7 Ecommerce Business Models

By Stephen Paul Samynathan on July 23, 2022

You need to make a lot of choices when you are starting an ecommerce business. One of the biggest decisions to make is to choose the business model.

In this article, we have shared and broken down eight major choices that you can consider for your business model to help you get off to a great start for your business.

Each of these have their own pros and cons, depending on a multitude of factors. Based on the pros and cons, one maybe more suitable for your business than the others

Dropshipping

Dropship is an excellent business model for those who want to start a business quickly and cheaply. It attracts people who like to keep startup costs as cheap as possible and aren’t concerned about margins. Dropship is also a great business for someone who doesn‘t want to hold and maintain inventory.

Pros

Low cost to start.

The biggest benefit of dropshipping is that you don't need to carry inventory. You don't have any inventory costs, which are usually the largest expenses for a new ecommerce store.

Low risk

You don’t actually buy your inventory upfront, so you aren’t risking holding items you can‘t sell.

Streamline sales. 

Dropship suppliers will take on the task of picking, packing, shipping, and even marketing your products for you. This allows you to focus on what you do best - running your business. You can also manage your business from anywhere around the globe.

Cons

High competition.

High competition means there are many other sellers selling the same products. You need to stand out from the crowd if you want to succeed.

Low margins. 

Low margins mean you will need to spend more money on marketing and sales. You will have to create more content, services, etc. to reach your audience. Low margins also mean you have to sell at high volumes to make decent profit.

Inventory syncing (back orders). 

Because you're relying on someone else's inventory, the occasion may occur where you place a shipment order to the wholesaler but there is not enough stock available. This causes longer than normal shipping time which leads to customers thinking negatively of your business..

Your profit is the difference between the price you sell your product at and the price you pay for it. Typically, with dropshiping your profit margins are slim. You will usually need to spend money on marketing and advertising to get customers.

Overall

Dropship is a great way to start an online store. You don't need to spend money upfront on inventory, and you don't have to worry about shipping. However, dropshipping is risky because you don't have any margin. You will have to sell a lot of items to make a profit. Additionally, there is a lot of competition out there.

Makers

Creating your own product is a dream or goal that many business owners have. Regardless whether it is healthcare products, lifestyle products or some other category of products, creating your own product allows you more control over quality and branding but on the flipside, it imposes severe limitations in terms of time and scalability.

The primary cost associated with making your own product is the purchase of raw materials. You need to buy them before you can start production. If you're going to produce something that requires a lot of time and effort, then you'll need to store it until you're ready to sell it. Finally, the product that you can make or create is limited by your skills and resources that are available to you. So there could be instances where you might need to hire someone to help you make it. 

This model is for someone who

  • Has their own exclusive ideas
  • Can make the product themselves
  • Has the resources to do it themselves
  • Want to control product quality
  • Want to maintain brand image

Pros

Low startup costs.

Generally if you are making your own product, you don’t have to own a large number of stocks compared to if you were having your products manufactured. Hence you are able to reduce production costs.

Brand control. 

Creating your own products means you can create any brands you want without any restrictions.

Quality control. 

You can ensure that your products meet your standards, as well as those set by your customers.

Price control. 

Since you are able to control the product quality and branding, you can set your product price as you see fit

Agility. 

Creating your own products enables you to modify the product as you see fit, whether by adjusting features or adjusting product quality or even the whole product.

Cons

Time consuming.

Creating your own products can take up a lot of your time, varying based on the exact choice you made for your product. This will in turn leave you with less time to focus on building your business.

Scalability. 

When your business grows, creating your own products can become an obstacle. You can look for manufacturers to help you to manufacture your product although this can be a problem if your customers expect your products to be handmade

Limited product choices. 

As mentioned earlier, what you can create is limited based on your skills and resources.

Overall

If you are able to craft a quality and in demand product, you can definitely look at this model to start your ecommerce business.

Manufacturing

Manufacturing option is a good choice for people who have unique idea that has been validation and you are confident that it will sell. Validation is utmost important in this scenario as it will require a great amount of financial investment upfront.

You can classify manufacturing into either white label or private label.

A white label product is created by one manufacturer which is then sold to different retailers under their own brand name. These are usually generic products that can be sold to wider target audience.

Comparatively a private label product is created by a manufacturer and sold under the business name. Everything from quality to branding is controlled by the business. Private labels are best for brands who want to create unique products.

Pros

Lowest cost per unit.

Manufacturing usually has the lowest costs per unit, which gives you the highest margins on your product.

Brand control. 

Manufacturing your product allows you to build your brand around it while not being constrained by others.

Price control. 

You can also set your own prices for the products you sell.

Quality control. When you manufacture your own products, you’re in control of the quality of the final results.

