The Ecommerce Business Model Explained
Ecommerce has come into its own as a force to be reckoned with in the online business world. The best way to sum up an ecommerce business is to look at it like any other retail store you would normally see in a mall or a shopping center. The only difference is that an ecommerce business has taken away the physical “walk-in” location aspect and is run completely online.
There are a lot of obvious benefits to this, such as having a much lower overhead than a traditional retail store, which we will get into shortly.
When many people think of ecommerce, they think of dropshipping. The two models are actually different, though both can be used in tandem with the same business. The difference between dropshipping and ecommerce has to do with how products are sourced. Instead of finding a vendor that ships out a product every time you make a sale (dropshipping), you source the product yourself from a manufacturer and then ship it to the warehouse where you hold all of your inventory (ecommerce).
Every time someone comes onto your ecommerce store and buys something, you earn a profit, and that item is shipped from the fulfillment center (i.e. warehouse) that you’ve set up.
While ecommerce has a lot more moving parts to it than dropshipping, they are very similar. The main difference is that for ecommerce, you source the product, keep an inventory of it, and have your own fulfillment service to ship it out.
If you prefer video, we did an overview of the e-commerce business model for our Youtube channel. You can check out the video below:
Examples of Real Ecommerce Stores
While there are hundreds of ecommerce stores out there, here are two that are very popular. Check out the links below to see how each of these ecommerce stores are laid out, how they offer their products, and what their general structure is. Look for inspiration for your own store.
Most people are familiar with the Reebok brand. For those who are not, it is basically a clothing company focusing on fitness clothes, shoes, and apparel for a healthy and active lifestyle.
This ecommerce store is focused specifically on single-speed bikes. It offers descriptions of their bikes, explains why they are awesome to a niche audience, and contains a blog discussing bike culture.
Types of Ecommerce Businesses
There are two different ways ecommerce companies can operate:
- Business to customer
- Business to business
B2C e-commerce is the most common and it simply means business to customer in which you, as the business, are selling to customers. The other is B2B ecommerce which means you’re business sells to other businesses. Most online retailers will follow the B2C model but there can be some cross-over if your products have a dual appeal.
The Pros of an Ecommerce Business Model
One of the huge benefits of an ecommerce business is that there are no traditional retail costs.
These businesses reduce the cost of the physical location, something which often ends up costing the business owner thousands of dollars a month in rent alone. You also do not need to have any cashiers or clerks on staff, so your payroll costs become very limited –– or even zero –– as many ecommerce businesses are completely owner-operated without a single full-time employee.
Availability is another benefit that most retail stores could never outperform you on. Is there any retail store that is open 24/7? The internet allows you to do business with anyone in the world, at any time.
If someone wants your product at 2 a.m., there is nothing stopping you from reaping the rewards of the late night shopper.
At the top of this article, we talked about the differences between dropshipping and ecommerce and how it basically comes down to sourcing your own products. Sourcing will take a larger upfront investment, but it will also give you a much larger profit margin over dropshipping. Typically, an ecommerce business that is handling all of its own fulfillment is also going to have higher profit margins than an Amazon FBA business or a dropshipping business. This can give you a competitive edge when it comes to pricing your products and using strategies such as paid marketing, since you will have a greater margin of error to work with that dropshippers simply do not have, and Amazon FBA business owners to a lesser extent.
There is a way you can combine the benefits of dropshipping with your ecommerce business, though. You can easily test out new product offerings on your website by simply adding some dropshipping listings alongside your normal ecommerce products.
For example, if you sold coffee mugs, you might want to test selling coffee as well. There are literally thousands of different types of coffee out there. Instead of sourcing all of these yourself, find dropshipping opportunities to put on your website. Then, when you find a winning offer, source that specific product yourself or just sit back and relax, letting the dropship product do its thing while you focus on your main product offerings.
This is an easy way to create new offerings for your audience, and it can be very profitable when combined with your higher-margin products that you sourced yourself.
Finally (and this is one of the biggest benefits of ecommerce businesses), you get to build your own brand. The brand can become something that really resonates with people. This is a major advantage you have going the ecommerce route over the dropshipping or the Amazon FBA route.
You can build a brand with these two models, but doing so is more difficult than it is with ecommerce.
