If you want to create an online business, there are numerous ecommerce business models available. Along with these business models, there are also several ecommerce revenue models that determine exactly how your online store goes about generating revenue. But what's the difference between a business model and a revenue model, and how can online retailers choose the best models for their ecommerce stores?
To help you create an effective business plan for your ecommerce company, let's take a closer look at the various business and revenue models available to online businesses and each one's strengths and challenges.
What is your ecommerce business model?
Your company's business model is largely defined by who you are selling to and the nature of your products or services. Meanwhile, your revenue model is mostly defined by how you sell to your chosen customer base. We'll focus on the five main ecommerce revenue models later in this article, but for now, here's a high-level overview of all the different models.
- Business to consumer (B2C): The B2C model entails selling products or services directly to customers. Target is one example of a B2C business.
- Business to business (B2B): B2B companies sell their products or services to other businesses rather than individual consumers. One example of a B2B company is IBM.
- Consumer to consumer (C2C): C2C companies facilitate commerce between individual consumers and typically generate revenue by charging transaction fees. One example of a C2C company is eBay.
- Consumer to business (C2B): C2B companies enable individual consumers to provide services to businesses. Freelancing platforms such as Upwork are one example of the C2B business model.
- Manufacturer: A company is a manufacturer if it manufactures its own products rather than purchasing them from another company. Warby Parker is one example of an ecommerce business that manufactures its own products.
- Distributor: A distributor purchases products from another company to resell to end users. Most online retailers and ecommerce business owners fall under this category, with even ecommerce giants such as Walmart and Amazon qualifying as distributors (though these companies do manufacture some of their own products as well).
- Wholesaler: Wholesalers sell products in bulk to distributors and commonly serve as the middleman between manufacturers and distributors. Alibaba is one example of an ecommerce wholesaler.
- Retailer: Retailers are any company that sells products to individual consumers, regardless of whether the company manufactures those products itself or purchases them from a wholesaler. Along with being distributors, Walmart and Amazon are two well-known ecommerce retailers as well.
- Franchise: The franchise business model entails licensing your brand to other business owners and then taking a portion of the profits from their franchise stores. This business model is much more common for brick-and-mortar brands than it is for ecommerce stores, but Ecommerce Empires is one example of an ecommerce brand that offers franchise opportunities.
When choosing the revenue model that is best for your business, it's important to frame it in the context of your business model. Keeping in mind the specific business model your company falls under, let's look at the top five revenue models for you to consider.
1) Sales revenue model: Selling products a la carte online for profit
The sales revenue model simply entails selling products directly to your customers, and this is the revenue model that most people think of when they picture an ecommerce startup. Most B2C ecommerce stores operate under this model, selling either individual or bundled products from their ecommerce website or other online marketplaces.
If your company is built around selling products rather than attracting traffic or facilitating services, then the sales revenue model is a great model to consider. Examples of ecommerce companies that successfully employ the sales revenue model include popular stores like Gymshark and ColourPop Cosmetics.
Strengths and challenges
One key strength of the sales revenue model is that it's the most straightforward way for any company selling products to turn those products into profit. Another benefit of this model is that the majority of ecommerce platforms and tools are built to support stores that utilize the sales revenue model.
However, just because this model is the most popular doesn't mean it is without any drawbacks or challenges. One challenging aspect of the sales revenue model is the inventory management, order fulfillment, and customer support responsibilities that go along with shipping out products.
2) Subscription revenue model: Generating recurring revenue
This revenue model entails packaging products or services as an ongoing subscription, and it's a model that well-known ecommerce companies such as Dollar Shave Club and Birchbox have used with excellent results.
Products that customers need to purchase on an ongoing basis (such as shaving supplies) are well-suited for this model, as are products such as subscription boxes that offer unique items with each purchase. If your company's products fall into one of these categories, leveraging the subscription revenue model can be an excellent way to create a reliable and recurring revenue stream.
Strengths and challenges
One of the biggest benefits of the subscription revenue model is that it generates a reliable and erectable revenue stream for your company. Another strength of subscription services is that they promote repeat purchases by creating a path of least resistance for your customers. Since subscribed customers who wish to stop purchasing your products have to go through the trouble of canceling their subscription, keeping their subscription (and thus continuing to purchase from your company) becomes their path of least resistance.
However, the subscription revenue model does present a few challenges as well. The first of these challenges is the accounting and reporting headaches that this model tends to create, and 48% of businesses with a recurring revenue model state that they struggle to meet accounting/reporting challenges. Another key challenge of the subscription model is that it's harder to convince customers to sign up for a subscription service than it is to convince them to purchase a single product, meaning that your store's conversion rate could suffer.
3) Transaction revenue model: Enabling transactions for a fee
Not every ecommerce company sells its own products directly to customers, and there are a number of ecommerce websites built around facilitating transactions. This includes ecommerce platforms such as Etsy, eBay, and Craigslist — all of which facilitate transactions between customers and third-party sellers and earn revenue by charging the seller a fee for each sale they make on the platform.
Strengths and challenges
One benefit of the transaction revenue model is that it eliminates responsibilities such as warehousing, inventory management, and order fulfillment. In addition to negating the need for these time-and-resource-consuming tasks, the transaction revenue model also enables you to profit from other sellers' high-quality products rather than requiring you to source or manufacture high-quality products of your own.
