Choosing the best E-Commerce business model in 2022

DISCLAIMER: This article was written in 2021 and has not been updated. For more up to date information about small business funding products and options, please browse our recent articles.

Ecommerce is a rapidly transforming revenue channel for small businesses. According to a recent report by eMarketer, a leading market research company, the worldwide retail ecommerce market grew by 27.6% in 2020. That growth in customer base, and the number of ecommerce companies, is expected to continue into 2022, with a conservative estimate of 14.3% or over $600 billion in additional e-commerce sales, as digitization efforts prompted by the pandemic’s disruption to traditional retail operations ramp up. This growth is not exclusive to large e-commerce brands, either. Small businesses are shifting to more digital operations as well, with online selling by small businesses seeing an average of 37% growth since 2019.

This is all to say that if you haven’t implemented an ecommerce strategy into your business plan or are looking for ways to innovate and improve on an existing ecommerce operation, there is no better time than the present! Business owners or entrepreneurs looking to build a new online store from scratch, shift their storefront to the online marketplaces, or improve an existing ecommerce site have a plethora of ecommerce platforms, plug-ins, and tools to choose from depending on their product offering and target market.

We’ve put together a beginner’s guide to help you understand the different types of ecommerce business models that you can implement in your growing digital operation.

Private label

Private label ecommerce involves entrepreneurs and small businesses working with manufacturing partners to produce new products while they handle inventory management, fulfillment, customer support, and other business operations. This is a fast-growing sector of ecommerce sales, with one report estimating over 400% growth in the next five years.

Private label brands have the advantage of taking over as much or as little of the product lifecycle as they want. They’re able to work more closely with manufacturers to bring down costs and choose fulfillment partners (like Amazon FBA) or do their own fulfillment if they have the know-how, all of which helps to reduce costs. Because of this level of involvement, private label entrepreneurs are often able to sell products with a higher profit margin.

However, building out a private label business idea is no cakewalk. Designing your own products, finding and securing deals with manufacturing partners, financing initial inventory levels, and monitoring ongoing quality control and customer support efforts takes a lot of hard work and business acumen.

White label

White label products are sourced from a supplier and then rebranded and sold by the buyer. The product looks and is sold like it was produced by your business, but it was sourced from an outside manufacturer with which you had little-to-no input.

• Easy Example: A common form of white label ecommerce is merchandise for online influencers. They’ll often sell generic t-shirts, stickers, mugs, and a host of other items that have their logo or brand iconography slapped onto them right before being shipped to their customers.

This type of ecommerce comes with many advantages. Small business owners are free from the stress and time requirements of product design, manufacturing, and quality control, but often have very little competitive edge as these products aren’t unique and can be sold by anyone. The only ways to differentiate yourself from your competition is branding strategy and price competition. Additionally, white-label manufacturers often have high minimum order quantities necessary to achieve low price points. This presents an inventory management complication for small business owners that can leave them with large amounts of unsold inventory if demand doesn’t match supply.

Dropshipping

A common issue, especially for brand new ecommerce entrepreneurs and small businesses making a digital transition is a lack of capital to finance initial inventory orders to get their ecommerce store up and running. But what if there was a way to engage in retail ecommerce that side-steps this need? That’s where dropshipping comes in.

Dropshipping is an innovative strategy that allows sellers to run ecommerce operations without stocking ANY inventory. Business owners work with third-party suppliers that manufacture and ship orders only once they are placed, the revenue from that sale paying, on a unit-per-unit basis, for everything needed to fulfill that order. Dropshipping businesses don’t have to worry about maintaining a warehouse, packaging and shipping products, or handling returns. They can focus completely on acquiring customers through digital marketing efforts like social media advertising, SEO marketing strategies, affiliate marketing, Google search engine ads, and other avenues that are essential in a competitive industry.

• Easy Example: Let’s say you want to sell a toy that you’ve designed and would like to sell on Amazon. Once you’ve found a manufacturing partner, as you get orders and new business the manufacturer will produce and ship only the number of toys that are demanded.

Dropshipping does have its fair share of downsides. The uncertainty for manufacturers prevents business owners from reaching optimal economies of scale, so price points are usually higher which thins profit margins. Additionally, drop shippers have no control over the product side of the business, leaving them vulnerable to bad suppliers and poor production quality that can damage even the strongest brands.

Wholesaling

Wholesaling ecommerce operations offer products exclusively in large quantities at discounted rates. Think of your usual everyday wholesaling brands like Sam’s Club or Costco, but online.

• Easy Example: Hurraw! Lip Balm is an ecommerce brand that participates in wholesaling, selling large quantities of their proprietary lip balm to customers who aren’t looking for just one or two bottles, like convenience stores or corporate offices.

While wholesaling has traditionally been used in business-to-business transactions by large companies, the internet and ecommerce tools like Shopify have democratized the practice. Wholesalers have the advantage, if successful, of massive economies of scale. In addition to the security of large order quantities, they often have healthy profit margins. The trouble comes in securing first-time and repeat customers as well as producing and distributing large amounts of your winning products.

Subscription businesses

A growing ecommerce strategy is subscription services. Brands like Curology and Keeps (consumer health), HelloFresh and Blue Apron (meal boxes), and Bean Box (coffee) have exploded in popularity with consumers and business owners alike. These businesses offer products that target a key consumer preference: convenience.

Subscription businesses charge customer credit cards typically once per month or annually, offering discounts for longer-term commitments, and ship the products directly to the customer’s door. Business owners can develop very accurate and stable revenue projections, maintain just the right amount of inventory and consistent delivery through long-term planning, and build paneled customer data profiles that help drive up conversion rates and reduce shopping cart abandonment rates.

The best advantage is that subscription services can often be integrated into traditional ecommerce operations, with businesses giving customers the option to turn their regular shopping habits into a (usually discounted) subscription, which helps retain happy customers.