Dropshipped products are not really your products, so it can be difficult to build a brand around something that so many other people are selling. You could build a brand on Amazon, but the Amazon brand is always going to overshadow yours when your customers are buying through Amazon.
With your own ecommerce site, you control everything from start to finish. You have your own platform and thus your own identity to craft in the eyes of your customers and target audience.
Make sure your storefront is built out with a design that makes it unique to you. Setting up social media accounts should be a no brainer, it helps to build up social proof for your brand. People are more inclined to buy if they trust you and can see other people have done the same. You could also reach out to bloggers in your niche and see if they’re willing to feature or review your products.
The Cons of an Ecommerce Model
When you start an ecommerce store, unless you are in a really bizarre niche, you are likely going to have some fierce competition.
You need to have a way to differentiate yourself from that competition. One way you can do that is by creating a really engaging brand while also offering better products than your competitors.
In addition to fierce competition, you are also going to run into trust issues at the start. People are going to take a while to warm up to you and your store. This is a disadvantage for sure, and it is one reason why Amazon FBA is such a loved business model because those owners get to leverage the reputation of Amazon’s brand alongside their company.
Both of these are going to be issues starting up an ecommerce store but should later fade away as you get brand recognition, solid traffic, and customer testimonials for your store.
In addition, there might be a lot of technical issues for you to overcome or solve. This is especially true if you build your store on your own platform using software like Magento.
Of course, you could get around this by using something like Shopify’s platform, which is a great alternative to building your own. Just realize that if you use someone else’s platform, you are going to have less flexibility.
Bottom line, with ecommerce, you are going to have to get good at managing a lot of moving parts. Owning an ecommerce store is exactly like owning a physical store in that there are tons of things you need to be accountable for.
You have to find the manufacturers for your products, set up a solid agreement, find the right freight shipping company, and find a fulfillment warehouse solution to handle the logistics of actually shipping out the product to your customers.
When a customer complains or has questions, you will also need to have some kind of customer service support to take care of those issues.
Not to mention: you are the marketing arm for your store.
Marketing can be an incredibly frustrating part of doing business. In fact, there tons of hats to wear in just the marketing department alone. You need to know your conversion rate, the lifetime value of your customers, where your customers hang out, how to advertise to that demographic effectively on the platform where they hang out, and manage an endless list of things to do to get the business up, running, and hopefully growing.
Some people flourish through having to wear multiple hats, but whether juggling all these different roles is right for you is something you will have to decide for yourself. In the end, most of these tasks can be outsourced or delegated to virtual assistants and other freelancers, but you should still know how every task is performed and make sure you hire an effective assistant.
What Buyers Need to Know
If you are looking at buying an ecommerce business, there are a few things to take into consideration.
Obviously, you want the basics out of the way. This will involve verifying the seller’s income and traffic by actually logging into their analytics. It is never advisable just to trust screenshots, as screenshots can easily be photoshopped.
Outside of those basics, there are a few growth questions you should ask before buying an ecommerce business.
First of all, can the business be expanded into new product territories? For instance, in our coffee mug example, there are plenty of products someone could expand their store into. These might include tea cups or actual bags of coffee and tea, etc. This differs from diversifying the channel in which you are selling, in that you actually have more things to sell and aren’t just exposing your one core product to a new audience. There is plenty of room for product growth.
Next, ask yourself if this business is a real brand or if it could become one. A business named BestCoffeeMugs2016.com is going to be a dubious brand to build on. Something like “Cool Mugs” has more brand potential, as it’s short and memorable. Look for a business that goes beyond just the niche play and can be expanded into dominating broader niches.
Finally, what e-commerce platform is the store actually using to run itself? Some people prefer self-hosted solutions, such as Magento, which can lead to all sorts of technical issues if you are not familiar with the platform.
Some even use WordPress, which can be pretty rigid in terms of what you can do with it. Others prefer to use pre-made solutions such as Shopify stores, and many see great successes using a more user-friendly, or “newb”-friendly, platform like Shopify.
If you are familiar with Magento, then no worries. If you are looking at buying a website on a platform like Magento that you are not familiar with, you should definitely ask the seller for training on how to best use the platform or deep dive into tutorials on the platform before purchasing the business.