However, there are also a couple of reasons why this model isn't feasible for most ecommerce startups. The first challenge of the transaction revenue model is competition. Sellers looking for online marketplaces to sell their products have no shortage of options, making it difficult for new companies leveraging this model to gain a foothold. Another challenge of the transaction revenue model is that building an ecommerce website that allows third-party sellers to upload their own products tends to be a lot more complicated than building a traditional online store.
4) Advertising revenue model: Increasing visibility for businesses
If your website is built around attracting traffic rather than selling products (as is the case for many news and entertainment websites), consider the advertising revenue model. This model allows you to monetize your website's traffic by advertising products and services from other companies. Best of all, services like Google Ads make it incredibly easy to get started with this model, enabling you to populate your website with ads at the click of a button and automatically earn revenue anytime someone clicks one of those ads.
Many well-known websites use the advertising revenue model, including Gizmodo, TechCrunch, and HuffPost. If you have a knack for generating an online audience, then you might be able to generate a lot of revenue using this model, too.
Strengths and challenges
The biggest strength of the advertising revenue model is that it is the simplest way for websites that attract a lot of traffic to turn that traffic into profits. You don't have to manufacture, manage, and sell your own products using this model, and you don't have to work directly with the companies you are advertising for thanks to services such as Google Ads. Another benefit is that it frees you up to publish whatever content you think your audience will enjoy the most without having to worry about marketing specific products.
However, while populating a website with ads is simple enough, attracting enough visitors to make those ads profitable is an entirely different challenge. Websites that rely solely on advertising revenue typically need to attract more visitors than websites with their own products to sell. Another challenge of the advertising revenue model is that online shoppers have become increasingly saturated with ads, and 96% of people now say that they don't trust ads.
5) Affiliate revenue model: Promoting products for compensation
The affiliate revenue model is similar to the advertising revenue model, allowing content publishers without products of their own to sell to still monetize the traffic that their website brings in by marketing products for other companies. And according to one 2020 survey, 31% of U.S. publishers say that affiliate revenue would rank as one of their top three revenue sources in 2021.
Where the affiliate revenue model differs from the advertising model, though, is in the specific details. With traditional ads, you are paid a small amount each time someone clicks on your ad. With affiliate marketing, you are paid each time someone purchases the product you are marketing using your link or affiliate checkout code. This amount tends to be much higher than the per-click amount received for traditional ads.
NerdWallet and Giftlab are a couple of well-known websites that generate revenue via the affiliate revenue model.
Strengths and challenges
The affiliate marketing model shares many of the same strengths as the advertising model. Namely, it's a model that enables you to build a profitable website without requiring you to sell your own products. But compared to the advertising revenue model, the affiliate revenue model offers the additional benefit of higher earnings for each successful transaction.
However, this benefit can also be a challenge. With the advertising model, all you need your visitors to do to make your company is click on the ads you publish. With affiliate marketing, you need them to actually purchase the products you're promoting — a much higher bar to clear. Another drawback of affiliate marketing compared to advertising is that setting up affiliate partnerships is more involved than publishing ads.
Determining the right revenue model for your business
When deciding which of these five ecommerce revenue models is best suited for your business, you'll need to consider several factors. Follow these steps to help determine which model will work best for your business.
Identify and understand your target market
Your target market's needs and preferences should shape all of your business decisions, including choosing the right revenue model. For example, if you sell consumable goods, your customers may expect the option to save themselves time by subscribing to your products instead of purchasing them individually.
Ensure the suitability of the model for your product and services
Not every product or service is a good fit for certain revenue models. For example, if you are selling a product that customers are likely to only purchase once, then a subscription revenue model won't be a good option for your business. Make sure that the revenue model you choose aligns with what your company offers to maximize the success of your ecommerce website.
Assess and evaluate your business goals
What are your company goals? If your goal is to expand the company's reach and attract lots of visitors with high-quality content, then the advertising or affiliate revenue models could be a great way to translate that goal into revenue. If your goal for creating an ecommerce store is to sell the wonderful new product you've created, then the sales or subscription revenue models are a better fit.
Test the model and adjust as needed
Pivoting from one revenue model to another isn't always as challenging as it might seem, and you may even be able to utilize a combination of two or more revenue models at the same time. This ability to adjust your revenue model makes it important to continually test and experiment to see which model (or combination of models) generates the most revenue for your company.
Regardless of your revenue model, don't neglect the customer experience
When it comes to ecommerce success, nothing is more important than the customer experience — and this is true regardless of the revenue model you choose. In fact, 81% of companies say that they are now competing primarily based on customer experience.
There are plenty of reasons why customer experience is so important for ecommerce businesses, including reasons such as:
- A good customer experience boosts first-time customer confidence, encouraging repeat purchases.
- A good customer experience increases an online store's conversion rates.
- Satisfied customers have higher average order values (AOV).
- Personalized customer service improves conversions and customer loyalty.
To learn more about why an optimized customer experience built around high-quality customer service is so important, check out our blog post on why customer service is key to growing your business.