DTC the most puplar eCommerce business model
When starting a business online, you have many choices. In addition to choosing the product you want to sell, one of the most critical decisions is the business model.
In this article, we will conduct a detailed analysis of the eight main options to consider when starting a business so that you can make the best decision from the beginning.
It is essential to understand each model to make the right choice for your small business. Each model has its advantages and disadvantages. According to your product, market, and cost structure, only one of them is more suitable for you and your business than the others.
Discover the business model that suits you.
※What is a business model?
※Common business model types
※Examples of popular business models
※Find a successful business model
※Frequently Asked Questions about Business Model
What is a business model?
The term “business model” refers to the core framework for a company to operate profitably and provide customers with prices. The characteristics of a good business model illustrate the customer’s price proposition and pricing strategy. It determines the products and services provided by a company, its target market, and future expenditures.
Business models are essential for both new and mature companies. They help companies understand their customers, keep employees motivated, attract investment, and provide a sustainable competitive advantage by identifying growth opportunities.
Think of your business model as a living asset of the company. It is healthier to update regularly to keep abreast of future trends and obstacles. If you plan to raise funds or seek partnerships, active business model innovation can show stakeholders that you can adapt to and meet changing market needs.
Common business model types
Four main business models describe most transactions between customers and companies.
The business-to-consumer (B2C) business model refers to the trade between businesses and individual consumers. For example, you buy a T-shirt from an online retailer. Although this includes physical business, it is also linked to e-commerce or e-retailing.
Business-to-business (B2B) refers to any trade that occurs between two companies. For example, a SaaS (Software-as-a-Service) company sells software to another company. Relative to companies that sell at the retail level, wholesale retailers usually fall into this category.
As a retailer, a brand can also include business-to-business services. For example, a coffee brand can sell coffee beans to customers on its website, but it can also sell them to coffee shops in bulk (B2B).
The consumer-to-consumer business model is that one consumer sells products or services to another consumer. For example, you sell second-hand notebooks on Facebook Marketplace. Individual sellers usually start selling online trading platforms and then open an online store to build a brand and make more profits.
The rise of the creator economy has led to a surge in consumer-to-business (C2B) companies. This business model refers to consumers selling their products or services to companies or organizations. If you want to be an internet celebrity or a photographer who sells photos online, this is the business model you will use.
Examples of popular business models
Business models can take many forms, including different manufacturing and transportation methods. Let’s look at some unique e-commerce business models that you can use to start your business.
※Face the consumer
Dropshipping is the cheapest option for starting a new business. It attracts those who tend to reduce costs as much as possible but are less concerned about profits. Dropshipping is also a good business model for those who do not want to hold and manage inventory.
※Low startup cost. The most significant advantage of dropshipping is the lower startup cost. Because you never have inventory, there is no inventory cost, which is usually the biggest expense for a new e-commerce company.
※low risk. Because you have not purchased the inventory in advance, you will not bear the risk of holding unsellable goods.
※Simplify sales. The shipping partner will take on the task of picking, packaging, and transporting the products for you. The drop shipping option provides convenience and efficiency so that you can manage your business from anywhere in the world.
※The competition is fierce. Because the entry barrier for agent delivery is shallow, many people are certainly doing it. The competition is fierce, and it isn’t easy to differentiate yourself.
※Low profit. Lower profits make it difficult to compete with paid advertising space, which means you have to rely more on building content, services, etc. Low profit also means that you have to sell a lot to make a good profit.
※Inventory synchronization (postponed orders). Because you rely on someone else’s inventory, you may send a shipment request to the wholesaler, but the product is sold out. This exceeded the average delivery time will harm retailers.
Your profit is the difference between the price paid by the customer and the price charged by the forwarder. Usually, the profit rate of delivery is shallow, about 20%.
The risk of potential financial loss of forwarding is shallow because you buy inventory in advance and don’t have to worry about shipping products. Additional threats come from meager profit margins and fierce competition. A low-profit margin means that you have to sell a lot of goods to get a good profit.
The success story of dropshipping
Subtle Asian Treats is a famous shipping company on Shopify. They sell cute plush toys and AirPods, and iPhone cases. It was founded by young Malaysian entrepreneur Tze Hing Chan, aiming to follow bubble tea in Asia.
The brand provides people with unique products at fair prices, attracting thousands of bubble tea fans in the field. It also excels in building social media visibility, sharing user-generated content, and attracting customers of any budget.
Making products is a standard method for many enthusiasts. Whether it is jewelry, fashion, or natural beauty products, creating new products by yourself can accurately control the quality and brand, but at the price of restriction, Time and Scalability.