After you have all of this taken care of, you will want to ask if they have exclusivity with the manufacturer. Also ask what kind of lead times (from the time of ordering a product to actually having it in the warehouse) they are looking at with each order to top off their inventory. This is important in helping your inventory management.
Have there been any hiccups with the manufacturing process? Are there limits to how much product the factory can produce? Are there other factories in place that could help with the workload if there is a limit to the primary manufacturer’s production?
You should also ask what kind of customer support system they are using. Many ecommerce businesses are purely owner-operated with zero employees, meaning they are handling all of the customer service issues that crop up. This could mean just a couple of calls or a few emails a week, or it could be an entire operation in and of itself.
It is good to know what they have in place and even better to know what kind of options are open to you.
What Sellers Need to Know
If you are looking to sell your ecommerce business, there are a few things you can do to boost your ability to sell the ecommerce business for the most money.
Obviously, everything in the buyer section above is something you need to pay attention to. After all, your prospective buyers certainly will be. The more you can systemize your website and really have your processes down, the more attractive the business will look to the potential buyer. Always ask yourself how you can make the business easier to hand off to the new owner where they can “plug and play” and start earning with their new investment as soon as possible.
In addition, you should be angling for your ecommerce business to form a true brand.
The brand should be something that customers can be loyal to and feel they have some stake in. Having a brand identity will help you in the long run to remain ahead of competitors that enter your space. Having an identity also makes it easier to accumulate profit when you launch new products.
Growing a brand isn’t exactly difficult, but it can be a long process.
Think about your brand identity from day one, and frame your content around that identity as you promote your store.
While branding is important, it is almost equally important to be continually growing your business in new ways that spurs revenue while also increasing your market share in the space. One of the best ways for an ecommerce business to do this is by selling through multiple channels.
Your online store is just one channel. The more channels you have, the more exposure you get to the entirety of the niche. One very simple way to go about this is to convert some of your better products into an Amazon FBA business on top of the ecommerce website.
At the end of the day, the more you can do to make your business a formidable opponent to any competitor encroachment while making the online store “plug and play” for the new owner, the higher the listing price you’ll be able to fetch for the business on the marketplace.
What Buyer Persona Best Fits an Ecommerce Business Model?
As with any business, certain buyer personalities will be attracted to an ecommerce business model over other models. You might find yourself identifying with one of these personalities and, if you do, it might be worth investing in an ecommerce business which is already making money. (You can find sites like these on our marketplace.)
Acquiring an ecommerce store could be a smart and extremely advantageous purchase for someone looking to corner a market.
For example, let’s say you owned an AdSense website that is in the fashion niche. You might be interested in buying a dropshipping business in the same niche, or you might decide to go a level higher and purchase a fully-sourced ecommerce store in the fashion niche outright that has a brand and a loyal audience buying their products.
Using both websites to promote each other will increase revenue and allow you to introduce both businesses to each other’s audiences, who already share similar interests and values.
Operating from a self-hosted platform like Magento, an ecommerce store would be a very attractive purchase for someone who likes to get deep into the technical aspects of a business.
They can clean up the coding on the website, make it run faster, add new plugins, or cart abandonment solutions that can keep people along the path of actually buying the product rather than clicking off the website.
A DIY Dave could tinker or fully create a brand new complete marketing funnel that is systematically integrated with the actual ecommerce store. Not only that, but also they can play around with different manufacturers, shipping solutions, and other operational aspects to drastically increase the profit margins for every item sold.
An investor looking to make a big splash in the online scene might find investing in an ecommerce store to be a golden goose. Since they control the majority of the operations (i.e. no affiliate program that might ban you and hold your funds), they are able to do things with an ecommerce business that they just can’t do with other business models.
Even dropshipping and Amazon FBA does not give you full control of the business like a fully-sourced ecommerce business.
Buying or designing new products or ordering inventory takes capital, so it likely makes sense to bring an investor into an ecommerce business. After all, an ecommerce store can blow up to become a powerful brand, which other leading industry businesses can come to respect.
One of the nice things about ecommerce for someone looking to flip a business is that there are so many parts of the business that can be improved. Someone buying an ecommerce website could dramatically increase its earnings with a multitude of different tweakings. Everything from addressing cart abandonment to increasing faster website loading speeds, from adding more content to improving copywriting, or even just changing out payment processors to shave off a few cents on fees, can improve an ecommerce business’ value.
