4 Business Models that eCommerce Companies Can Choose
Online business owners often face several choices when it comes to deciding the right business model route for core functions. These choices involve not only the products to sell but also the business model on which the entire organization sits.
When businesses deal with new products, there are various ways to ensure production and delivery, with their own drawbacks and benefits. However, for brands to stand out and thrive in the overly competitive market, choosing the best model can be the make-or-break strategy. To get with it, one needs to have a comprehensive understanding of everything on offer.
This may sound bewildering in the beginning, but there is no need to worry. We’ve provided a breakdown of each option to help you make coherent and educated decisions going ahead.
And for those looking for the support of a company secretary or accounting services in the UK, our team possesses the proficiency and skills to tackle all your problems head-on whilst you expand your business.
Table of Contents
- 1 Introduction to a Business Model
- 2 The 4 Most Common Business Models For E-commerce
- 2.1 1. Make
- 2.2 2. Manufacture
- 2.3 3. Wholesale
- 2.4 4. Dropship
- 2.5 Who should use this model?
- 2.6 Benefits of dropship
- 2.7 Drawbacks of dropship
- 3 Save yourself from the headaches of paperwork
Introduction to a Business Model
A business model is the core framework that contributes towards growth in profitability and value creation for customers. It provides clarity on the pricing strategy and your customer value proposition. Information such as products or services, target markets, and costs and expenditures are particularly delved upon.
That being said, whether you’re a new or established venture, finalizing on a model that does right by your needs is crucial. The right business models help motivate and uplift the morale of your employees, offer a better understanding of the customer base, leverage a competitive edge, and lend endless growth opportunities.
The 4 Most Common Business Models For E-commerce
The make model is all about making and designing your product in-house. Alternatively known as the artisan method, owners can slowly craft their jewellery or natural beauty products to perfection. This model renders businesses autonomy and complete control of the final product.
However, there is a limitation in terms of the time invested, which is rather significant considering the intricacies involved. The model comes at the expense of scalability and limitations costs. As business owners and runners, you handle all aspects of the value chain – design, production, storage, and delivery day in and day out. So, burnouts are not that uncommon.
Who should use this model?
The model is apt for creative people, especially perfectionists fixated on the entire process. Having the armoury of skills for making the product from scratch is quite the prerequisite as well. The work adds on if the clientele comprises of people who value a personal touch and a dedicated experience.
Benefits of Making your Products
- Low startup costs – For those making their products, you have the luxury of accepting preorders. Doing so saves the uptime and cost involved in stocking up the inventory. Makers have the liberty to invest time and money as per the order volumes. This helps keep hefty setup and labour costs in check as well.
- Control over branding – Since you create the product, the model offers creative freedom in all aspects of brand representation. You can choose the minimal way or go over the board; the choice is yours.
- Quality control – Making your products gives you the power to maintain quality with every single piece that goes out of your warehouse. With close monitoring, the chances of a slip-up reduce drastically.
- Control over pricing – Since the product is personalized, so is the pricing. You can select a value that justified your efforts on all fronts.
Drawbacks of making your products
- Time-consuming – Although a lot depends on the type of product, making your product is no easy feat, and more so, a time-consuming endeavour. From sourcing materials to production to contemplating packaging and delivery, the process takes up considerable time. This can leave you feeling drained, and other aspects such as marketing, inventory and billing may take a backseat.
- Limited choice – There is only so much you can do with your skills, resources and time. The option of divide and conquer is non-existent. Hence, the product options are limited.
- Scalability – Thriving companies often struggle with volume. One could consider outsourcing to a manufacturer, but this could lead to loss of quality and control. Plus, you could be looking at returned products as your client base stands on the foundation of a personal experience.
However, there is a silver lining.
The lifestyle brand, Polkaros, created a blend of modern Zakka goods and traditional Japanese crafts. Attention to detail was their USP.
Once hosted on Shopify, designer Ros collaborated with brands, including Swatch, Uniqlo and Guerlain, to expand the portfolio. What worked was that she stayed true to her passion for hand-making everyday objects and never faltered on the initial concept.
The manufacturing model involves sourcing products directly from manufacturers, both domestic and overseas. Interestingly, in this scenario, domestic manufacturers sometimes cost higher than the overseas counterparts based out of countries such as China and India.
The Chinese market makes for an excellent repository of cheap and reliable products. For instance, businesses can source their entire catalogue from Alibaba.com, the largest B2B marketplace worldwide.
Furthermore, companies have the space to reach out to a varied set of producers for quotes and samples, giving a wide spectrum of options. IndiaMart.com, Made-in-China.com, and TradeKey.com are some trustworthy partners.
Who should use this model?
There are three requirements to this model’s adoption –
- a unique product idea,
- tested market response,
- and a list of potential prospects.
A considerable financial investment for products and inventory is a must too.
Benefits of manufacturing products
- Lowest cost per unit – If you manufacture or buy products in bulk, the purchase costs are bound to take a dive, thereby offering better profit margins.
- Control over branding – Collaborating with manufacturers helps with brand-building. While the production is outsourced, packaging, marketing and sales are still very much your call.
- Quality control – Manufacturing gives both uniformity and control over the final product.
- Control over pricing – Since the brand is yours, the pricing is in your court too.
Drawbacks of manufacturing
- Minimum Order Quantity (MOQ) – This is one of the most significant drawbacks of manufacturing. The MOQ can run into thousands of products in the inventory, depending on the product and manufacturer. With that being said, the inventory levels are on you to decide.
- Time and other complications – Manufacturing is time-consuming as it entails prototyping, sampling, refining and production. More so, you need to invest a great amount of time in sourcing from the appropriate manufacturer. Further complications can arise when eyeing for an overseas partner, especially ones with language and cultural barriers.