The main costs of making your products include purchasing raw materials, storing inventory, and labor. However, the most crucial point is that not all products can be made by hand. Your product choices are limited to your skills and available resources.
This option is suitable for DIY people who have unique ideas, produce products on their own, and have available resources. Making your products is also ideal for those who want to maintain complete control over product quality and branding and those who want to keep startup inventory costs low.
※Low startup cost. When making your products, you usually do not need to produce many products in advance, as you have to buy in large quantities in advance when someone else makes the products on your behalf. In this way, you can enjoy relatively low production costs. For many e-commerce companies, these costs account for most of their startup costs.
※Brand control. Making your products means you can create any brand you want without restrictions.
※Price control. Closely related to brand control is your ability to price products in the way you see fit.
※Quality control. When making your products, you can strictly control the quality to ensure that they live up to the expectations of you and your customers.
※Flexibility. Making your products can provide your business with the most significant degree of Flexibility. You can adjust the quality, function, and even the entire product anytime, anywhere.
※ Time-consuming. Depending on your specific product choice, making your product can be a time-consuming process, allowing you to focus on building your business in less time truly.
※Scalability. When your business takes off, making your products can become a problem. Although you can choose to ask the manufacturer for help when scaling up, if your customers want your products to be handmade, this may not be easy or possible.
※Limited product selection. As mentioned earlier, your choice of potential products is limited by your skills and available resources. This will vary from person to person.
The success story of Producer
Old World Kitchen was originally a family business, selling door-to-door locally. It has gone through a period of growth, during which Etsy is the best choice to bring the company online.
This brand specializing in handmade kitchenware hopes to expand further but to do this, it needs to have complete control over price, brand, and quality, which Etsy cannot provide.
After switching from Shopify to Etsy, the brand’s online conversion rate rose sharply. It can also cooperate with relevant brands to increase prices while remaining loyal to selling handmade products.
Producing your products is a good thing for those who have unique ideas or changes in existing theories. It is also suitable for those who have verified their product market and are confident in their sales prospects. This is important because production requires the largest upfront capital investment.
You can look at production from two perspectives: OEM label and white label.
OEM products are manufactured by manufacturers and sold under the name of the enterprise. The company controls everything about the product, from the packaging method to the appearance of the label. OEM labels are best for brands that want to create unique products.
White label products are manufactured by a manufacturer and sold to them under the brand names of different retailers. They are generic products that can be sold to a broader customer base.
※The unit cost is the lowest. For the production industry, it is not uncommon to obtain the most subordinate unit cost and the most significant profit for your product.
※Brand control. Letting others produce your product means that you can build your brand around it without being restricted by others.
※Price control. While building your brand, you can also set a price for your products.
※Quality control. Unlike agent delivery or wholesale purchase, you can have more control over the quality of the final product when producing your products.
※Minimum order quantity. The startup cost of the initial order can be pretty high. Depending on the price of your product and manufacturer, your inventory investment may easily reach thousands or tens of thousands of dollars.
※Trouble for the manufacturer. Nothing can stop your business more than being deceived by an overseas manufacturer.
※ Time to start and run. Production may be a long process of prototyping, proofing, improvement, and production. If you plan to cooperate with overseas manufacturers, the difficulties of this process may be magnified or even extended due to language, distance, and cultural barriers.
When producing your products, your profit margins will vary greatly depending on the product, manufacturer, and order volume. However, under normal circumstances, compared with other bulk purchasing and forwarding methods, producing your products will bring you the greatest profit potential.
If you want to get up and dash or sell various products and brands, buying products wholesale is a good choice. Wholesale offers a wide range of opportunities because there are many products available for Wholesale.
※Sell mature products. Wholesale purchases are generally less risky. You face a brand that has been validated in the market, so you will not risk wasting time and money to develop a product that no one wants.
※Brand familiarity. Brands that have matured in sales can help you position your business by creating a halo effect around your brand.
※Product differentiation. Selling mature products may be good for you or bad for you because these products are available from multiple retailers, so you need to put in more effort to differentiate yourself and persuade potential customers to buy from you.
※Price control. Selling other brands means that you have to abide by its rules in specific procedures. Some brands will implement price controls to prevent you from offering discounts on their products.
※Inventory management. When buying wholesale, you may have to purchase a minimum order quantity for each product. The minimum order quantity will depend on the product and the manufacturer; however, you will have to store and hold the inventory and manage the stock to reorder.
※Deal with supply partners. If you have a range of products, dealing with multiple supply partners may be difficult. Requirements may vary by vendor.
