What are the eCommerce business models?

Before we get into the detail of setting up and running an eCommerce business, we need to understand how eCommerce businesses get customers, sell products – basically how they make money!

Understanding these ideas means that we save a lot of time later. We are going to look at three different practical concepts.

The first is how we get our eCommerce business in front of customers, the second is the revenue model of all eCommerce businesses, and the third is around the sort of products sold.

Let’s look first at how we get in front of customers – the channel to market.

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Channel choice

• Brand.com means selling direct to the customer from your website – an online store. You own the brand and the customer experience end to end – including customer service, order processing and delivery. You stock and sell (almost exclusively) your own brands. These brands are typically available in physical retail outlets as well. Examples include www.apple.com or www.nike.com.
• Direct to consumer (DTC) is a new variation on the Brand.com model. These are typically new brands created from scratch that pursue a single-item retailing strategy. Like brand.com, DTC brands control the product, proposition, packaging, brand message and digital merchandising. An example is www.gymshark.com. Many DTC brands eventually start distributing on Amazon.
• Retailer.com covers websites that sell products from a large number of brands. Basically, these are your high-street department stores – but online! They are a one-stop shop using supply chain or scale advantages, for instance, next.com, tesco.com, www.lookfantastic.com, www.asos.com or ao.com.
• Horizontal marketplaces are marketplaces that offer a large selection of products across lots of different categories. Amazon.com is the best known example of a horizontal marketplace, as it is a one-stop shop for sellers to provide many categories, so is eBay, Allegro in Poland, Lazada in Southeast Asia and Mercado Libre in Latin America. All transactions are processed by the marketplace operator and they take a cut of the final price. Marketplaces such as Amazon are now offering branded online stores similar to brand.com but within the Amazon Marketplace.
• Vertical marketplaces focus on one particular market or industry, for example food services marketplaces, such as Just Eat and Deliveroo. They can also be considered as marketplaces as they connect local restaurants with consumers looking for delivered meals. Lyst.com serves fashion retailers and fashion customers. Each fashion brand selects the collection of fashion items it makes available through Lyst to give retail customers the feeling of browsing a curated fashion collection. Likewise, Airbnb is a marketplace in only one particular market – as its connects properties with travellers.
• Social commerce is the name given to eCommerce on social media channels such as Facebook, Instagram and Pinterest. Each of these well-known social media brands are putting together a comprehensive eCommerce capability – so you can sell directly from the eCommerce channel.

Revenue model

Regardless of the channel choice, all eCommerce sites have three primary revenue ‘levers’ to make money – a relatively simple revenue model:

CAC / Conversion Rate / AOV

What do each of these mean?

• Customer acquisition cost: the cost of persuading a potential customer to buy a product on your eCommerce store. This is calculated by dividing the cost of acquiring a customer (all marketing cost) by the number of customers acquired in the same period. For example, if you sold £10,000 of products and made 1,000 sales, then you would have a CAC of £10.
• Conversion rate: the percentage of visitors to your eCommerce store that bought out of the total number of visitors to the site. Conversion rate optimisation is the series of activities carried out to ensure that more of the current visitors convert with the same traffic.
• Average basket size: also called AOV (average order value) measures the average amount spent each time a customer places an order on your eCommerce store. To calculate your store’s basket value, simply divide total revenue by the number of orders in a given period of time. Most eCommerce stores work to increase their basket size through upselling and cross-selling other products.

When you are looking at any eCommerce business, these three ‘levers’ are what you must know. For example, if you have a great product, but the customer acquisition cost is too high, then you don’t have a business. If your average basket size is very small, that could reduce your opportunity to make a decent margin.

Product

We now know the channels to market and and the revenue model. There is one more thing to consider: what about the products that we are going to sell? Of course, there are tonnes of options, but there are ways of selling product in eCommerce that are somewhat unique. Here are the main ones:

• Dropshipping: dropshipping is the process of shipping eCommerce orders directly to your customers from a third-party supplier without a step in between like having them in your store or warehouse. Normally most businesses store products until a customer orders them and then package them and ship them to the customer. With dropshipping, when the customer orders a product, you pass the order information to a dropshipper who packages the goods and ships them directly to the customer. The dropshipper charges you a price for the product sold, usually wholesale plus a delivery fee. Dropshipping is very common for small eCommerce businesses just starting out. Why is this? Storage, packing, picking and delivery is very labour intensive and costly.
• White label: when we use the words ‘white label’, we mean that an eCommerce store works with a manufacturer to create a product with their brand or logo on it. Other brands can sell similar products, but this one has your name on it. With private labelling, the product is exclusive to your eCommerce store.
• Arbitrage: buying products that are reduced or on clearance elsewhere and selling them for a higher price on a different eCommerce channel. There is even an eCommerce model where an eCommerce seller lists products on Amazon, and then when it sells, buys the same product cheaper from another seller on eBay for a cheaper cost and then ships it to the customer on Amazon. Not for the faint-hearted!
• Craftsman’ or ‘handmade’ eCommerce: this is where you make your own products such as jewellery, furniture, candles or clothing. You – as the owner and maker – are directly involved in the design and manufacturing of these products as well as selling directly online. Besides selling direct on their own eCommerce store, these sorts of products also work very well on marketplaces such as Etsy.
• Subscription box eCommerce: an eCommerce store that sources different products in bulk and repackages them as a box of goods – and charges a subscription for them.

That’s nearly every aspect of the eCommerce business models that matter explained.

Of course, there are lots of nuances within eCommerce, and people use different labels for what is the same concept – but you know enough now to get going on creating your eCommerce plans!