If you’re looking to start or build a DTC ecommerce business, your ability to grow profitably and sustainably often hinges on the business model you choose.
While many might think of ecommerce as a “get rich quick” method, it’s not. Ecommerce is a sales channel that requires intentional business strategy centered around a great product.
Under the umbrella of online selling, there are several types of ecommerce to consider. In this post, we’re going to break down the most common ecommerce business models, their pros and cons, and ideas for implementing them inside your business.
This information will mainly be geared toward existing business owners who are looking to add ecommerce to their business model, but it will also be valuable insight for those just getting their business started as well.
Prerequisites for a Successful Ecommerce Business
Before we dive into the types of ecommerce and the top ecommerce business models, let’s go over a few prerequisites necessary no matter what method you choose.
To have any chance at a successful ecommerce business you’ll need:
- A great product
- A strong brand
- A compelling story
- A customer maximization strategy to create returning customers and raving fans
Once you’re able to check those boxes (or at least have a vision for how you’ll accomplish them) you can dive into the various models we’ll outline below.
Product Models for Ecommerce
At the product level, there are two options: physical products or digital products.
If you want to sell a physical product, there are a few ways you can go about creating those:
- Purchased: You can purchase products from another company or manufacturer to sell.
- Manufactured: You can manufacture your own, unique product from scratch. This is where most brands should aim to get to.
- Handmade: You can also create products by hand. This is less common and more difficult to scale, but it is possible.
Digital products, on the other hand, can be a great way for service business or B2B businesses to start doing ecommerce quickly by packaging up the knowledge they normally offer through services and selling it in a product instead. For example, an online coach, consultant, or agency could create ebooks or courses with the material they teach and sell that material in an online store. This also ends up being a great way to market your business to a wider audience. Once someone has purchased a digital product from you, you’ve gained authority and expertise in that customer’s mind, and they might end up being a fit for your higher-cost services.
There are three types of digital products to consider:
- Asset: This is a tool for customers to use, such as a template, image, photoshop file, spreadsheet with a model built into it, etc.
- Information: This is typically an ebook, paid newsletter, or paid access to a repository of content.
- Training: This could be a live or on-demand course, webinar, or masterclass that walks customers through your product in order to achieve a result. This usually lends itself to selling your services afterward.
Sales Models for Ecommerce
Next, let’s walk through the main sales models for ecommerce—meaning, where you will market and sell your products.
The first model is selling your product through a marketplace, such as Amazon or Etsy. This option will get you up and running quicker, and it provides a built-in customer base, making it easier for people to find you. This also means less marketing and advertising is needed since that’s typically built into the platform. However, a considerable drawback is that you are essentially selling on someone else’s “land”. You do not own the channel, or the customer information, so there is a fair amount of risk and vulnerability. For more details on this, check out Why Amazon Is Not Ecommerce and Why You Need Both.
The second sales model is an owned ecommerce store. As the name suggests, in this scenario, you’re selling on your own website. We recommend this for almost every business we work with, because your business will be more profitable and sustainable in the long run if your website is the #1 channel for traffic and sales. Sometimes we’ll use marketplaces in addition as extra channels for discovery, but if your own store is the primary revenue generator, you have much more stability and control.
If you’re selling on your own ecommerce store, there are two approaches for building that experience.
One is the funnel model. This website setup is more of a sequence of steps than a browsable store. It’s a good customer acquisition strategy if you have one main hero product that you want customers to stay focused on, and then you can add additional steps in the funnel for product up-sells. A common platform for this is ClickFunnels.
The other, more traditional option is the store model, where customers go to an ecommerce store, browse products throughout the website, and then checkout. This is the ideal place for customers to land, as it’s the best way to increase discovery of all your products while also creating a brand experience, which is critical for creating loyal customers and raving fans. You want people to buy into your brand, not just your products, and a strategically designed ecommerce website creates that brand stickiness. Popular platforms for building an ecommerce website include Shopify Plus, BigCommerce, Adobe Commerce, WooCommerce, or SalesForce Commerce.
