As the digital world continues to be an integral part of our daily lives, more and more people are becoming interested in venturing into ecommerce. However, only some understand what it truly means to start an online business.
One of the first things anyone should look into when starting a business online is the type of business model they lean toward. Different business models entail other processes and strategies. Aside from that, each has its fair share of advantages and disadvantages.
Here’s a quick run-through of the most popular ecommerce business models to give you a better idea. We’ll discuss how they work and their notable pros and cons.
Dropshipping Using Own Website
Dropshipping has been one of the most popular online business models. One of the reasons for this is that a dropshipping business is relatively easy to implement.
First, there is minimal investment involved. Generally, all you need to do is to build an ecommerce website where customers can browse and order your products. This is cheap and easy, given the numerous website builder sites and online hosting platforms.
Aside from that, this business model doesn’t entail inventory management and order fulfillment. A third-party supplier or vendor processes all this for you in a dropshipping business.
Considering all this, launching a dropshipping business with your website is extremely easy. But how does it exactly work?
Dropshipping allows you to store digital products or goods online without carrying inventory. Your website is there to take orders from customers, but someone else is going to be the one to fulfill them. Instead, you direct the order to your supplier, who will be responsible for packing and shipping the products to customers.
To do this, the first step is to get in contact with a wholesaler or supplier. The goal is to be approved as a retailer to access the different products they manufacture.
From there, you build your ecommerce website and brand where customers can see your catalog and browse your products. An important part is creating product listings and descriptions for the items you want to sell. This is where your entrepreneurial and marketer skills come into play, as you would have to find ways to sell your products.
Cons of Dropshipping
However, dropshipping also comes with its fair share of drawbacks and challenges.
Lower profit margins
One of which is that dropshipping doesn’t offer significant profit margins. This is primarily because a third-party service does most of the grunt work for you. While you still have the liberty to raise your prices as high as you want, the ideal profit margin for dropshipping stores is only around 10% to 30% to keep it competitive.
Financial limitations
Because of the lower profit margins, other aspects of the business, such as website maintenance and marketing, can be affected. It would be difficult to conduct paid advertisement campaigns to gain traffic. Thus, entrepreneurs would have to put more effort into drawing organic traffic through campaigns like search engine optimization, email marketing, and social media marketing.
Lack of control over third-party service
Another drawback of dropshipping is that you don’t have control over the products to sell. The minute your supplier or vendor decides to discontinue a certain item, you can no longer sell it, even if it’s the most popular or in-demand product on your website.
In addition, dropshipping also carries the risk of an unreliable vendor. Ideally, the supplier would process customer orders efficiently. However, there may be circumstances where they don’t. Since you’re the business customers directly interact with, you are the one to face customer complaints, even if it’s not your fault.
Retail Arbitrage Through Amazon
This business model has also become increasingly popular in recent years. Much like dropshipping, retail arbitrage requires minimal investment. However, it takes much more effort on the business owner’s end.
Retail arbitrage involves selling items bought at clearance sales or liquidation stores for a profit. The idea for retail arbitrage is to find products sold at rock-bottom prices and sell them online on ecommerce websites like Amazon. You have the option to sell these items at retail or put them at higher prices. Regardless, this strategy ensures significant profit once sold.
One of the advantages of retail arbitrage is that customers with no access to liquidation or clearance stores are willing to pay for products at full retail prices. Aside from that, retail arbitrage can also take advantage of existing ecommerce platforms, thus ridding the need to set up an online website.
Selling on platforms like Amazon also gives entrepreneurs access to its large user base and other ecommerce features. Leveraging Amazon FBA takes much of the inventory management and order fulfillment off your plate.
Cons of Retail Arbitrage
Despite the growing popularity of retail arbitrage, it still comes with disadvantages and risks.
Requires more effort
Unlike dropshipping, retail arbitrage requires more effort in the sense that entrepreneurs need to look for products to buy and sell constantly. Therefore, they must be more hands-on in finding and contacting liquidation stores to purchase the most lucrative products. Doing this not only requires more effort but it is also significantly time-consuming.
Slow business growth
In relation to the laborious effort it takes to run a retail arbitrage business, another disadvantage of this model is that it is relatively difficult to scale and grow. Given that entrepreneurs spend most of their time looking for profitable products to sell, they typically don’t have the time to expand and scale their businesses.
Platform Limitations
Recently, Amazon has become strict in monitoring online sellers under the retail arbitrage model. In an effort to protect brands, Amazon has introduced rules that prevent stores from selling branded products without permission or approval from the manufacturer. An example of this includes the likes of Adidas, Lego, Vans, and even Nestle.
When this happens, you lose the opportunity to sell these products on a huge platform like Amazon. Even worse, Amazon can shut your business completely for not following its rules on selling branded products.
Private Labeling Through Amazon or Your Website
Private label is another popular business model. However, it is different from dropshipping and retail arbitrage in the sense that you are selling your own branded products. Therefore, this business model works particularly for entrepreneurs looking to sell online and build a brand.
To start a private labeling business, entrepreneurs need to find and contract a manufacturer. This supplier should be capable of producing your products in bulk and also allow you to include your brand.
Generally, entrepreneurs find their manufacturers overseas or through websites such as Alibaba. Once you’ve produced your products, you have two options. You can ship your products in bulk to an Amazon logistics and fulfillment center or manage the inventory yourself.
Among the business models in this list, private labeling offers the highest possible profit margins. When you are going to ship your products through Amazon FBA, you won’t need an ecommerce website, and you don’t have to worry about inventory management and order fulfillment.
On the other hand, selling your products on your website is considered the most secure way to start an ecommerce business. Doing this provides you with the utmost control over your brand.
Cons of Private Labeling
While a private label business sounds enticing, it still has a number of disadvantages and challenges.
Larger upfront costs
Private labeling is unique because you are not simply reselling manufactured products online. Instead, you are creating your products and building your own brand. Considering this, one of the drawbacks of private labeling is that it involves a much larger upfront cost. You would have to shell out a significant amount to produce a sizeable inventory to kickstart your business.
Strict Amazon requirements
Considering that Amazon is an established ecommerce platform, the site has several regulations to ensure the quality of privately labeled products. One of the things Amazon looks into is customer reviews. If there are many negative reviews on your product or store, Amazon has the right to ban you from the platform.
Tedious and demanding
If you decide to sell your private label products on your website, you must be ready for a tedious and laborious process. This involves building your ecommerce website as well as managing product inventory.
Bottomline
Starting an ecommerce business can sometimes feel overwhelming. However, it is essential for aspiring entrepreneurs to find the most suitable business model. Some of the factors they need to consider are their ability to hold stock, the manner in which they source their products, and the overall resources they can put into their business.
Want to know more about running an ecommerce business? Sidekicks is an on-demand virtual company, and we’re eager to help visionaries and entrepreneurs like you. Get a free ebook and learn more about how we can help you by signing up for our newsletter. We also offer a free 30-minute consultation if you prefer something more personal.
