You know what you are selling, you know who your customers are, and you know that the best thing for your business is to have an online presence. But which type of e-commerce revenue model is right for you? The best model for your company depends on the product, the demand, and the startup costs involved. Choosing the right business revenue model can make or break your company.
What is dropshipping?
Dropshipping per definition is a three-step process:
1. The customer orders the product from the vendor
2. The vendor sells the order on to the supplier
3. The supplier delivers the product to the customer
As a vendor you are only responsible for the storefront and the money transactions – the rest is up to your supplier.
Getting the best out of dropshipping
Dropshipping will save you a lot of time and money because you don’t have to manage inventories, warehouses, or packaging – perfect for smaller companies. It will also allow you to scale your business while keeping costs low, which makes it popular even with big brands.
“33% of e-commerce retailers used dropshipping in 2018.”
While dropshipping is perfectly legal, you need to be aware of the fact that you can be held accountable if your supplier is not running a legitimate operation. As a storefront, any backlash from poor quality products or late delivery times will impact your brand. Therefore, you must do your due diligence on suppliers and make sure you provide good customer support, should anything go wrong.
Novelty t-shirts and marketing merchandise are among the most common dropshipping products. This model is also an attractive option when selling large or heavy products as it allows you to cut down on storage and shipping costs. Dealing with fragile products, or other items that require special care, maybe best left to your supplier.
Wholesaling and warehousing
What is wholesale?
Wholesale is defined by a company buying a product in bulk at discounted rates. Products are stored in warehouses and resold to retailers. This model requires you to stay on top of customer orders while also managing inventory, stock, and packaging.
Why choose wholesaling?
Wholesalers have control over the entire business process. This makes it easier to ensure a high-quality standard while also enabling faster deliveries. However, investing in a warehouse space and stocking it with your product can be a costly affair, especially if you overestimate the demand.
The best of both worlds
Wholesaling and dropshipping can be combined to provide a better service. Should you as a wholesaler have a sudden influx of orders that you cannot fulfil, you can complement with dropshipping until you are ready to expand.
On the other hand, the main advantage of dropshipping is that it keeps prices down for all parties, but it frequently involves longer delivery times. By keeping a small stock easily available you can shorten these delivery times for customers willing to pay premium prices.
What is a private label?
With the private label model, you outsource the manufacturing of your original product, saving you the cost of building and manning your own factory. This requires you to provide the manufacturer with a plan or a prototype and startup costs are typically low. Companies such as Walmart and Target frequently have store brands – private label products only sold at their stores.
Setting up your own private label
Private label products are typically new takes on existing products, be it food or furniture, which means that your best hope of being competitive is not just a better design but a better price. This means that you will have a low-profit margin, especially in the beginning, and it can be a long process before you start to enjoy real success.
The best private label products for a new business are small, light and uncomplicated items. These are easier to ship and produce, which reduces the risk of complications. You should also avoid seasonal products as your costs are unlikely to be limited to the narrow period of time these items sell.
You need to take the time and find the right manufacturer. While this model allows you to quickly change suppliers if you are dissatisfied, bad reviews at an early stage can be detrimental to your business.
What is white label?
White labelling is when a manufacturer mass-produces a generic product. This product is then bought by you and others in bulk and repackaged as your own brand before selling it. This practice is common in some niche markets, such as electronics and beauty products.
The importance of your label
Buying an existing product and rebranding it is easier and cheaper than reinventing the wheel. However, because white labelling relies on brand recognition to sell a product, this model is best suited for established brands. Additionally, most suppliers have a minimum order quantity, which requires you to buy and store a large amount of the product. This means that, just like with wholesale, it is important to do your homework to accurately determine demand before you invest in this revenue model.
What is a subscription business model?
A subscription revenue model is when your customer signs up for a regularly scheduled delivery of products. Successful e-commerce subscription services range from the purely digital, such as Netflix, to subscription boxes delivered to your home, provided by companies like Dollar Shave Club.
Creating the best subscription service
While the subscription model yields a relatively reliable income stream it is vulnerable to high customer churn rates. Customer churn is when existing customers stop doing business with you, by cancelling their subscriptions, closing their accounts, or otherwise.
Customers often opt out at an early stage, which suggests that people are willing to try a free or heavily discounted trial, but they often don’t find the product appealing enough. By offering your customers a desirable product and a personalized experience you increase the chance of converting them into loyal customers.
Since customer churn can turn this type of model into a costly affair you need to consider your target audience before you decide on this business revenue model. E-commerce subscribers tend to be younger urbanites with money, and the most successful markets are services that involve grooming, beauty, and food.
There is no denying that the e-commerce market is highly competitive, however it is also constantly expanding. Expectations are that B2C e-commerce will reach $7,724 billion by 2025 and B2B $1.8 trillion by 2023. That leaves plenty of room for your e-commerce success story.