What is E-Commerce? The Basics Explained
Electronic commerce is when business transactions take place via the internet. Today it seems that most purchases are made online, which is why this type of business model has exploded in the past decade.
Many brick-and-mortar stores, even the ones that have been staple, anchor stores for years, have closed because they just could not compete with online marketplaces like Amazon. What does this mean for you and exactly what is e-commerce? Well, if you’re trying to start an online business, this could be the perfect time to launch it.
Types of E-commerce
Business to Business (B2B)
With this business model businesses sell products and/or services to other businesses. One example of this would be a paper company selling reams of paper in bulk to another company. Another example is a temp agency, providing a service to another business.
Business to Consumer (B2C)
This is the model most familiar to us. As consumers we patron businesses, either online or in person, and make purchases of goods or services. If you are interested in building a retail business this would most likely be the model you would follow.
Consumer to Business (C2B)
With this model individuals sell goods or services to a business. An example of this would be individuals who work for companies like Upwork or fiverr. These sites hire individuals on a contract basis for the benefit of companies. Although some individuals make a living doing this type of work, unless they are operating as a business they are still considered consumers in this scenario.
Consumer to Consumer (C2C)
With the consumer to consumer model individuals sell goods or services to another individual. An example of this could be sellers selling to consumers on websites like Ebay. Individuals list products, usually under their own name, that others purchase. Service providers like barbers and hair stylists often operate under this model as well.
How Does E-commerce Work?
Business models can be differentiated by the way inventory and the sourcing of products are handled. Some business owners like creating and selling their own handmade products while others like the idea of selling without having any inventory on hand. There are many different types but the three most common are below.
Dropshipping
Dropshipping allows sellers to sell goods without ever having to handle inventory. Sellers source the product from a dropshipping company and markets it to customers. Once the customer pays, the seller pays the dropshipping company the base price of the item and the shipping cost, and the dropshipping company then creates the products and ships them directly to the customer.
In this scenario, the seller never touches the product and there is no inventory to maintain. There is very little risk with this model and it is often possible to start this type of business with very little money spent upfront.
Wholesaling
Wholesaling e-commerce businesses must invest in a significant amount of inventory that is then held at a warehouse for a fee. The seller must keep track of the inventory and sales, and is responsible for getting the inventory to other retailers.
Many of the items sold by Amazon, Walmart, and other big box stores are provided to them by wholesalers. This business model carries more risk because if the items do not sell the seller may be forced to sell at a loss or find themselves stuck with unsold inventory.
Subscription
Subscription services offer customers regular delivery, usually by mail. There are many different hair, cosmetic, shaving, and food subscription services that have popped up over the past decade. Customers pay a weekly, monthly, or bi-monthly fee and receive a box of items, sometimes varying from month to month.
The seller is responsible for choosing what goes in each box and must make sure customers receive their box. This model requires a lot of work, especially when the box contents change from month to month.
White Labeling
White labeling allows a seller to offer a product that is already being sold by another company. The white labeling allows the seller to purchase these items wholesale, put their name on them, and resell them as their own to customers.
The risk with this model is that the items may not sell and the seller will be stuck with unwanted merchandise. I would only entertain this model if I was sure I could sell the inventory I purchased. Perhaps pre-orders would help to ensure the demand meets the supply.
Which Type of E-commerce Model Would Be the Best Fit for You?
This would depend largely upon the amount of risk you are willing to assume and what type of product or service you have. For beginners, the easiest model would appear to be dropshipping. No upfront costs or inventory make this an attractive option for anyone trying e-commerce for the first time. What do you think?
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