E-Commerce is one of the new driving forces when it comes to businesses selling products online. According to Statista, more than 21.55% of the world’s population is buying goods online, so all enterprises need to capitalize on e-commerce. However, to do that, one will need an e-commerce revenue model that works.
An e-commerce revenue model refers to a business’s strategy for managing the company’s revenue, costs, and profits. The most profitable revenue models are the subscription, freemium, and Amazon FBA revenue models. High-risk revenue models include drop shipping, warehousing, and wholesale.
In this article, we’ll give you a breakdown of 8 e-commerce revenue models that are proven to work. Your business can use these to develop a better strategy and capture extra value.
The Five Major Classifications of E-Commerce
There are five main types of business models, each with its pros and cons. Most companies operate with multiple models. Understanding the kind of models your business runs on can help you draw up better business plans.
Business-to-Business e-commerce focuses on selling products between two companies. Instead of marketing services or goods towards individual customers, they focus on selling them to another company. Good examples of B2B companies are Dropbox, WeWork, and Xerox. These products and services can be sold to other businesses.
- Convenient. B2B is an online revenue model where businesses can advertise and sell their services or products online. This allows the company to easily sell its service or product without any hassle of setting up a storefront.
- Higher profits. Since companies can sell their products or services in wholesale quantities, it’s easier to gain more profits. Additionally, the decreased need for a storefront can help save on costs.
- High market potential. B2B companies can target a larger audience than storefronts. Although, marketing and sales may cost more than traditional storefronts.
- Complex setup. Requires a good marketing and advertising campaign to get enough large-scale orders.
- Hard to stand out. Lots of competition makes it hard to start out as a B2B company.
A B2C business model involves selling to consumers. Common B2C businesses include household supplies, food, and entertainment providers—essentially, anything you would typically see in stores.
- Global reach. Easy to advertise to the whole world instead of limited to storefront locations.
- Easy to attract leads. Potential customers can easily access websites and become return consumers with the right advertising techniques.
- Easy to set up. Starting your own digital storefront isn’t difficult as you have access to plenty of site management options like WooCommerce, Wix, and Shopify.
- Fast Growing Potential. Easy to grow small- or mid-tier businesses due to large reach.
- Hard to convert customers. Most online customers are constantly bombarded with online ads, so converting leads to paying customers may require a sophisticated marketing strategy and heavy investment.
- Costly website upkeep. Although getting your online storefront up and running isn’t all that hard, maintaining and growing it can be very costly.
- Cheaper customers. Consumers are much more sensitive to price than a business would be, and are thus less tolerant of large investments.
A consumer-to-business platform allows individuals to sell or provide services to companies. Essentially, users can offer a skill or product while a company will host their talents. Typical markets are affiliate marketing and freelance sites. C2B platforms let users control their pricing and use an online market to help advertise their skills.
- Highly innovative. This model allows consumers to set their own terms and gain profits while also helping a company. This freedom boosts creativity and leads to higher productivity.
- Beneficial to consumers. Consumers can interact with multiple brands without being limited to just one.
- Highly Profitable. The approach is both profitable to consumers and businesses.
- Privacy risks. Consumers may have their information stolen or experience other privacy breaches.
This business model lets consumers connect to one another to exchange goods and services with one another. Typical C2C businesses include marketplaces like Craigslist, eBay, and Etsy.
- High profits. There are no middlemen involved, which means no extra costs. Additionally, there’s no need to account for extra staff, hosting, or marketing.
- Larger customer base. No need for a physical or online shop due to less of a hassle for sign up. Can browse for specific products or services easily. A good example of this is Craigslist.
- Easy to build a reputation. Allows individuals with no credibility to build their own reputation.
- Risky. The business can be risky due to allowing almost anyone to join.
- Highly competitive. There are many consumers offering the same services or products. So, it may be hard for consumers to provide services or products consistently.
A business-to-government model is where a business will strictly sell its products or service to government or public administrations. These include contractor companies such as Synergetics Inc. that can help the federal and logical government keep running.
- Good compensation. More benefits and pay due to working with large-scale companies with multiple connections.
- High reputation. Working with the government will help build your credibility with other similar businesses.
- Long-term contracts. Often, companies who work with the government receive long-term contracts.
- Slow payments. Some contracts can take up to 60 days to clear a payment.
- Lots of regulations. Many rules and regulations to follow along with paperwork.
8 E-Commerce Revenue Models to Help Your Business Grow
Now that we’ve covered the major business models, it’s time to get into the revenue models that are successful.
