models

Direct Selling (B2C) B2B Drop Shipping
Startup Capital Need to buy/manufacture products Need to buy/manufacture products $0-$100
Risk Level Moderate Moderate None
Potential Profit Margin Moderate – High High Low

Conclusion

Before starting your business, pick the eCommerce business model that best fits your long term objectives.