Amazon, Myntra, Urban Company, eBay, Zomato.
These are some of the popular eCommerce companies that most of us are familiar with. We use these platforms to order goods and services from the comfort of our homes.
Apart from these major platforms, a majority of the retail traders and startups also have their online stores, where you can order the products.
A majority of us have participated in eCommerce transactions at some point or the other. But what is E-commerce?
What Is The ECommerce Business Model?
Electronic commerce or eCommerce is a business model where businesses and individuals buy and sell goods and services online using the internet.
Devices such as computers, laptops, tablets, mobile phones, and other smart devices are used for this purpose.
Ecommerce is a highly disruptive technology that has changed the way people shop for products and services. It has transformed the retail landscape, forcing traditional retailers to change their way of business.
The popularity of eCommerce has grown manifold during the past recent years it is projected to further rise in the time ahead. The global eCommerce sales in 2020 are $4.28 trillion and it is estimated to reach $5.4 trillion by the end of 2022.
Businesses of all sizes and types have to venture into the eCommerce business landscape to be profitable. However, it is crucial to choose the right eCommerce business model for ensuring success.
To choose the right eCommerce business model it is essential to evaluate your business completely and understand your target market.
Types Of ECommerce Business Models
There are many types of eCommerce business models. Each model has its own share of merits and demerits. Most of the eCommerce companies operate simultaneously in several categories.
However, understanding the major business models will help you to draft an effective eCommerce strategy for your business.
Here are six different major types of eCommerce business models.
B2C – Business to Consumer
B2C or the Business to Consumer is the most common category of eCommerce. Companies in this category sell their products and services directly straight to the end consumers.
You are involved in a B2C transaction, whenever you order food at a restaurant, purchase groceries, buy entertainment packages or order a home cleaning service.
The B2C model has a short sales cycle due to the lower value of transactions. The decision-making process in a B2C transaction is quicker in comparison to other categories such as Business to Business and Business to Government.
On the other hand, the average order value of B2C transactions is low in comparison to their B2B and B2G counterparts and so are the recurring orders.
There are different types of B2C eCommerce models –
- Direct online selling by retailers
- Online direct intermediaries who bring buyers and sellers together and take a commission
- Advertising based model, where information is provided for free and thereby Money is made through advertisements
- Community-based business models like Facebook
- Fee-based or subscription-based business models where companies sell entertainment and information for a fixed fee.
B2B or Business To Business
In this business model, a business sells its products or services to another business. The buyer, in this case, can be the end-user, an intermediary, or a reseller. The order value in a B2B transaction is high and there is a good scope for recurring purchases.
Though historically, B2B eCommerce sales were lagging behind in comparison to B2C, they are projected to grow at a faster pace due to technological advances and integrated experiences offered by the sellers.
For example, a business can buy things like stationary or canteen supplies from another business. In this case, the buyer is the end-user. On the other hand, a business can sell products to a wholesaler in a B2B transaction and the wholesaler sells them to end consumers.
In this case, the first buyer is a reseller. A business can also buy raw materials and other products to manufacture its products, in a B2B transaction.
The B2B business model can be categorized into two methods –
- Vertical – In vertical transactions, the buyer sells his products and services to businesses from a specific industry.
- Horizontal – In horizontal transactions, the buyer can sell his products or services to businesses across different industries.
B2G Or Business to Government
Business to Government is also known as Business to Administration. In B2G or B2A transactions, the business directly markets its products to public administration or government agencies through the internet. The government agency can be a local, state, or central organization.
A B2G transaction is different from B2C or B2B due to the fact that government agencies do not order directly from eCommerce websites. A business must submit its quotation through a central website when the government floats a tender or requests for RFP.
The pace of B2G transactions is also very slow due to the involvement of the bureaucracies. However, the value of B2G transactions is higher than B2B and B2C.
An example of a B2G transaction can be a civil engineering company supplying its products and services to government agencies for public construction works, or a software company providing different products to the government for automating different services.
C2B or Consumer To Business
As the name indicates, the Consumer to Business model has individuals at the starting point. In the C2B model, individuals pitch their services and products to businesses through online websites. Businesses hire the services, whenever a need arises.
A good example of the C2B business model is freelancing websites such as Fiverr and Upwork. Individuals can market their skills and products on these platforms, where businesses from across the globe scout for talent. Businesses bid for the time of freelancers and pay through the platform as per the terms of the agreement.