Some brands also use a combination of the store and funnel models. For example, a brand might start with an ecommerce store as their home base and build that up, and then use a funnel as a marketing tactic. The funnel could drive ad traffic to a hero product, and then once those new visitors become customers, you could market other products to them via your ecommerce site.
Fulfillment Models for Ecommerce
Now let’s explore options for fulfillment. While we break down how to choose the best ecommerce fulfillment option for your brand in other posts, this is an important topic to touch on here as well. There are two main options, and which model you choose determines how hands-on you’ll be in your business. Most brands migrate through these two models as they mature and revenue grows.
The first option is in-house fulfillment, where, as the name suggests, you fulfill all orders in house. This is a good option if you’re just starting out, or if you want to create a very unique unboxing experience or custom packaging for each product. Fulfilling in-house is less expensive per package and more integrated with your team, but it also comes with more overhead expense and can lead to more complexity. This is why most business owners will eventually look at the second model, or at least have a hybrid model.
That second model is outsourced fulfillment, also known as using a 3PL. In this scenario, you will purchase your products from your manufacturer and have them shipped to a third party warehouse. They will store it, handle fulfilling orders and shipping, and often handle processing returns as well. This is a great option for brands who just want to own their product and market it, but not have to handle the logistics of shipping and fulfillment, along with the staff and overhead that comes with that. One factor to consider though is that you’ll have less room for a customized unboxing experience, since a third party is doing it for you alongside many other brands. It will also be more expensive to fulfill per package. There is usually a fee depending on how many products are being shipped and how they’re packaged, in addition to the cost of shipping and your package materials. But, overall, it is an easier model with less overhead in terms of staff, logistics, and space in your organization.
Customer Service Models for Ecommerce
The next element to decide is how your ecommerce business will handle customer service. It’s important to note that this is critical to get right, as customer service serves as the front line of fan creation. We often see customers become lifelong fans of a brand simply through their customer service experience. Why? If someone reaches out with a problem, it is an opportunity to turn those negative feelings into relief and gratitude if it’s handled correctly. And that can be extremely powerful.
For customer service models, you have three options: outsourced, in-house, or hybrid.
If you outsource your customer service, that means an outsourced team handles all customer service tasks and communication. This model is easy to scale and less expensive, but it can be hard to make it feel like your real team. In fact, that’s the most important consideration with this model. Customer service representatives need to be culturally relevant and feel local. They also need to have thorough knowledge about everything going on with your brand from product information to promotions.
The other option is to handle customer service in-house, with a team in your organization. This is likely the best solution for your customers, but it can be harder to scale and more expensive.
We often find that brands have the best luck with a hybrid model. In this scenario, you would have some customer service roles in-house to lead the customer service team and handle the most important needs. But you would also have an outsourced team to help you scale, and to provide extra seasonal support during busy times of the year. (Remember, your outsourced team will still need to be able to talk to your customer in relevant ways and blend seamlessly with your organization.) A third component to this hybrid model is using technology. There are many technology options out there to help scale your customer service team, especially with the growth of AI and its ability to answer common questions. We also recommend having a customer service page on your site that allows customers to self-solve FAQs and other common issues.
Business Models for Ecommerce
Lastly, let’s unpack the main ecommerce business models to help you determine what’s right for your brand. These can be broken into four different options, and they are essentially combinations of the decisions you’re making about the models above.
1. Dropshipping
For physical products, the dropshipping model is essentially selling someone else’s products. They’ll handle fulfillment, shipping, and returns, so you act solely as the marketing arm.
In the digital world, a similar model would be doing strictly affiliate marketing for a product where another brand fulfills what you sell—you just get paid for the customer you sent to them.
For the purposes of this post, we’ll mainly focus on dropshipping physical products. This model has gotten a lot of attention especially in recent years because it’s fairly straightforward to get started. However, it’s not the most scalable or profitable approach.
In most dropshipping scenarios, the product will not be unique. It might actually be more expensive as well, because you will have to pay several middlemen, making your product margins much slimmer. Remember, a unique product and healthy margins are critical for a sustainable business and competitive advantage. Without a unique product, the only thing you can rely on is creating a unique brand, and it takes a lot of time, investment, and margin to build that.
