With the growth of the web, entrepreneurs continue to leverage e-commerce.
With the growth of the web, entrepreneurs continue to leverage eCommerce and for good reason. Online purchasing continues to grow and evolve. In fact, according to Forrester Research, online sales, specifically in the U.S., are expected to break the $500 billion mark by 2020. It’s expected to grow even more as access to the web expands with the proliferation of smartphones and other mobile devices. As the industry booms, it’s important to recognize the successes and challenges of different eCommerce models in order to make informed decisions regarding the future of your brand’s growing needs.
Here are five of the most popular and effective eCommerce business models, and a discussion on what their pros and cons are:
1. Brand (B2C)
A B2C eCommerce business model is when a brand conducts business transactions of its own product via online orders.
Pros: A Business to Consumer (B2C) model gives better control over the overall brand experience. By selling to directly to the consumers, brands can create strong relationships a lot quicker, as well as increase brand recognition and brand loyalty. The marketing freedom and discoverability can also lead to a higher sales margin.
Cons: Startup expenses can be extremely high and there is a lot of risk. In most cases, brands commit to spend a lot of capital upfront and may not see their returns for a long time. This type of long-term scaling takes a lot of expertise, innovation, and design. Brands also need to constantly ask themselves, “How can I excite my customer?” which can often be a creative challenge.
An eCommerce retailer sells product from a variety of brands as part of their online offering. Usually, a retailer will purchase product wholesale and then resell it on their platform.
Example: Steven Alan
Pros: If your business follows an e-retailer model, it has the ability to reach wider audiences and piggyback onto the success of the brands your online store carries. For example, if the retailer positions your brand next to a similar, high-selling brand, it could greatly increase your item’s sales.
Cons: Online retailers, don’t always have direct control over supply chain and inventory management of the different brands the store carries. Manufacturing seasons may vary by brand, causing different items to be available at different times, thus affecting inventory. For smaller eCommerce retailers, consistent product photography may be an issue. Since every brand has its own style guide, or a way of depicting its product, a retailer may have photos with different images on a variety of backgrounds - unless they choose to do product photography themselves.
A subscription eCommerce model is when a brand’s customers pay a set recurring fee and receive product on a consistent revolving basis. Subscription delivery can vary (monthly, quarterly, etc.).
Pros: With a subscription model, there is always predictable fulfillment, volume and demand and brands can easily determine what they need to keep in stock for their subscribers. There’s lower retention spending and a steady cash flow thanks to automatic renewals.
Cons: The longevity of a customer is never guaranteed and customer acquisition can cost a lot of money. Supply chain management can also be an issue if various brands are included in an order. It’s also hard to increase the average order value as this is usually set in advance.
Dropshipping enables distributors, wholesalers, and manufacturers to ship products directly to a brand’s customers, eliminating the need for a brand to have in-house inventory management and order fulfillment.
Pros: With the dropshipping model, inventory management can be simpler for brands because they don’t have to hold/manage inventory in-house. This alleviates time and manpower which in-turn saves money. Inventory is usually held by 3PL partners, at the factory or at the wholesale warehouse. Dropshipping can also be easy to pivot; if a retailer or a brand is dropshipping a generic product that isn’t selling well from a manufacturer warehouse for example, the company selling the units does not have to commit to that inventory.
Cons: With that said, this also severs any personal tie to the product and may require frequent travel to check on the condition of a brand’s inventory. If shipping directly from the manufacturer, a brand may not have control over order fulfillment or the fulfillment experience unless a 3PL partner allows a hands-on approach and has an excellent team of communicative client relations employees.
Typically for the fashion or accessories industry, the try-on model is unique in the fact that it allows customers the ability to purchase multiple versions of a product to see what best suits their needs and return what does not fit. The try-on model sometimes comes with a dedicated stylist who may send a customer multiple outfit options based on a previous conversation or a questionnaire they filled out.
Pros: This highly-customized experience is a distinct marketing opportunity as it gives brands the ability to capture unique customer data. Moreover, the try-on model can boost customer loyalty thanks to the relationships built via stylists. This loyalty can go a long way in maintaining an engaged customer.
Cons: Inventory management can be a hardship. Due to constant returns, shipping costs can skyrocket resulting in very low margins. Because of vanity sizing, returns can increase because while one item may fit the customer well, another one may not. A higher return rate may damage a brand’s reputation and diminish repeat customers.
Keep in mind that there’s no such thing as a one-size-fits-all business model when it comes to eCommerce. When determining what model will work best for you, never lose sight of what matters most - your brand DNA and of course, your customers.