A revenue model refers to the way a business generates income. By narrowing down your model type, you’ll identify what sources to pursue, what goods and services to offer, and how to price the products or services.
Here’s a list of the most common revenue models in e-commerce:
Dropshipping is one of the most common e-commerce models, where a company sets up a storefront and then sells goods and services through online transactions. Forms of payment include credit cards and PayPal.
Dropshipping is popular because the set-up costs are relatively low. Unlike other revenue models, you won’t need to keep an inventory or pay for a storage facility. All you’ll need to do is connect with a supplier to take control of shipping.
Aside from that, the only significant investment you’ll have to make is to set up an online store.
Another alternative is to use an already established company for shipments and to host your products, although not every company takes this route. Sites like Amazon, eBay, or even Etsy are great platforms. However, using these sites requires fees and the competition is high, making it hard to stand out among the numerous products out there.
This is what makes product photographers like ourselves more valuable to e-commerce stores, because we create the content that will set storefronts apart within the listings.
Dropshipping E-Commerce Business Model
- Design and host an online store
- Market your store and drive traffic to it
- Notify your supplier when a sale is made
- Pay the supplier for the product plus their fees
- Have the supplier ship to your customer
- Address any customer care if necessary
Pros of Dropshipping
- Low up-front investment
- It helps build your brand
- Transporting the goods is cheaper
- Easy to start for e-commerce noobs
Cons of Dropping Shipping
- Low-profit margin
- Have to manage your store and inventory
- Highly competitive
- No control over the supply chain
- Legal liability
Warehousing isn’t highly popular because you’ll have a lot of up-front investments. To start, you’ll need to invest in storage space, manage your inventory, and purchase stock. Other responsibilities include keeping track of each order and shipping to the client.
More established companies generally prefer this revenue model because it gives them more control over the process. Relying on suppliers can be risky and reduces your profit margins.
Although maintaining a warehouse may be more expensive, it’ll give you more profits in the long run. Essentially, the costs balance out because you’re spending less money on your supplier and more on the business.
Warehousing E-Commerce Business Model
- Find a warehouse and rent it
- Take time creating inventory and tracking products
- Set up an online store and start selling products
- Manage and track purchases and ship to customers
- Take care of any customer complaints
Pros of Warehousing
- Opportunity to expand
- Price stabilization
- Less risk
- Higher profit margins
Cons of Warehousing
- Determining the warehouse you need
- Finding one in your budget
- Less control
Private Labeling & Manufacturing
Private labeling gives you complete control over your product without the need to build a production factory because you’ll find other companies to manufacture your product for a small price.
This approach is highly beneficial to companies that need to craft a perfect product, but may be risky when outsourcing production to China or other places that don’t respect intellectual property and non-disclosure agreements.
By hiring a third party as their production line, they’ll gain all sorts of valuable tools and can quickly iterate between prototypes to find the right product. Besides, you can switch suppliers if you’re not satisfied with the end product, giving you more control and reducing your losses.
Lastly, private labeling is often cheaper than investing in your production line. Startup costs are minimal, and you also have fewer responsibilities. If you’re just starting out, private labeling is an excellent place to start before switching to your production line.
Private Labeling & Manufacturing Business Model
- Design a product
- Find a third-party manufacturer
- Test a prototype
- Sign a contract and begin production
- Set up an online website
- Get sales
- Outsource shipping
- Ship to customers
Pros of Private Labeling & Manufacturing
- Upper hand over the competition
- Brand driven benefits
Cons of Private Labeling & Manufacturing
- No control over the quality
- No control over product sources
- Inventory concentrates
White labeling is very similar to private labeling, except you use a product that another company is already selling. White labeling is when a product or service removes its logo from the design and lets other marketers rebrand the product as their own, without any actual changes in how the product is designed.
This takes the responsibility of designing a product off your hands. All you’ll need to do is create your package and label and sell the product.
This method is most common in the beauty and wellness industries. However, there are times when it’s used in other niches.
The only downside to white labeling is that you’re often stuck with the product, even if it isn’t good. So, you must weigh the pros and cons of a product before investing in it. Otherwise, you may be caught ordering a batch of low-quality products that won’t sell well.
White Labeling Business Model
- Find a product you want to sell
- White list it and come up with labeling
- Make an online store
- Market and sell the product
- Outsource shipping
- Ship products sold to customers
- Run customer support
Benefits of White Labeling
- Increased supply
- Reduced cost of production
- Rapid brand growth
- Simple market entrance
- Improved customer access
Cons of White Labeling
- Inconsistent quality
- Less control
- Expensive implementation
- Potential liability
- Newmarket risk
One of the other most common business models is by selling products and services through subscriptions. Using this model, you’ll market a product or service each month. Customers are billed either monthly, quarterly, or annually.
