When you start an ecommerce business, one thing you have to determine is which ecommerce business model you are going to use. There are many directions you can go with your online store, including private labeling, retail arbitrage, and liquidation. Each ecommerce business model consists of a different way of approaching what and how you sell and it shapes your entire business strategy including marketing, pricing, and which sales channels you use.
How to Choose an Ecommerce Business Model
To make your choice easier, it’s important to know the advantages and disadvantages of each business model. Keep in mind, there are no rules that say you have to stick to one exclusively. You can mix and match business models to make your business grow. Below are the five most popular ecommerce business models and the pros and cons of each.
Ecommerce resellers buy products in bulk from wholesalers, distributors, and manufacturers, and then sell the individual products to customers at a profitable price. This is a traditional way of retailing – from brick and mortar stores to online shops.
Pros of Reselling
- Quick way to get your products seen – You can easily get your items on marketplaces like Amazon and eBay, where they can be seen by millions of shoppers right away.
- Established customer base – When you choose to resell products that are already popular on the market, you will enjoy a ready-made customer base. Just be sure that your products are priced competitively.
- Less work than other models – When you use dropshipping or Fulfillment By Amazon (FBA), reselling is easy as you don’t have to handle the products or shipping. A dropshipping manager or Fulfillment by Amazon order routing software will make the process even easier.
- Quick cash flow – You can start selling items quickly, with little or no marketing, as long as your pricing is appealing.
Cons of Reselling
- No personal branding – Selling products that are already established in the market allows for very little personal branding.
- Smaller margins – Even though you may start to make money quickly, you will have to sell more items to make any significant profit.
- Competition is fierce – There is a lot of competition out there that uses the reselling model of ecommerce. Customers are easily able to find the products they are looking for from multiple sellers. Setting yours apart from the rest isn’t easy.
Liquidation refers to inventory that cannot be sold at full retail price for one reason or another. The products are often sold off in bulk and at a discount in order to make room for more profitable inventory. Stock may be liquidated because of different situations including overstocking, returns, discontinuation, or damage.
Pros of Selling Liquidated Items
- Deep discounts – Discounts for liquidated products can be as much as 90% off the retail price.
- Higher margins – With discounts like above, sellers can make a more significant profit with liquidated items.
- Variety of products – There are a wide variety of items available to sellers due to liquidation. So, if you like to sell a wide range of products, you can do very well selling those that have been liquidated.
Cons of Selling Liquidated Items
- Questionable quality – Sometimes products are discontinued due to defects in manufacturing. You have to be cautious with what you buy.
- High competition – Selling liquidated items has become a trend, so there is a lot of competition for these types of products. It’s all about price when you are selling items that have been discontinued for any reason.
- Inconsistency in product lines – Because liquidated products are no longer being sold for retail, once they’re gone, they’re gone. You may establish some loyal customers, but then run out of the products they are looking for.
This type of selling is becoming increasingly popular. The way that retail arbitrage works is by buying up all of the clearance and liquidation products at discount stores (like T.J.Maxx, Marshall’s, etc.) and then selling it on Amazon at retail prices.
Pros of Retail Arbitrage
- You get to choose items – With retail arbitrage, you get to pick the items you are going to sell yourself, allowing you to touch and look over the item for quality and to determine whether you think it’s going to be a good seller.
- Local items – You may have access to items in your geographical area that are not available elsewhere, making it more likely that you will be able to sell them for a higher profit.
- Lower cost – Buying at discount and liquidation stores will cost you less for your products.
- Higher margins – You are able to charge retail prices on Amazon, making your margin higher than with some of the other business models.
Cons of Retail Arbitrage
- Time-consuming – There is a lot of driving around, shopping, and mileage to cover.
- Heavy competition – This type of selling is trendy at the moment, so there is a lot of competition flipping these products.
- Amazon’s rules – You have to pay close attention to Amazon’s rules as there are certain brands that cannot be sold without manufacturer approval.
- Difficult scalability – It’s difficult to scale up when your business takes off. The time and work that is put into retail arbitrage can be overwhelming.
The business model of private labeling involves placing your own label or brand on products that are manufactured by an outside contractor with your input.
Pros of Private Labeling
- Brand equity – As your business grows and you gain brand equity, you may be able to partner with other retail companies to increase your visibility and sales.
- Cash flow – If you choose to sell your products on a large scale, to larger retailers, you will likely sell in bigger quantities. Depending on what your product is, you may see a steady income flow as your business increases.
- Innovation – You have complete creative license on your products and branding, allowing you to make adjustments that optimize your sales and give your customers exactly what they want.
Cons of Private Labeling
- Takes away from core objective – Private labeling can take away from the core objective of your business – selling products and making a profit. It’s easy to get caught up in the day-to-day operations when you are offering input on manufacturing your products.
- Financing – You have to have start-up capital to get a private label off of the ground, and depending what your product line consists of, it can be costly.
Probably the least glitzy of online selling models is selling used products. However, when it’s done effectively, it can be quite profitable.
Pros of Selling Used Products
- Margins can be huge – It’s possible to make large profits on some used items. For example, you may find a used textbook at a library book sale for a couple of dollars, and turn around and sell it for a hundred dollars plus online.
- Limited competition – When you are finding used items to sell, it isn’t as likely that other sellers will have the exact same thing, decreasing competition greatly when compared to another ecommerce business model.
Cons of Selling Used Products
- Less appealing than new products – You will be selling other people’s cast-offs, which can be unappealing to some buyers.
- Time spent sourcing items – Finding used items to sell can be time-consuming, and unless you are going to make a nice profit, it may not be worth the time.
- No consistency in product lines – You never know what you are going to find when you are dealing with used items, so your customers may be more hit and miss than with the other business models.
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