The ultimate guide to ecommerce business models
Since the first online shopping system was demonstrated in 1979, ecommerce has been constantly growing and diversifying.
Now, what we think of as “ecommerce” encompasses a huge and varied range of different models and formats: between business and other businesses, between businesses and consumers, and between consumers and other consumers.
Any consumer can become a vendor by putting an item up for sale on an online marketplace; the subscription craze is seeing all kinds of goods being delivered in boxes and parcels to people’s doorsteps; social networks have become retail outlets with the advent of social shopping.
To help you sort through the maze of different types of ecommerce, we’ve put together a comprehensive guide to different ecommerce business models and how they work, together with key examples from across the sector.
Business to Business (B2B)
When thinking about ecommerce, most people’s minds probably jump to business to consumer (B2C) retail. Generally speaking, it’s the most widely encountered and discussed, and unless you run a business yourself, you wouldn’t be that familiar with B2B ecommerce.
But B2B is actually a huge ecommerce market that’s experiencing plenty of growth, as more and more B2B retailers opt to bring their businesses online to increase efficiency and cut operating costs. Last year, Forrester released a report which forecast that the B2B ecommerce market would top $1.1 trillion in the US alone, with 7.7% growth per year predicted for the next five years.
So what are the dominant business models in B2B ecommerce? Broadly speaking, there are two which make up the vast majority of B2B retail online:
Online marketplaces differ from straight-up online retail outlets in that instead of one company selling all of the goods on the site, a wide variety of third parties can set up ‘stalls’ in the marketplace and use it as a forum for selling to customers. Online marketplaces come in both B2B and C2C flavours, which I’ll explore a bit further down.
The giant of B2B marketplaces is Alibaba, the world’s largest online B2B trading platform for small businesses. Amazon, always one to have a presence in almost any ecommerce category that you can think of, also has a B2B marketplace called Amazon Business (which replaced the older AmazonSupply last year).
Other less-known online B2B marketplaces include IndiaMart, India’s largest B2B marketplace, and EC21, which was established in 1997 as an online trade board of the Korea International Trade Association, and was spun off into EC21 in 2000.
I’m using the term ‘catalogue sites’ to describe any B2B ecommerce site where you can browse through a retailer’s stock by category and place an order for goods through the website – much like a print catalogue. Needless to say, there’s a huge range of these sites out there, covering every sector and industry imaginable.
Here are a few notable examples:
Often cited as a leader in B2B ecommerce, Grainger sells a wide range of industrial and commercial supplies through its extensive catalogue site. It’s well-designed to ensure a seamless shopping experience and ease of repeat purchases, with a guest checkout option and a clever “auto reorder” feature that will automatically purchase the product again at a specified interval.
The Sprint business site is divided up into ‘solution categories’ depending on the kind of service you’re looking for: business automation, for example, or mobile workforce management.
The site is more geared towards arranging a consultation to find the most appropriate products than an immediate, one-time sale, but it has a clear layout making it easy to navigate to the right section and get in touch, an attractive design and energetic, interesting copy.
Bouncepad is a retailer of high-end tablet kiosks, enclosures and stands. It has a slick, visual and interactive site that invites browsing, and works equally well on mobile. The site is also packed with useful information about digital innovation in retail aimed at inspiring purchases.
Business to Consumer (B2C)
Most people tend to think about ecommerce, and retail in general, in terms of Business to Consumer (B2C) transactions, since as consumers, that’s the form in which we most often encounter it. With that said, the expansion of different types of Consumer to Consumer (C2C) ecommerce, which I’ll look at in the last section, has made its dominance much less absolute.
The boundaries between B2C and C2C ecommerce have also blurred quite a bit, as more and more consumers have been able to establish themselves as businesses thanks to the range of options available to them. Either way, B2C ecommerce is the most diverse out of all the types of ecommerce listed here, thanks to the ways that retailers have evolved over the years in a bid to keep innovating and making profits.
First and foremost, of course, we have the most ‘ordinary’ and straightforward B2C ecommerce model: standard retail. The vendor, a business, sells an item (or more than one item) to the buyer, a consumer, who pays for it and then receives it. You could call this the default B2C ecommerce model, but it’s by no means the only one – and can easily be combined with other models for a more varied service.
Subscription-based services, often collectively called the ‘subscription economy’, have seen a huge rise in popularity in recent years across all industries, including – or perhaps especially – ecommerce. They often take the form of subscription boxes, which are regular deliveries of boxes containing goods by the seller.