A subscription is more predictable than your average buy-and-sell model. You won’t have to guess your income, as the subscription sales guarantee your product will sell. The only time it won’t is when a customer cancels their subscription.
Although, the hard part about this revenue model is that you’ll need to come up with a good enough product to sell and continue providing value on an ongoing basis. Otherwise, customers won’t want to keep purchasing the product.
It takes extensive marketing but is one of the safest revenue models out on the list.
Subscription Revenue Model
- Design a product
- Market that product online
- Create a website
- Fulfill subscription orders
- Ship orders each month to clients
Benefits of Subscriptions
- Very profitable
- Stable profits
- Easy to ship
Cons of Subscriptions
- Increasing competition
- High cancellation rates
- Uncertain revenue in Startup
- Need to provide actual value
Amazon FBA is essentially private labeling while using Amazon as your selling and fulfillment platform. Instead of going through the hassle of building your own website, you can use Amazon to market and list your products.
This method is prevalent but has a few flaws.
It may not be the most cost-efficient model because you’ll have to create your brand, manufacture a product, and then also get into contact with Amazon for shipments. Aside from that, you’ll also have to pay for Amazon’s FBA service. There are plenty of seller fees for using Amazon, which means it’s only worth it if the product can sell well and you have a very large margin.
We only recommend this method if your main focus is marketing and building your brand. Many consumers visit Amazon before heading to the store. So, the platform offers an excellent way to market your products without having to advertise.
However, in order to compete for the top ranked positions on Amazon, you will have to advertise quite extensively.
Amazon FBA Revenue Model
- Create a product
- Get your product manufactured in bulk
- Send products to Amazon
- List them for sale on Amazon
- Wait for customers to purchase
Pros of Amazon FBA
- Easy to advertise
- Brings in more customers
- Moderate tolerance risk
- High-profit margins
- High conversion rates
- Fulfillment and shipping
Cons of Amazon FBA
- High cost to Startup
- Lots of fees
- Need to outsource services
Wholesale sourcing is suitable for businesses with long-term goals. They will be able to build their company and make lots of profits if their model succeeds. However, this is the most challenging and most risky revenue model to go for.
As a wholesale company, you’ll be looking to sell multiple products to customers via an online store. To make a profit, it’s essential to work with outsourcing production lines with cheap fees for production. However, this doesn’t mean you should skimp out on quality.
This model requires upfront money to purchase products in bulk. You’ll also need to develop your own online store and market your brand. From there, you’ll also need to learn to turn one-time consumers into long-term clients. Otherwise, the company will soon have to close down its doors.
Wholesale Revenue Model
- Buy bulk products
- Get a storage unit
- Build an online store
- Advertise your site
- Ship orders that come through
- Take inventory when necessary
- Customer service if problems arise
Pros of Wholesale
- Ease of scaling
- Others market for you
- Control over sales
- Easier to convince consumers to buy
Cons of Wholesale
- Significant capital to get started
- Need bulk orders
- Overhead is big
The freemium model splits users into one free and multiple premium tiers. So, free users will get services even if they are not paying for an account. The paid users will get access to features that they find valuable and worth paying for.
The whole point is to give value to users without charging them and then convince those free users to start paying for more features and convenience.
When building this model, it’s essential to limit your service or product in a certain way. You’ll need to modify your features, set usage quotas, and provide limited support. The limited capabilities prompt free users to purchase the full version.
Freemium Model Revenue Model
- Develop a product or service
- Build an online store
- Advertise your site
- Offer free services or products
- Enable option to upgrade for full access
- Create a customer service team to face issues
Pros of Freemium Model
- Pressure-free environment
- Easy to expand features based on users feedback
- Users are more likely to sign up for free service
Cons of Freemium Model
- Burns through cash quickly
- Hard to balance profits and spending
Learning which revenue model to use can be difficult if you don’t have a firm idea of your brand or product. Working on these before choosing an e-commerce revenue model can help you understand which ones to implement. Make sure to be realistic without being too ambitious to avoid high-risk situations.
If you’re looking to maximize profits, start with a low-risk business model. Of course, you can continuously adapt and change your business model as the brand grows. Most companies often start out small and work their way up to a subscription, private label, or whole company.