C2C or Consumer To Consumer
Consumer to Consumer is a relatively new eCommerce business model facilitated by the growth of eCommerce marketplaces such as Etsy, eBay, OLX, and Craigslist. In this model, the sale of goods and services takes place between 2 consumers.
An individual may post his requirement for a particular product on a C2C website and get offers from other consumers, who are willing to sell the product.
In the same way, a consumer can list his product for sale and call for bids from interested buyers, the buyer with the highest bid gets the product.
The C2C business model provides opportunities for home-based micro-businesses and hobbyists to sell their creations on digital platforms without the need of owning an online storefront.
C2G or Consumer to Government
This category includes all the transactions between the government and the consumers. It includes statutory payments, disseminating information, distance learning, filing tax returns, etc.
Whatever eCommerce business model you choose, the ultimate goal is to earn revenue and grow your business. It is crucial to determine a sustainable revenue model that ensures your revenues are streamlined and consistent.
What Are ECommerce Revenue Model?
A revenue model determines how a business intends to earn money. A business can have a simple revenue model or a complex model that involves multiple streams of revenue. There are multiple ways eCommerce businesses can generate revenues. Here are some of them.
Five Major ECommerce Revenue Models
- Sales Revenue Model – It is the most common eCommerce revenue model. No matter the eCommerce business model, everyone selling products and services on the internet follow the sales revenue model, where they sell products and services to earn profit.
- Advertising Revenue Model – When you are surfing a news website or an entertainment website, you might see some advertisements. So why are they there? The advertisers pay fees to the website to display their ads. This is the advertising revenue model. The fees from advertising is a source of revenue for the website. The fees can be flat monthly, or weekly or it can be based on the number of clicks on the advertisement(pay per click).
- Subscription Revenue Model – Netflix, Spotify, Amazon Prime, and YouTube Premium are some names that come to our mind when we think of subscriptions. Businesses with a subscription revenue model charge a fixed subscription fee from the users to provide access to their services. These businesses offer several options for the subscription fees such as daily, weekly, monthly, or yearly packages.
- Transaction Fee Revenue Model – The eCommerce platforms that follow the transaction fee model levy transaction charges, every time a seller makes a transaction. For example, eBay, Amazon, and other eCommerce platforms collect transaction charges from the sellers. Another example of a transaction-based revenue model are payment companies, which provide payment gateway services to eCommerce businesses. Paypal collects a transaction fee from users for transferring money.
- Affiliate Revenue Model – Affiliate marketing is a fast-growing trend in the eCommerce landscape. Under the affiliate revenue model, businesses earn revenue by promoting and selling the products of other merchants on their platforms. The merchant pays a commission for every sale that happens on the affiliate platform. For example, if you sell clothing on your eCommerce platform, you can do affiliate marketing for complementary products such as footwear, accessories, etc. Affiliate marketing provides a win-win scenario for both the parties as the affiliate can generate a passive revenue stream whereas the merchant can gain new customers.
The choice of revenue models depends on your business and customers. You can choose a single revenue model or develop a mix of different models depending on the size of your business, budget allocations, and revenue estimates.
How To Choose An ECommerce Business Model?
Now that you have understood the different types of eCommerce business models, the next step is to choose the right model for your business.
Before you make the choice, it is critical to answer a few questions. Your answers to these questions will guide your decision.
Who are your customers?
Who exactly are you planning to target? What are their buying habits? What are the pain points that you wish to address? What is their spending behaviour?
What is your product?
What is your product? How will it solve the customers’ problems? How is your product different than that of competitors? What are your strengths and limitations? Understanding your strengths and limitations is crucial to choose the right business model.
How to position your business?
How do you want to portray your business in front of the customers? How will you make the customers understand that your product is the best choice? What is the USP of your product? On what basis are you competing (product quality, price, customer service, etc.)?
What is your delivery model?
The choice of delivery model depends on your product and the nature of your business. You can choose different delivery models such as drop shipping, subscription services, private labeling, white labeling, and wholesaling. For example, if you are a reseller, you can choose the dropshipping delivery, on the other hand, if you are a manufacturer, you can choose private labeling, white labeling, and subscription-based delivery model.
Once you have answers to all these questions, the process of selecting the right eCommerce business model becomes easy. After determining the e-commerce business model, the next step is to fine-tune your eCommerce platforms and develop an effective eCommerce strategy to grow your business.
Let us know if we missed out on anything in this article ecommerce business model and share your thoughts in the comment section.