Compared with agent delivery, wholesale profits are usually good. We will introduce them later, but they are not as good as production profits. Wholesale may be seen as a safe zone between production and forwarding. Although each situation has its unique features, wholesale merchandise resold at retail prices usually has a 50% profit margin.
There are still risks in wholesale purchases. Wholesale requires the purchase of inventory, but there is no guarantee that you will be able to see it. Perhaps the most significant risk comes from figuring out how to distinguish yourself from many other retailers selling the same products.
The success story of wholesaler
Pernell Cezar Jr. and Rod Johnson founded BLK & Bold to help the local community by selling coffee. The company pledged to donate 5% of all profits to programs designed to assist youth programs, improve workforce development, and eliminate youth homelessness.
BLK & Bold uses wholesale and direct-to-consumer channels to promote sales. Its main wholesale partners include coffee shops, restaurants, offices, and co-working spaces and hospitality providers such as boutique hotels, Airbnb, and bed and breakfast.
Partners can provide various indoor roasting blends, organic specialty coffees, and seasonal teas and customize coffee and tea experiences.
On-demand printing is a way to sell customized products that feature your design. You only need to design, and when a customer orders a product with that design, a third-party printing service will make, package, and ship the order.
Similar to drop shipping, this model reduces the cost of entering online sales. You do not need to pay product fees before the transaction is facilitated, so there is very little upfront investment. This frees up funds that can be used for marketing and advertising strategies.
When printing on demand, everything from printing to packaging to shipping is handled by the printing partner.
※Create products quickly. After creating the design, you can make the product in a few minutes and sell it in the online store.
※Automated transportation. Your supplier does transportation and distribution. After facilitating the transaction, you are only responsible for providing quality customer service.
※The upfront cost is lower. Because you don’t hold any inventory, you can easily add and delete products, test new business ideas, and build products for niche markets.
※Less control over transportation. Transportation costs can become very complicated because the transportation costs of different products are often additional. If you want to create a great out-of-the-box experience, the options may be limited.
※Limited customization. The content you can customize depends on the supplier and product. When deciding which product to customize, you must determine the essential cost, printing technology, and available size.
On-demand printing is also an excellent business model for creativity because of the wide variety of products. You can sell the following products:
※Canvas prints and posters
On-demand products usually have lower profit margins, depending on your pricing strategy and customer acquisition costs. But for those who are new to e-commerce or want to test new sources of income for existing businesses, this is an excellent low-risk business model.
The success story of printing on demand
Liz Bertorelli, the founder of Passionfruit, really wanted a French fighting dog. In 2013, she set a goal for herself: if she could make an extra $5,000, she would buy one.
Although she had a full-time job at the time, to achieve her goal quickly, she founded Passionfruit, an online on-demand T-shirt printing company.
Fortunately, Liz achieved his goal in just a few months. Eight years after a dog completely changed its name, her sexual minority clothing brand and e-commerce store were vibrant. The sales of her “protecting transgender children” T-shirts have soared, just as they were on “Saturday Night Live.”
A digital product is a type of non-physical asset or media that can be repeatedly sold and distributed online without restocking. These products usually come in downloadable, streamable, or disseminated digital files, such as MP3, PDF, NFT, videos, plugins, and templates.
The upfront costs of creating digital products can be high, but the variable prices of selling these products are relatively low. After the asset is produced, the cost of delivering it to the customer will be meager.
※Lower management costs. You will not hold any inventory or accumulate any shipping costs.
※Scalability. The order can be delivered immediately, allowing you to complete the order efficiently. As your business grows, you can easily convert tasks to automation to save time.
※Extensive product supply. You can use various ways: the free model, which provides products with free upgrades, pays monthly subscriptions to exclusive content or authorizes the use of your digital products. You can build a business that revolves entirely around digital products or integrate them into your existing business.
※Good prospects. You will have a tremendous opportunity to develop your business and make an impact around e-learning. The industry is expected to be worth US$374 billion by 2026.
※The competition is fierce. People may find free alternatives. You must consider your goals, provide quality products, and know-how to create your brand to be successful.
※Piracy and plagiarism. You are at risk of being stolen by people and reusing your product as their own.
※Sales restrictions. For example, according to the commercial policies of Facebook and Instagram, you can only sell physical goods through them.
Because your income does not depend on owning physical assets, you do not need to make any large-scale upfront investment for the digital product business. This also means that you can charge lower prices than physical competitors. Also, the absence of recurring costs of goods and services means that you retain most of your profits.
The direct-to-consumer business model means that you can sell products directly to consumers without wholesalers, drop shippers, or third-party retailers such as Amazon. As the development of the multi-channel retailer model slows down, this new business model is becoming more and more popular.