Cons

Minimum order quantities.

The startup costs required for initial orders can be quite high. Depending on the costs of your product and the manufacturer, your inventory investment can reach thousands or tens of thousands of dollars, easily.

The startup costs for initial orders can be quite high. Taking into factor your product, manufacturer, raw materials required, your inventory investment can skyrocket.

Trouble with manufacturers. 

Supply chain halt like what is happening around the during Covid times can cause your business to come to a halt.

Time to get up and running. 

Manufacturing can be a long process of trial and error to create the product, refine it then followed by production. This can get even more difficult if you plan to use an overseas manufacturer because of language, distance, and cultural obstacles.

Overall

Usually manufacturing your own product leads to the highest margin over other models however it can differ based on some factors like the product, manufacturer and order quantity

Wholesale

Wholesale is a great way to start your own business. You can buy products at a discount and resell them at a higher price. There are many different types of products available for wholesale, including clothing, electronics, furniture, toys, books, and more.

Pros

Selling established products.

Buying retail is typically higher risk. You’ll need to spend time and money developing a brand that will sell. If your product doesn’t sell, you’ll lose all your investment. Buying wholesale is usually less risky because you’re buying products that have already been tested on the market.

Brand familiarity. 

When you sell products that are already established brands, that in turn can help your business to be recognized as a trustworthy and familiar brand to customers.

Cons

Product differentiation.

If you're selling an existing product, you may not have any unique features to offer your customers. You'll need to compete with other sellers who are offering the same thing at the same price.

Price control. 

Selling someone else’s product means that we have to follow their pricing guidelines to some extent. Certain brands have stricter price control that disallow you from reducing the product price. 

Inventory management. 

When buying wholesale you will need to buy a minimum amount of each product. The amount required will vary depending on the product and manufacturer. You will also need to keep an inventory of all products and manage that inventory for reorder.

Dealing with supply partners. 

Dealing with different supply partners can become hard to manage when you have a wide range of products as each supplier might have different set of requirements.

Overall

Profit margin for wholesale is typically better when compared to dropshipping but not as profitable as manufacturing. You might think of it as being in between these models.

Wholesale is risky because there is no guarantee that you will be able to sell your product at all. You may not be able to compete with the big box stores. There is also a chance that you won't be able to get enough customers to buy what you're offering. Only in certain instances, you'll be able to figure out how to stand out from the crowd.

Print on demand

Print on Demand is a way to sell custom products that feature your designs, whether you're an artist, designer, or entrepreneur. You simply create the design and, when someone buys the product, a third party prints, packages, and ships the order to them. Print on Demand services are often used by small businesses and artists, but they also offer a great option for large companies looking to produce unique items.

There is no need to invest in inventory or store space. You simply place an ad on a website and wait for customers to come to you. Once someone buys something, you ship it directly to them. This means you don’t have any overhead costs for inventory. This gives you the ability to use more funds for your marketing and advertising strategies. 

When using print on-demand, all the steps after receiving the order, like printing to packaging to shipping, are handled by the printing partner.

Pros

Create products quickly.

Once you've created the design, you can start making the product and selling it in your online store within minutes.

Automated shipping. 

Your supplier will help you handle shipping and fulfillment. Your only responsibility after making the sale, is to provide excellent customer service.

Lower cost upfront. 

You don't need to hold any inventory, so it's easy to add and remove items, tinker with new ideas, and make products for a unique market.

Cons

Less control over shipping.

Shipping costs are usually calculated based on weight, size, destination, and other factors. You might not have many options when it comes to shipping your product. 

Limited customization. 

Reality of what and how much you can customize would rely on the vendor and the product. You would also have to take into account the base cost, printing techniques and size when deciding on this.

Overall

Print on Demand is an excellent business model for creatives. There are many different ways to offer your art, including:

  • Blankets
  • Canvas prints and posters
  • Throw pillows
  • Duffle bags
  • Face masks

On-demand products typically generate lower profit margin, depending on how you price the product and marketing cost. However, it is a good low-risk business model for those who are just testing the waters with ecommerce.

Digital products

A digital asset is any kind of digital file that can be bought and sold online and there would be no need to restock inventory. These products can be in a wide range of forms and formats such mp3, mp4, pdfs, excel sheet, NFTs, plug-ins and templates.

The initial cost of creating a digital product could be high but the cost of selling it is comparatively low. Another advantage of digital products, once an asset is made, it’s incredibly cheap to deliver to your target audience.

Pros

Lower overhead costs.

No inventory, no shipping charges that lead to lower overhead costs

Scalability. 

Orders are fulfilled immediately, allowing you to be hands-off in regards to the fulfillment process. As your business grows, you can automate work to reduce time consumption. You can also scale your team quickly and efficiently.