Some types of subscription box will deliver a selection of new, random items – these are known as ‘discovery boxes’ – while other boxes will provide specific, pre-determined items, called ‘convenience boxes’.
The subscription model is used across ecommerce businesses of every variety, from food to publishing to hygiene. Graze, which sells healthy snacks in slim cardboard subscription boxes, has achieved great success with this model beginning in 2008. Other food companies, such as HelloFresh and Plated, offer subscription boxes containing ‘meal kits’: all the ingredients needed to create a healthy meal, designed to make healthy cooking quicker and more convenient.
In the publishing industry, subscriptions to newspapers and magazines are obviously very common, but one business has used this model to do something a bit different: Stack is a company which delivers a different independent magazine to its subscribers every month. Similar to the ‘discovery box’ model, this system allows subscribers to support the wider independent magazine industry while discovering new publications on a regular basis.
Other diverse companies catering to the subscription craze include the Close Shave Society, which sends out regular deliveries of men’s razor blades; Pink Parcel, which sends out monthly packages of sanitary towels and care items for ‘that time of the month’; and Ink Drops, a stationery subscription service for lovers of hand-written letter-writing.
Social shopping is a newer, but still up-and-coming trend in ecommerce. There is a range of different models within the wider category of social shopping, including ‘buy’ buttons on social networks like Pinterest, Facebook and Twitter; shoppable videos and galleries; and third-party social shopping sites.
Aspects of social shopping can easily be integrated alongside one of the other ecommerce models detailed in this article. Marks and Spencer, for example, is a B2C direct retail outlet which has integrated shoppable video into its content marketing.
The prom suits section of its website features a video giving men advice on how to put together a classic formal look, with thumbnails alongside the video that allow viewers to click through and buy the products shown.
Third-party social shopping websites are online communities that blend together aspects of social networking and ecommerce. On Polyvore, for example, users can create ‘outfit collages’ using clothing items that interest them, share them with other members on the site. Each item can be clicked on to buy it from its respective seller.
Social shopping sites overwhelmingly tend to fashion and beauty-oriented. Other examples include Svpply, The Beautyist and Grabble, which has been dubbed “Tinder for fashion”. For more on the various kinds of social shopping and how you can put them into practice, read our list of five ways to incorporate social shopping into your digital marketing strategy.
The consumer credit model is one which is widespread in mainland Europe, but has only recently begun to make its way to the UK and the US via ecommerce. Essentially, it’s a ‘buy now, pay later’ system which allows consumers to purchase items on credit and be billed for them at a later date. As with credit cards, there is usually interest charged on the credit, and customers can opt to pay off the balance over time.
British clothing company Next has had considerable success with this model online; five years ago, as many as 95% of its customers were paying for their online purchases with a Next credit account, according to the Independent; although this number has faltered in recent years. Littlewoods and Very are two other retailers who offer a credit model, and advertise it prominently on their sites.
Some credit model companies, like Klarna and Affirm, are not ecommerce retailers in their own right but provide a credit service to retailers, giving customers the option of purchasing on credit at checkout using their service.
There aren’t a lot of examples of Consumer to Business, or C2B, ecommerce models, but a few have found success over the years. The main principle of most C2B ecommerce, which differentiates it from regular B2C ecommerce, is that the consumers are the ones creating value for the products.
This can be done through a reverse auction or Name Your Own Price model, in which buyers name the amount they are willing to pay for a product, such as travel tickets, and the transaction takes place if the seller accepts the price. (In other words, it’s like online haggling).
A notable example of this ecommerce model is Priceline.com, which sells low-cost travel products like flight tickets, car rental and accommodation to price-conscious buyers. Consumers get the benefit of buying services at reduced prices, while businesses can sell off unused seats, rooms, etc. without advertising the low price to the general public – the selling business’s identity is only revealed after a transaction has successfully completed, and transactions are also non-refundable.
Another example of a C2B ecommerce model in which consumers create value for a product is the retailer Gilt, which was first introduced and took off in 2007, just as the global recession and credit crunch was hitting businesses worldwide.
Gilt’s business model involves selling excess stock from designer brands at steeply discounted prices to a highly engaged community of members. It creates consumer demand around the goods, and allows fashion brands to liquidate excess stock without compromising their high-end image or lose as much revenue as they otherwise might by selling to off-price retailers.