With this in mind, dropshipping isn’t the best model for a business that wants to grow their customer base and create a solid brand, but it’s a way to get off the ground if you’re looking to add ecommerce to your business. It’s also a way to test the ecommerce business model from scratch if you’re not currently in business and just want to learn the ropes. Either way, just make sure the products you dropship are in line with your business and are high quality.
2. Whitelabeling
Another ecommerce business model is whitelabeling. Rather than making your own product, you will purchase a product from suppliers or manufacturers for them to send to you or your warehouse, and then your business will handle your own fulfillment, shipping, and customer service.
If you’re in the digital space, the equivalent for this would be licensing and selling someone else’s product. You can pay the product creator a license fee, and then you’ll fulfill and send the product to the customer as if it’s your own.
Whether you’re looking to start an ecommerce brand from scratch, or you’re an established business wanting to add DTC to the mix, whitelabeling is a great way to test the waters for what products will resonate with your customers.
The key is to find a supplier or manufacturer that you trust, especially if you’re sourcing internationally. Confirming quality is also important, so we recommend ordering samples from several manufacturers to ensure you find the right one. It will be more expensive to start than dropshipping, because you’ll have to purchase in bulk upfront. But overtime, you’ll have better margins, and most likely, a more unique product and better customer service experience for your audience.
3. Manufacturing
A third ecommerce business model to consider is manufacturing. This refers to designing and manufacturing your own unique products, which is where you want to get to if you’re a serious product company.
Many brands start out by whitelabeling, and then you can begin to customize and innovate your products as you learn about your customers. Eventually your manufacturer might be able to take the product you’ve been white labeling and start customizing and manufacturing a separate, unique product for you.
We recommend making it a goal to nail one hero product, and then begin to build out the rest of your product line to create an entire ecommerce ecosystem. R&D is critical to reaching the health stage of your ecommerce business, as you will need additional products to upsell and cross-sell and create repeat customers.
Manufacturing is the most time-consuming and expensive ecommerce business model, but if done right, it has the most margin, future reward, and competitive advantages. If you’re looking to build a highly valuable business, this should be your end goal.
4. Department Store
The last ecommerce business model to consider is the department store. This is where you will purchase and sell inventory from various brands, and customers purchase from you knowing the product is made by another brand.
This is not the most common approach, and unless you’re a large business like Macy’s or REI, we don’t recommend starting here, as it can be really difficult to create a valuable business this way. However it’s still a model worth mentioning.
The key here is building up a trusted, recognizable brand, particularly in regards to customer service and providing value-added knowledge for your customers. Customers will need to have a strong reason to buy from you, since they can likely buy the products you’re selling elsewhere. This takes time and investment to do, but the benefits will lead to a loyal customer base.
Another recommendation for this model is to start manufacturing your own products to sell alongside the other brands on your site. A benefit here is that by selling other brand’s products, you’ll have plenty of data about what customers like about different items, and then you can create your own version of products by combining the best qualities of your top-sellers.
How to Choose the Best Type of Ecommerce for Your Products
Ultimately, choosing the best ecommerce business model for your products depends on your current business stage and goals. If you want to build a valuable, long-lasting brand, you will want to pick the right product, test it in inexpensive ways, and then eventually own that product over time. If you just want to add some additional revenue to your business or test the waters with a new brand or ecommerce business, adding a relevant drop shipped product or fully outsourcing fulfillment and customers is the way to go at first. As you mature, you can change that to bring more products and teams in house.
No matter what approach you take, you’ll want to own your channels or at least work toward that over time. That means not just selling on Amazon or another marketplace, but owning your ecommerce store on Shopify or another platform. It also means not just marketing through Facebook or Google where the customer data isn’t yours, but focusing on owned channels such as email marketing as well.
Once you pick your model, you’ll need to successfully build your business, generate traffic, market your product and your brand, and increase your customers’ lifetime value. We have plenty of articles on how to do all of these things, and we also take on select clients to partner with. If you’re a business who wants to implement an ecommerce channel or grow your existing one, we do that for some of the most influential brands in the world and would love to talk. Just reach out below!