What’s the best ecommerce business model? There is no “one size fits all” approach to ecommerce; it depends on what type of online store you are or want to be. The real question is, what’s the best ecommerce business model for you? Accounting for your own personal resources, branding style, and capabilities, which strategy suits you best?
It’s a delicate question worth considering every angle, so we developed this pocket guide on the best ecommerce business models. Below, we outline the 8 most common models and what kind of merchants they’re recommended for, to let you browse your opinions and see which method “clicks.”
To some people, the dropshipping model sounds like easy money — the product manufacturer handles the storage and shipping, so all you have to do is sell online for a commission fee. But in practice, the selling aspect is anything but easy, requiring a keen understanding of ecommerce marketing strategies, social media, and ecommerce techniques to get around its unique risks.
- … you have little capital or want a minimum investment. Dropshipping brands are easy to set up and cost very little at first — mostly the price of a website. Some suppliers charge contract fees upfront, but for the most part dropshipping is one of the cheapest models to start.
- … you care more about online marketing than logistics. Dropshipping success depends on social outreach, branding savoir faire, and generating traffic; whereas someone else handles the technical details of shipping and storage so you don’t have to. The downside to doing less work though is slimmer profit margins (you only get a commission).
2. Retail Arbitrage
Don’t mind a little legwork? How about a lot of legwork? Retail arbitrage is when you buy goods at a discount from other retailers and resell them with a markup. Essentially, discount chain stores like Target, Wal-mart, and K-mart are your suppliers, and you buy the goods there before shipping them yourself.
Retail arbitrage can be a lot of work; you don’t control product line because you’re relying on other stores. Since you have a say in what you sell, it’s hard to build an identifiable brand — not to mention all the extra product pages you have to build.
- … you have an eye for bargains. Coupon-hunters and master shoppers can find the best deals for the more profitable turnarounds.
- … you live near several discount stores and you don’t mind making regular trips.
3. White Label/Private Label
Have you ever seen the same generic item like a toothbrush or soap sold by two different brands? Those might be white label or private label goods — products where the manufacturer lets the merchant sell them under whatever brand they want.
The difference between white label and private label is that private label goods are exclusive to one seller, while white label goods are salable by anyone. However, both require a strong brand identity, considering that you have little control over the actual product.
- … you already operate a popular brand. The more name recognition, the more enticing white and private label goods are to shoppers.
- … you’re targeting a closed niche. White or private label manufacturers often let you tweak certain features, allowing you to hand-tailor a general product for a specific market.
4. Wholesale (B2B & B2C)
Wholesale takes the retail arbitrage method to the next level. Instead of buying individual items from other retailers at a small discount, you buy them in bulk from manufacturers and other wholesalers at a big discount. Just make sure you have enough storage space.
- … you’re serious about ecommerce and have a long-term scaling plan. Wholesale is quite involved and requires a sizeable investment to get started, not the least of which is storage space.
- … you have good relations with a supplier already, and can better deals than your competitors.
Very similar to the wholesale model, the liquidation model instead sources products from companies desperate to unload stock. Most liquidated products come from companies that went bankrupt, but liquidation also refers to excess items, products that a company can’t seem to sell, or even abandoned storage auctions (à la Storage Wars). Liquidation discounts and price breaks are some of the biggest around, but be careful of defective merchandise.
The liquidation model shares some of the same risks as retail arbitrage, namely you don’t control your products and rely on what’s available. That risk is magnified if there’s no guarantee the products aren’t defective, or if you’re bidding on unknown contents.
- … you can acquire a resale certificate without trouble. To avoid stifling sales tax, most states require certification to legally sell liquidated stock.
- … you belong to a strong network of other sales managers. Liquidated stock sells fast, so it helps to know people on the inside for a head-start on bidding.
Artisans are their own manufacturers! “Homemade” and “hand-crafted” goods are a niche on their own, and if you like selling as much as you like making, this is the obvious ecommerce model for you.
- … you’re a skilled craftsperson. That’s the real gatekeeper — can you make something people would actually want to buy?
- … your prices adequately cover both the cost of raw materials and the time spent crafting.
7. Subscription Box
One of the most popular ecommerce trends of recent years is the subscription model. For a regular (usually monthly) fee, you send customers a personally curated box full of goods you chose. Selling subscription boxes is a lot like being a professional shopper — part of your fee is for your expertise/recommendations for giving people what they didn’t know they wanted.
- … you have a talent for product recommendations. Are you the friend your circle looks to for advice on what to buy? Do you have an eye for trends before they catch on?
- … you understand a focused niche. Subscription boxes are most successful when they cater to a specific niche, so your success depends on how well you know your target shoppers.
8. Used Goods
One vendor’s trash is another’s best-seller! Also known as second-hand or thrift goods, used goods are just products that have been sold before. They’re sold at a steeper discount the second time around, but with the right item in the right niche, you can make up the difference and then some!
- … you already frequent reseller markets: thrift stores, flea markets, auctions, pawn shops, and garage/yard sales.
- … you have an eye for retro trends and collector’s items.
Conclusion: Mix and Match!
Don’t feel locked into choosing only one model. The beauty of customizing your ecommerce brand is that you can mix and match the elements you like from different business models. A wholesaler can use dropshipping to test if a new product will sell; an artisan can sell a subscription box full of hand-made goods. Don’t be afraid to experiment and try something new — the best ecommerce business model for you might just be a hybrid!
Editor’s Note: This blog post was originally published May 2017 and was updated in February 2020 to reflect more accurate and relevant information.