The C2B business model therefore tends to involve creating value around a product that might not otherwise be of use to businesses, and selling it at a benefit to both the buyer and the seller. There are also a handful of ecommerce sites which are C2B in the more straightforward sense of “consumers selling to businesses”, such as Upwork, a platform for freelance professionals and contractors to advertise their services for hire by businesses.
Much as with B2B marketplaces, C2C online marketplaces are sites where consumers can establish their own shops in order to sell goods to other consumers. The marketplace will typically profit by charging a listing fee, and/or taking a cut of the final sale value when an item is sold.
A sale on an online marketplace can take the form of an auction, where prospective buyers can bid increasing amounts in order to win an item, as eBay is best-known for; or it can take the form of a direct sale.
Throughout most of the world, sellers who want to list items on a C2C marketplace will usually look to either eBay or Amazon Marketplace, both of which are hugely popular and well-established online marketplaces. In China, however, the undisputed market leader in C2C ecommerce is Taobao Marketplace, owned by Alibaba Group.
A number of smaller C2C online marketplaces cater to more niche sellers and audiences, such as those which allow artists and craft enthusiasts to sell their work to others. Etsy, a C2C marketplace which specialises in handmade crafts and vintage goods, is one of the most popular, with 54 million registered users as of December 2014.
Society6 and Redbubble are two other examples of C2C marketplaces for independent artists, which allow artists to sell their designs on a range of items including cushions, framed prints, mobile phone cases, T-shirts and more.
It might seem like pushing the definition of ‘ecommerce’ a bit to include crowdfunding, but I felt like it deserved a nod here. Crowdfunding websites like Kickstarter and Indiegogo often see projects launched as a way of trialling or testing demand for a product that later goes on to be sold commercially.
While most people probably don’t go shopping for products on crowdfunding websites, they can still be a great way to purchase something new and interesting – a board game, say, or a biodegradable umbrella – as long as you don’t mind the wait and the risk that comes with backing a crowdfunding project.
Last year Indiegogo acknowledged this with the launch of InDemand, a service that facilitates the shift from crowdfunding project to retail product, enabling campaign owners to “seamlessly transition into the next phase of operations, including accepting product pre-orders, customer acquisition and earnings growth.”
Kickstarter has also put together gift guides on its blog of products that were originally crowdfunded on its site and are currently sold online, encouraging users to buy a Kickstarter-funded item as an unusual Christmas gift.
Many crowdfunding projects are used as a way of selling a product in a limited number to a select audience, such as when a webcomic creator with an established following wants to sell a limited print run of their comic to their readers.
In this way, crowdfunding frequently acts as a precursor to or even a stand-in for traditional ecommerce, making it well worth a mention on this list.
The 21st century has seen the massive take-off of both the gig and the sharing economy, or what I am tentatively dubbing ‘rental ecommerce’. While often treated and categorised separately, the gig economy and sharing economy have a lot of overlaps, and services which straddle the divide between the two.
Both ultimately revolve around the same principle of paying for a temporary service, whether it’s a car to take you from A to B, a person to assemble your flat-pack furniture, or a room to stay in for the night. The ease of digitally connecting people who have things with people who need them has led to a profusion of rental and convenience services where almost anything can be acquired temporarily.
Amazon’s Mechanical Turk programme is one of the oldest examples of the digitally-enabled gig economy, and has been connecting workers-for-hire with individuals and companies that require their services since 2005. Amazon has since expanded its stake in rental ecommerce with Amazon Flex, which hires temporary drivers to deliver Amazon parcels in certain US cities.
Uber and AirBnB are two frequently-cited examples of industry disruptors from the world of rental ecommerce, but countless other smaller services have sprung up in this area, started by ordinary individuals to cater to a specific niche. For example, there are multiple websites geared around connecting pet owners with animal-loving pet sitters who will provide care services: Cat in a Flat, Borrow My Doggy, Pawshake to name but a few.
Rental ecommerce allows consumers to rent out anything from a parking space to sporting equipment to others who need it, allowing them to monetise commodities that would otherwise go to waste. It’s buying and selling of a different kind than we’ve come to expect from ecommerce, but is still both popular and profitable.
If you’re trying to determine which ecommerce model would suit your retail business best, there’s no reason to confine yourself to just one. As we’ve seen, many retailers combine different business models to maximise their opportunities, mixing B2B and B2C, combining direct retail and online marketplaces, or integrating social shopping or credit models on the side.
Ultimately it comes down to what makes sense for your business and who you want to market and sell to. Familiarise yourself with what’s out there and how it works, see how other businesses put it into practice, and then try it out.