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5 Online Business Models

5 Main E-Commerce Business Models: Which One Is Right For You?

There are five main ways to build an online business. Each has its own advantages and disadvantages. Which one is right for you?

With so much information thrown out there online, it’s super easy to mix them up and get confused. So, I decided to lay them out for you here. That way, you can have a clearer vision of where you’d like to start your new online business with or even expand your existing business into. Fair enough?

Let’s dive right in.

Drop Shipping

This is when the customer places an order, you then send the order to the supplier who then ships it directly to your customer. Benefits are no inventory or upfront cost. You simply collect the money, pay the supplier his due (and shipping) and you just handle the customer service.

This model is often used for beginners because it’s easy to start on merchant sites such as ETSY and EBAY. Keep in mind you’ll still have to design your products. For instance, you decide to sell print-on-demand (POD) t-shirts.

There are a ton of suppliers, the biggest one is Printful. Once you’ve decided on a t-shirt brand, you’ll need to upload a design to print on it. Thus, making it your own and hoping that enough people will like it and place an order. Merchant sites such as ETSY will handle the order processing for you and since Printful integrates with ETSY beautifully, the order goes straight to them, is printed and shipped. Apart from some customer service, there’s little else to do.

Wholesale/Warehousing

Here you preorder your supplies (or craft materials) from a wholesaler who already has a product line, send them to a warehouse (or at home) where they are stored. A customer places an order and you ship it it off. 

Obviously, the drawback here is the fact that you have to place big orders from the supplier before a single sale is made. Risky for sure! But say you’ve made a few bracelets that are already bringing in steady sales and you need to make sure you have enough beads and glue, etc. Then having a supply on hand makes sense.

Private Labeling & Manufacturing

You find a manufacturer to create your custom product en masse for you. Saving you an inordinate amount of time. They send it to you and you store it in a warehouse (i.e. garage).  Customers place their order with you and you handle all the shipping.

Selling Handmade Goods

A common mistake among many hand-made shop owners is to offer up custom or personalized design from scratch. The customer designs the product, then you make the product, sell it and deliver it. Can you see the problem with this model? It relies exclusively on your own effort.  

TIP: Avoid promising a “one of a kind” product because if you’re making handmade products yourself, it’s only a matter of time before you burnout.  

So say you find a pretty wooden table and paint it up decoratively and sell it as a one of a kind product. Then a few weeks later you that same table again, you won’t really be able to sell it on your shop because you already sold a previous one as “one of a kind”. So best to avoid saying that at all so as not to paint yourself into a corner down the road. 

Regardless of how skilled you may be. What happens if you have 100 customers, each with their own custom design. How long will it take for you to make the product to their specifications and ship it? What if you run out of a particular material? What if you have a life event that hampers your ability to fill the remaining outstanding orders? What if the glue you were using to put together those cute jewelry pieces goes off and you suddenly find yourself also having to replace previously sold items? 

Most customers will expect their delivery within a week to ten days. Unless you have a large group of helpers on hand 24/7, you’ll be hard pressed to meet the demand through your own efforts.

There’s no denying the inventible here. This model just isn’t scalable because it’s too custom and reliant on your own physical ability to produce it. This very scenario played out with a jewelry designer who ended up getting terribly sick and needed surgery. Needless to say, all the stress of trying to keep up with the custom order requests, she wasn’t getting enough sleep and her health deteriorated. 

A better strategy is to do your research first to determine what your competition is selling and how you can improve upon it. Take note of which colors and materials are most popular. Then design that product, find a manufacturer that can mass produce it for you and send it to you in bulk. You then simply sell the item and ship it to the customer.

TIP: You can still offer customizations to your existing product such as color choices (as in t-shirt design). I’ve learned though that giving customers too many choices, results in no sales. They can’t decide which ones they want because they like them all and as such get distracted and go elsewhere. Limit your customizations to no more than five maximum. 

White Labeling or Wholeselling

You find a product that is already made with a manufacturer who then sends it to you in bulk. You slap your own label on it and ship it to the customer. This is very common practice with nearly all big retailers.  The advantage here is that you don’t have to create the product from scratch. 

If you go this route, make sure to do your homework. Choose wisely! Look for popular products that are already becoming scarce. Find a supplier who is running out and buy up the last of the supply. Now this is likely to run you into a couple thousand dollars upfront. So you better be sure.

Subscription Service

You bill the member each month and ship the products every month. Selling magazines or online membership only courses are a prime example of this type of business model. This model has become very popular. Stitchfix, Blue Apron are online examples of this.

Your Two Cents

So, tell me what you think. Which one of these models are you currently using or plan to use. Share your own experiences and/or ask questions.

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