- The propensity of getting scammed – Full disclosure: This is more likely to occur with overseas manufacturers. Although they provide lower costs, verification is often a challenging enterprise. More so, the labour and production standards are generally lower. This could essentially hamper the quality of your products. Additionally, there is also the case of intellectual property theft.
Here is someone who made it big by optimizing the manufacturing model.
As the first contact lenses brand in Singapore, Two of a Kind believed in great products and sensible prices. The masterstroke was when the firm got rid of intermediaries and dealt directly with manufacturers. Doing so saved the company the usual 15x markup.
This decision was based on research that spanned over 18 months. It revealed that conventional contact lens brands saw retail prices that included an unrealistic price hike between the factory and the final selling point. The cost savings gave Two of a Kind a better cash flow to invest in manufacturing and quality.
A simple and easy process, wholesale allows businesses to procure inventories at below-market rates due to bulk buying. The model entails a lower business risk when compared to manufacturing.
For starters, you are purchasing from commercially viable brands. Doing so helps save considerable time and effort in testing. Also, the product volumes are less than manufacturing, thereby requiring lesser initial finance and time investment. Depending on the product and the manufacturer, MOQ is considerably lower as well.
Who should use this model?
The model is suitable for businesses who are interested in running a store but lack a unique product idea. Plus, it is absolutely perfect for those possessing marketing, branding and inventory management skills.
Benefits of the wholesale model
- Barriers to entry are low – Setting up and running your business is simpler when you’re simply buying someone else’s product. You get to stock the inventory at your own will. More so, there is less upfront investment.
- Profit margins are higher – The math is simple: when new products get introduced in the market, the older ones get sold at lower prices. Plus, with similar products available across different brands, you can quibble for further price reductions. The result – lesser costs and better margins.
- Familiarity with the brand – Selling products from established brands fortifies your stance in the market and elevates your credibility substantially.
Drawbacks of wholesale
- Lack of pricing control – Established brands generally have rules and regulations about price points, including the minimum retail price. When providing promotional offers and discounts, wholesalers stick to these guidelines laid out by the brands.
- Lack of product differentiation – Selling products belonging to an established brand means including the online stores housing the same line-up as your direct competition. So, there are hundreds of market participants, all continuously working to capture your prospects.
- Supply chain management – For those selling an extensive range of products, time and effort are devoted to handling multiple suppliers. It is a challenging enterprise as each supplier has its unique requirements. Additionally, wholesale store owners also run the risk of running into unreliable supply partners.
- Inventory management – Inventory management is the bread and butter of the wholesale business. It involves knowing what to order, the quantity and the frequency of order placement. You’ll need to consider the MOQ for each product before placing a requisition for fresh stock.
An example that worked.
Althea is an online platform that purchases K-beauty products from beauty enthusiasts all over the world. Since 2015, Althea has been curating a line-up from the evolving Korean market. Today, the company ships the products directly to over 200 countries, including Singapore, Malaysia, Indonesia, Thailand, Taiwan, and the United States.
The dropship model entails selling products that you do not own. It also means getting your business off the ground in no time.
To begin with, the startup costs are super low. Additionally, the model inherently takes care of shipping, delivery and inventory management. In Singapore – AliExpress, Shopify, Qoo10 and Facebook Ads are profound platforms for kickstarting your business through the Dropship model.
In simpler words, you are the face and facilitator for the drop shipper. Orders are fulfilled by delivering the products directly to the customer from the partner’s warehouse.
It is vital to note that the dropshipper is the one who handles the packaging and delivery while you make a profit by cutting out the difference between your price and that of your dropshipper.
Who should use this model?
Those with limited money and time to invest should get on with dropshipping. More so, it is ideal if you’re not fussy or fixated about profit margins, as they can be insignificant. It serves as a side hustle for the regular 9-to-5 employees or work-from-home parents.
Benefits of dropship
- Initial capital is low – Since there is no inventory involved, the investment required is relatively small.
- Low risk – The business model does not involve buying products upfront. Hence, there is no risk of holding onto unsold products.
- Efficiency – As the drop shippers manage everything from picking, packing and shipping, efficiency is not something you have to worry about. The process thrives on lending complete flexibility of time and place when running the business.
Drawbacks of dropship
- Highly competitive – With almost no investment involved, the competitiveness is at an all-time high. The biggest test for businesses is to cut through the clutter and stand out.
- Lower profit margins – The low risk, low return equation stands true here. Given that the required investment is negligible, profit margins are also very slim. They can be as lean as or even below 10%. This adds to the outlays of running a paid advertising space. Hence, drop shippers usually focus on personal factors like customer service and content building.
- Backordering – Since people are dependent on the inventory of the drop shipper, it can so happen that the stock gets sold after placing the order. In such a case, drop shippers would have to back order the products, resulting in extended delivery times.
For instance –
Luxury City brings in American and European brands to sell them at wholesale rates. The product catalogue is quite extensive, including handbags, shoes, sunglasses, perfumes, and others. More so, Luxury City provides drop shipping services without minimum orders.
|Pros||-Low startup costs|
|-Lowest cost per unit|
|-Low barrier to entry|
-Greater profit margins
|-Low initial capital|
-Limited choice of products
|-Minimum Order Quantity|
-Time-consuming and possible complications
-Chances of being scammed
|-No control over price|
-Lack of product differentiation
-Slim profit margins
-Reliance on dropshipper
Save yourself from the headaches of paperwork
Irrespective of the product acquisition process you choose, paperwork is the common denominator across all the models. But, now you can save yourself from all the administrative work and focus on growing your business.
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