Changes like this allow a flipper to sell the ecommerce business they bought for a much higher listing price than what it was originally sold for.
There are several routes someone could take to growing a small business into something much bigger.
Accessorize with Dropshipping
The more products your business offers, the higher chances you have of making a sale, as there is more opportunity to capture your target audience’s interest.
One easy way to do this without spending a large upfront sum of money on inventory is to simply add some dropshipping products that are related to your core products (if at all possible, they should be accessories or something that requires your core product).
Accessories are easy to add. They create some extra organic traffic possibilities from the search engines, and they can increase your bottom line without much risk.
Of course, you should also be on the lookout for more products to source for your store. One way to choose what kind of products you source is to start off with a dropshipping offer. If that offer converts well enough on your store, look into how you can source that product yourself with your own branding.
The next thing is to increase the organic traffic you are already getting by using a tool like SEMRush.
Find out what keywords you are ranking highly for then add more content to those pieces to help cement your dominance on page one of Google. For more information on how to do that, there is a post we recently wrote that is mainly meant for AdSense and Amazon sites. The same SEMRush strategy can be applied to an ecommerce business as well.
Since the goal with an ecommerce business should be to build a solid brand in addition to moving products, creating an email list can become an invaluable asset. You can drip feed high-value content related around your products, and — more importantly — when you launch a new product you will have an immediate audience of people who have raised their hands, saying they would like to hear more from you.
We mentioned it already in the seller section, but multichannel selling can be a huge boost to your revenues. Here are just a few different online sales channels you can tap into:
- Amazon FBA
- Shopping comparison sites
- Other public marketplaces (even places like eBay)
This of course does not include the potential of getting your product on the shelves of offline stores as well as the various online marketplaces.
Every sales channel you can get into and dominate is just another portion of the market you can have complete leverage over (and hence make a lot more money).
Speaking of making more money, ecommerce is a perfect business to create an affiliate program.
You can make the affiliate program give out certain levels of commission (similar to an Amazon affiliate business) based off the number of items sold. You could offer a 48-hour cookie or one that’s even longer. Or, you could decide that you want to only pay commission on the products you source yourself due to the higher profit margin and not pay out a commission for the offers that are dropshipped products.
The sky’s really the limit with an affiliate program. It can be a big win, especially if a super affiliate starts promoting your goods. It can become your number one marketing channel, and the best part is, as long as you treat your affiliates well, you don’t have to do too much marketing to make the sales happen.
Once you start selling, another area for growth is the construction of an email list.
This is known as post-purchase automation. It is more or less an email sequence you can set up for whenever someone buys a product from you that will go out over the course of a few days or even a few weeks. (You decide how long the sequence should be, which is yet another area to test and tweak.)
These emails are designed to nurture your new customers and draw them deeper into your brand. From here, you can start upselling existing customers on other related offers.
Depending on how many core products you have and which accessories are available, you could set up a post-purchase automation email sequence for every product to really drive up your total lifetime value per customer.
Resources to Learn More
Interested in learning all you can about ecommerce?
Here are two of the best resources around when it comes to taking a deep dive into how this specific business model works:
This community caters to more advanced ecommerce store owners. That being said, it is a worthwhile place to go even if you are brand new. There is plenty of free content in the form of podcasts, blogs, and a few email opt-in bribes that would be worth checking out if you are looking for smart ways to grow your business.
As the name suggests, this website is packed full of useful tips, tricks, strategies, and general advice for anyone looking to dive into the world of ecommerce. It is a worthwhile place to check out and is loaded with free content that will help you grow your business.
Also make sure to check our guest post on the Shopify blog to learn even more selling/buying an ecommerce site.
Are you excited about ecommerce?
If you want to take the guesswork out of an ecommerce business so you can focus on tweaking the business to spit out bigger profits, then you might want to head to our marketplace to see our current ecommerce listings. It is typically easier to grow a business that is already making money versus starting one from scratch.
Or maybe you already have a profit-producing ecommerce store?
In that case, you might be looking to cash in on what you have created by selling your ecommerce business for a big payday. If that’s you, click here to learn about how to get your website listed on our marketplace and in front of 30,000+ hungry buyers.
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