Think of the latest popular brands: Warby Parker, Barkbox, Bonobos, Casper. What do they have in common? DTC business model. Even brands like Apple and Tesla are using mobile commerce as their primary channel for DTC sales.
These brands eliminate the hassle of research and selection from hundreds of competing brands, making the customer’s entire shopping experience easier.
※Have customer relationships. When someone shopped at a retailer like Nordstrom and bought a Canadian goose jacket, they became a Nordstrom customer, not a Canadian goose customer. Brands cannot communicate with these customers, cannot send them updates via email, and cannot establish relationships with customers. Direct selling can help you have more connections and increase customer lifetime prices.
※Collect customer data. Direct selling allows you to collect first-party data to personalize customer communication and experience.
※Higher profits. You don’t have to share profits with any third-party distributors.
※Get feedback faster. Since you can communicate directly with customers, you can easily collect feedback to improve the product and customer experience.
※Direct distribution costs. No one will share freight or storage fees. DTC companies need to make more upfront investments to make their business run smoothly.
※There is no built-in audience. One of the benefits of working with retailers is that customers can find your products more efficiently. If you are a new brand, you must promote yourself. You will not benefit from the dealer’s experience or sales force.
By directly interacting with customers, you can maintain control over the product and its performance. Although it may take some time to establish a reliable distribution channel, direct selling is an intelligent business model that can build a loyal customer base and improve long-term profitability over time.
The success story of DTC
Handmade leather shoes and “Made in Italy” are closely linked. Consumers wearing this kind of shoes usually accept its high price, thanks to the industry is full of distributors, agents, dealers, and retailers.
It wasn’t until 2013 that the Milanese shoe startup Velasca began to get involved in this field. Its goal was to rewrite the industry by directly connecting consumers with shoe manufacturers.
Velasca was born from a small chat between co-founders Enrico Casati and Jacopo Sebastio in the back seat of a taxi. It has developed into a successful DTC brand, selling hundreds of thousands of shoes in more than 30 countries.
By 2025, the subscription e-commerce market is expected to reach $473 billion. The subscription business model usually charges customers monthly or yearly recurring fees for using products or services. The subscription model can help companies take advantage of ongoing customer relationships. If they continue to see the value in your favor, they will continue to pay you.
Whether you are an e-commerce company or an online educator, you can develop a subscription business across multiple industries, including:
Monthly subscription box
The recurring revenue model can bring higher revenue and stronger customer relationships. Although it is a subscription member, the longer the customer uses your product or service, the more valuable it will be to them.
※Predictable income. The recurring monthly payment helps you forecast sales, plan inventory, and understand how much you need to reinvest to grow your business.
※Have more cash on hand. Receiving monthly payments in advance means your startup has more cash flow (and ideas).
※Loyal customers. Regular purchases can give you a deeper insight into customer behavior, so you can continue improving the product and allowing customers to repurchase more products.
※Easier cross-selling and up-selling opportunities. The more customers use your product, the more trust you can build with them. This makes it easier to sell other products to them because they already know you provide value.
※High risk of attrition. One of the disadvantages of the subscription business model is customer churn. You must keep people interested and involved so that they can continue to pay you.
※Various products. If it is not changed frequently, the product will become boring. Netflix adds and removes movies every month. Trunk Club promises to invest in your changing style over time. You need to keep the product fresh to maintain the subscription business.
※Small problems, big problems. Most subscription services provide customers with the same services at the same time each month. Although this may seem simple, as long as there is a small problem in your system, it will quickly become a big problem if you don’t plan to solve it.
The success story of Subscription
There are many forms of subscription companies. B2C e-commerce retailers can add a subscription model to their products, similar to the famous online socks brand John’s Crazy Socks. 22-year-old John Cronin founded the company, and since its establishment in 2016, it has grown into a multi-million dollar company.
The brand offers monthly socks clubs, and the company founder John selects his favorite high-quality socks for subscribers every month. Each package has a thank you letter from John, some sweets and a discount card for future orders. Besides, 5% of each Subscription will be used to support Special Olympics.
Find a successful business model
Most products belong to one of these core business models. Depending on your product or niche, you may not be able to decide which e-commerce business model to choose.
This largely depends on the type of product you plan to sell. Some products will naturally fall into specific categories. However, your final sales model will partially define and shape your entire future business plan.
Use the different business models described above as a springboard to build a foundation on which you can rely. Then, continue to innovate in how to deliver value to customers. You will soon witness the effects of good business models and start your entrepreneurial path in the right way.