6 Types of eCommerce Business Models
Editor's Note: This post was originally published in 2018 and has been updated to reflect the current state of the models of eCommerce 2021.
Global ecommerce retail sales surged 25.7% in 2020 to $4.213 trillion. Five, ten, or even twenty years ago this probably seemed like an impossible number to reach. eCommerce has exploded over the last few years and even with the end of the COVID-19 pandemic in sight, isn’t expected to slow down.
The digital shift is a very real trend and businesses not already online will need to break into the eCommerce landscape sooner rather than later. Applying the right eCommerce business model to the online store will be one of the first steps.
Not taking the time to evaluate your business and understand your target market can be extremely detrimental and lead to thousands in wasted spend. Digital advertising, SEO, and content marketing are effective ways to drive traffic, revenue and help you realize a large ROI, but they won't be nearly as effective without a well-planned eCommerce business strategy.
Whether you’re just starting to explore eCommerce models or already have an established digital commerce venture and are looking to expand your online presence, it’s important to know which model best fits your needs and requirements.
What is an eCommerce Business Model?
Electronic commerce, or eCommerce, is a business model that lets businesses and consumers make purchases or sell things online. There are six major eCommerce business models:
- Business to Consumer (B2C)
- Business to Business (B2B)
- Business to Government (B2G)
- Business to Business to Consumer (B2B2C)
- Consumer to Consumer (C2C)
- Consumer to Business (C2B)
We’ll review each of these six business classifications in depth and dig into the five primary delivery models that you will need to consider when launching or expanding your online store.
Business to Consumer (B2C)
As the name implies, business to consumer (B2C) is when a company markets its products or services directly to end users. It is the most widely known form of commerce. B2C ecommerce is fairly straightforward. You complete a B2C transaction every time you purchase food from a grocery store, eat dinner at a restaurant, watch a movie at a theater, and get a haircut. You are the end user of the products and services these companies sell.
In eCommerce, there are five different B2C business models: direct sellers, online intermediaries, advertising-based, community-based, and fee-based.
- Direct selling is the most common model. It is when consumers buy products from online retailers.
- Online intermediaries are online businesses that bring sellers and consumers together and take a cut of each transaction made.
- In the advertising-based model, information is given away for free and money is made from advertising on the site.
- Facebook is an example of a community-based site that makes money from targeting ads to users based on their demographics and location.
- Finally, the fee-based model involves companies that sell information or entertainment to consumers for a fee, like Netflix or subscription-based newspapers.
In recent years, online B2C sales have been trending upward. Many traditional brick-and-mortar retailers have either been closing, or pivoting and adding in digital channels to their strategy as shoppers go online for the things they need.
This hybrid approach is when companies have both a traditional brick-and-mortar presence and an online shopping platform. Many companies integrate these approaches with an omnichannel ecommerce strategy to maximize the customer experience. For example, some companies now let you order your products online and pick them up at one of their local stores. Many companies also allow customers to return products they bought online to local stores for a quick and easy refund or exchange.
To implement the B2C eCommerce model successfully, businesses must rely on having a platform that can be adjusted quickly and adapt to new customer needs without causing delays in service.
Business to Business (B2B)
As the name implies, business to business (B2B) is when a company markets its products or services directly to other businesses. B2B ecommerce can be broken down into two methodologies, vertical and horizontal.
Vertically oriented businesses sell to customers within a specific industry. With a horizontal approach, you are selling to customers across a myriad of industries. Each approach has their own pros and cons, such as industry expertise and market depth (vertical) versus wide-spread market coverage and diversification (horizontal).
Both can be a lucrative pathway, but your strategy will depend on your products and customers, so consider them carefully.
Historically, B2B businesses had always been a few steps behind their direct-to-consumer counterparts, especially when it came to commerce innovation and digital sales. The problem lay in price negotiation and collaboration, and many businesses were used to leveraging sales representatives as the primary revenue generating channel.