Extensive product offerings. 

You can choose to offer your product for free, charge a subscription fee, or sell licenses to use your product. You can also combine all three models. For example, you could offer a free version of your product, then add premium features at a later date. Or you could start out offering a free version of your software, then add a subscription option later.

Cons

High competition.

You will need to think about what kind of product you are offering. Is it something that is already available? If not, then you will need to create a unique value proposition. You will also need to consider the niche you are targeting. Do you offer a service that is similar to another company? Or do you offer a product that is different enough to stand out? You will also need to know how to build your own brand. You may need to spend money on advertising if you are trying to get attention.

Piracy and theft. 

Digital products has higher risk of people stealing and using them as their own. 

Selling restrictions. 

Certain platforms don't allow selling digital products on their platform. For example, according to the Facebook and Instagram guideline, you can only sell physical products..

Overall

You don’t need to invest a lot of money to start a digital product business. You can sell products at low prices because you don’t have to pay for inventory or other overhead costs. There is no recurring cost of sales, meaning you keep most of the profit.

Direct-to-consumer (DTC)

Direct-to-consumer business model means you sell your product directly to customers without a middle person. 

Recently even big brands like Apple and Tesla are embracing this model. Famous local brand that are successful in this model includes Oxwhite. 

These brands eliminate the need to research and choose from hundreds of competing brands.

Pros

Own the customer relationship. 

When someone shops at a retailer, they become a customer of the said retailer. Your brand communicates directly to them. However if they buy directly from you then you can then communicate directly with them. Update them on your products, and even sell them other products. Owning the customer relationship means you get to keep more money.

Collect customer data. 

Selling directly to customers let’s you know your customers better and enable you have more detailed data that you can use to personalize customer communications and experiences

Higher profits. 

Profit earned don’t have to be shared to any third-party or middle person.

Get feedback faster. 

Direct communication also makes it easier for you to collect testimonials and feedback. With that you can strengthen your strength and improve your weakness.

Cons

Costs of direct distribution. 

You can't share shipping or storage costs. So you would have to invest more upfront on these overhead cost to smoothen business operation

No built-in audience. 

Working with retailers help customers find your product faster and easier. So if you are a new brand, you will have to market your product by yourself. You also don’t benefit from the distributor’s experience, network or salesforce. 

Overall

DTC model allows you to maintain control of your products. While it might take time to establish reliable distribution channels, it will also help to cultivate loyal customer base and increase profit over time.

Subscription (Bonus Model)

Subscription business model is one where the business charges the customer a recurring fee, usually monthly or yearly to allow the customer to access a product or service. This model helps businesses to capitalize on continuous customer relationships. Customers will continue to pay as long as they see value in what you are offering.

Subscription business can be done across different industries. Some notable ones are::

  • Membership communities
  • Streaming services
  • Food services
  • Telecommunication services

Subscription model enables customers to have higher revenues and build stronger relationships with customers. The longer customers use your product or service via subscription model, the more beneficial it ends up being to them.

Pros

Foreseeable revenue. 

You can predict to a certain extent how much your revenue will be on a monthly basis which then helps you forecast sales, plan for inventory, and plan how much to reinvest in your business.

More cash on hand. 

Receiving revenue monthly means more cash flow (as well as peace of mind) for your business.

Loyal customers. 

Regular purchases allow you to get a better understanding of customer behavior, so you're able to continuously improve products and keep customers returning for more.

Easier cross-selling and upselling opportunities. 

The more people use your product, the more valuable it becomes to them. This means that the more people use your product the more likely they will buy other products from you.

Cons

High risk of churn. 

Churn is most commonly expressed as the percentage of service subscribers who discontinue their subscriptions within a given time period. In order to avoid this, you have to constantly keep customers interested and engaged for them to continue as subscribers and pay you.

Varied products. 

Products become boring if they don’ t change often. Disney Hotstar, Amazon Prime has new movies and shows consistently. You need to keep a variety of your products fresh to maintain a subscription business.

Conclusion

In conclusion, ecommerce in Malaysia has become a booming industry. There are countless ways to sell online, but only a handful of models actually work well for most entrepreneurs. 

Hope we have helped you to find the most suitable model for your ecommerce business.

As always, feel free to reach us in case you have any question or feedback about this article.

At Specflux Solutions, we work hard to ensure we are building ecommerce website solutions that clients can use to grow their business.

Article written by Stephen Paul Samynathan
Co-founder of Specflux Solution, he builds IT products that work. He is also running Ipoh based website design agency with his partner. If not working on client's project, he's a part of a vibrant IT community in Ipoh locally known as Digital Perak.

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