The modern B2B buyer has gotten quite tech savvy though, and now shares many of the same demands and buying habits as the average buyer. Convenience, flexibility, personalization, and integrated experiences are expected and now business-critical.
Despite the slow adoption of digital strategies, B2B brands have focusing more and more on ecommerce to keep up with consumers. A recent report by Gartner uncovered a recent dramatic shift with B2B digital commerce initiatives surpassing B2C. Gartner assumes "By 2025, 75% of B2B manufacturers will sell directly to their customers via digital commerce."
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Business to Government (B2G)
Business to government (B2G) is when a company markets its products and services directly to a government agency. This agency could be a local, county, state, or federal agency.
An example of a B2G relationship is when an ammunition manufacturer sells ammunition to the US Army. And an example of a local B2G relationship is when a private engineering company sells its engineering services to a county government to develop a new water and sewer system for the community. In B2G, companies typically bid on projects when governments announce Requests for Proposals (RFPs).
Interacting with government agencies is very different from working with other businesses or consumers. Due to having to deal with bureaucracies, business deals tend to move at a much slower pace than in other sectors. Ecommerce companies can definitely bid on government contracts, the same as other companies. Unlike many B2C transactions, however, many government agencies will not go directly to an eCommerce website and place an order.
There are exceptions to this, of course.
A local government agency could, for example, place an order directly from an eCommerce company for a part to repair a piece of equipment. It depends on a variety of factors including the size of the agency and the need.
Business to Business to Consumer (B2B2C)
In B2B2C ecommerce, a company sells products to another company which are then sold to consumers. An example of a B2B2C arrangement is when a wholesale distributor sells merchandise to retail stores that then sell the merchandise to end users. The B2B2C model is comprised of three parts: the first business (the business of product origin), an intermediary, and the end user.
There are several different ways the B2B2C model can be used in eCommerce applications. For example, a company could partner with another company to promote its products and services, giving the partner a commission for each sale.
The primary advantage of the B2B2C business model for eCommerce companies is the acquisition of new customers. This is an important consideration for new eCommerce companies that need a way to rapidly grow their customer base.
Consumer to Business (C2B)
Typically, when we think of commerce strategies, we tend to think of them from the starting point of the business. However, consumer-oriented models, like Consumer to business, are growing in popularity.
In the C2B ecommerce business model, individuals sell goods and services directly to companies. We see this most commonly in websites that allow individuals (contractors or freelancers) to share work or services they’re skilled in. Often, businesses will put in a request or a bid for that person’s time and will pay the person through that platform.
One of the most recognizable examples of a C2B business is Upwork, a freelancing platform that connects organizations directly with talent. It’s marketed is a ‘marketplace for work’ and gives businesses the ability to find and source project support, ranging for anything from software development and content creation to UX design and even financial needs for things like bookkeeping or filing tax returns.
Another intriguing, newer example is that of influencer marketing platforms such as Upfluence or GRIN. In a similar fashion to Upwork, both of these platforms connect businesses with individuals selling services. In this case, people are ultimately selling the ability expand a brand's reach and visibility by sharing across their social media networks.
One of the key benefits of this business model is that it allows consumers to set their own price and can also often help expand their individual reach by giving the more visibility.
Consumer to Consumer (C2C)
Another model most people don’t typically think of is the consumer to consumer business model. The rise of the digital landscape has really enabled the concept to take off, with companies like eBay, Craigslist, and Esty leading the way.
In C2C ecommerce, consumers sell goods or services directly to other consumers. This is most often made possible by third-party websites (such as the examples we previously mentioned) or marketplaces, that facilitate transactions on behalf of the buyers and sellers.
These ecommerce marketplaces allow smaller businesses, or even hobbyists, to sell their products at their own pricing without having to maintain their own online storefront.
Top 5 Delivery Frameworks for your eCommerce Business
Once you have determined which model best fits your business, the next step is to identify the delivery method that meets your needs and requirements. Not every business manufactures their own products or maintains their own inventory and warehouses.
Here are 5 of the most common approach businesses are using today:
1. Drop Shipping
Drop shipping is an order fulfillment method in which a business’s products are stocked, packaged, and shipped by a third-party supplier (i.e., you sell someone else's products through your store).
With drop shipping businesses, the team that stands up the storefront doesn’t have to worry about managing inventory, stocking warehouses, or handling shipping. They can focus on their front-end customer experience and building their customer network.
One of the biggest caveats to this approach that you need to consider before adopting the process, is that your business will have absolutely no control over the supply chain. Should products arrive damaged or late, or if the quality is lower than expected, it will reflect poorly on your brand. While the onus is on the drop shipper to deliver, you’re the one that is in direct contact with the end consumer and ultimately responsible for handling support requests and managing the relationship.
2. Subscriptions services
With a subscription model, you are committing to continuously sending your products to customers over an extended period of time at consistent, pre-determined intervals. There are many different type of subscriptions, like product discovery or unlimited services, so pricing, billing, and account management will depend on your business, your products, and your customer’s consumption behaviors.
Take ButcherBox for example. ButcherBox is a subscription company that sends consumers farm fresh, organic meat and seafood products on a monthly cadence. Customers can pick from a list of curated boxes or customize their own, and can choose from a couple of different box sizes that will send differing amounts of food.
Food is one of the most prevalent categories of consumer goods that tends to perform well with subscriptions, along with fashion, beauty, or even pet products.
While ecommerce subscriptions can prove to be fairly lucrative and have a number of benefits, they are not for every business.
Businesses that leverage wholesaling manage everything apart from the manufacturing of the product. You will order goods directly from the supplier, and are responsible for the warehouse, managing inventory and stock, and tracking customer orders and shipping. You tend to see wholesale ecommerce a lot in the B2B space, but it can be leveraged as part of a B2C ecommerce strategy as well.
4. Private labeling
In private labeling, a business will hire a third-party manufacturer to create their desired products based on their own unique ideas and designs. This will save you from having to build your own factory and manufacture your own products, but give you exclusive rights to sell your own goods.
Once the goods are manufactured, you can either have the manufacturer ship directly to the customer, to an online marketplace, or back to you for you to handle. Initial costs can vary, but should you have the product designs and finances to get started, private labeling can be a great way to get started or test new ideas.
5. White Labeling
With white labeling, you are branding and selling a product under your own name and logo, but it’s manufactured and purchased from a third-party distributor.
You tend to see this in the fashion and health industries, commonly with cosmetics, essential oils, and companies that sell CBD online.
White labeling can boost your brand visibility, keep you from having to manufacture your own products, and allow you to take advantage of the knowledge and expertise of the distributor.
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How to Choose Your eCommerce Business Model?
Now that you’ve familiarized yourself with the various models and product management and delivery methods, you can start the groundwork for actually choosing your model. There are three key criteria that will impact how you move forward.
- Understand your customer. Who are they? What are their buying habits and purchasing behaviors? What are their pain points? Building your ideal customer profile (ICP) with this information is a great first step in choosing the right eCommerce business model.
- Understand your value proposition. What makes you different and in what areas do you exceed compared to the competition? Is it your pricing, customer service, product selection? Also ask yourself, “What do you not do well?” Knowing where you excel and when you’re not a good fit is vital to your business strategy, and being honest about it with potential customers will only built trust and brand loyalty.
- Sell your product in a way that makes sense for your customers. This is where you choose your delivery method. A good way to look at this is from the point of view of a manufacturer versus a distributor. If you create your own products then you’ll probably want to consider wholesale or a subscription service. If you’re selling someone else's goods, you’ll need to focus more on building your brand and customer base.
Once you have identified your target market and the correct model you need to best serve your customer base, you can focus on building and optimizing your ecommerce infrastructure and marketing tactics to fine-tune your business and maximize revenue. If you need a support in launching your online B2B, B2C, or B2B2C store, or even replatforming ecommerce experience, our team is here to help.