When starting a business, you face many choices. Regardless of the product you choose to sell or your marketing strategy, one of the most important decisions you will make is the business model you will follow.
What is a Business Model?
A business model is the basic framework for a company to operate profitably and deliver value to customers. It explains the features of an effective business model, the value proposition to customers, and the pricing strategy. The model defines the products and services offered by the company, its target market, and future expenses.
Why Do Business Models Matter?
Business models are essential for both new and established companies. They help businesses understand their customers, motivate employees, attract investment, and provide a sustainable competitive advantage by identifying growth opportunities.
Business models are a living entity for your company. It is healthy to update it regularly to stay informed about upcoming trends and obstacles. If you plan to raise capital or partner with someone, active innovation in the business model shows stakeholders that you can adapt and meet changing market aspirations.
Common E-Commerce Business Model Types
There are four main types of e-commerce business models: business-to-consumer (B2C), business-to-business (B2B), consumer-to-consumer (C2C), and consumer-to-business (C2B).
1. Business to Consumer (B2C)
The business-to-consumer (B2C) model refers to commerce between a company and an individual consumer, such as purchasing a shirt from a brand’s website. B2C includes e-commerce and traditional retail stores.
2. Business to Business (B2B)
The business-to-business (B2B) model refers to any commerce between two companies. Wholesale transactions typically fall under this category. You can include B2B offerings whether you are an e-commerce company or a traditional store. For example, a coffee brand can sell its beans to consumers on its site (B2C) but can also sell them wholesale to coffee shops (B2B).
3. Consumer to Consumer (C2C)
The consumer-to-consumer (C2C) model, or peer-to-peer model, is when a consumer sells a product or service to another consumer. Selling a used laptop on Facebook Marketplace falls under this category. Individual sellers often start selling on online marketplaces and then start an online store to build a brand and achieve more profit.
4. Consumer to Business (C2B)
The rise of the creative economy has led to an increase in consumer-to-business (C2B) companies. This business model refers to when a consumer sells their own products or services to a company or organization. If you want to become an influencer or a photographer selling photos online, this is the type of business model you would use.
Examples of Business Models
Business models can take many forms and include different ways of manufacturing and shipping. Let’s take a look at some unique business models you can use to start your business.
1. Drop Shipping
Drop shipping appeals to those who want to keep startup costs as low as possible and do not want to worry about margins. It’s also a great business model for those who do not wish to hold and manage inventory. Drop shipping involves B2C commerce (when a consumer buys a product from your store) and also B2B commerce (the amount you pay the shipper to provide the product and fulfillment services on your behalf).
2. Retail
Physical retail is when you sell your products in person to consumers in a B2C business model. This can be in a traditional retail store or through temporary retailing such as pop-up stores, markets, and events.
3. Manufacturing or Production
Manufacturing your own product is suitable for those with a unique idea or a twist on an existing idea for a B2C or B2B business model. It is also fitting for those who may have already validated the market for their product. You can consider manufacturing through two lenses: private label and white label.
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Buying products wholesale is a good option if you want to start quickly or if you want to sell a variety of products and brands. Wholesale offers a wide range of opportunities, as many products are available for sale in bulk. Purchasing goods is a B2B transaction, while you can then sell them to consumers in a B2C business model.
5. Print on Demand
Print on demand is a way to sell products that feature your designs. This is common for B2C business models, but it also works for B2B models, such as gifts for clients or gift bags at conferences. In print on demand, you create the design, and when a customer orders a product with that design, the service provider prints, packages, and ships it.
6. Digital Products
A digital product is an intangible asset or type of media that can be sold and distributed online repeatedly without the need to restock inventory. These products come in the form of downloadable or streaming files, such as MP3 files, PDF files, videos, plugins, and templates.
7. Subscription
The subscription model charges customers recurring fees—typically monthly or annually—for access to a product or service. The subscription model helps businesses leverage ongoing relationships with customers. If they continue to see value in your offering, they will keep paying your fees.
8. Brokerage
The brokerage model is a business model that connects the customer with the product or service provider, acting as an intermediary between the two parties. Brokerage often appears in B2C and B2B business models, such as real estate or insurance brokerage, but it doesn’t appear much in e-commerce.
How to Create a Business Model
Your business idea may come first, in which case you will need to select a model that fits it. Alternatively, you might be tied to a specific business model and need to work backward to find an opportunity that fits that model.
Some companies play a role in one business model while others use a mix of business models to implement their vision. Regardless of your approach, here’s how to get started:
Understand Your Target Audience
Knowing who you want to sell your products to is an essential first step in market research. This tells you that there are enough people out there willing to buy your product, confirming demand in the market.
After understanding the size of your audience, you’ll also want to consider their background and behaviors to understand what motivates their purchasing behavior. You can leverage this information later when developing pricing, product development, marketing, and advertising strategies.
Identify the Problem You Solve
Once you have identified your audience, you should have a good understanding of their wants and needs. Dive deeper to consider the problem you are solving. For example, if you are selling jewelry—in this case, you may be solving your customers’ challenge of finding high-quality earrings at an affordable price or bracelets that they can wear in water without damage.
When you know the problem you are solving, you can begin to understand the value you provide to people. This will help you develop a value proposition to stand out from others and remain true to your original vision.
Create a Business Plan
The process of writing a business plan is essentially mapping out a plan for your business. The business plan will indicate what type of business model you will use, who your customers will be, where you will get the money to start, the backend functions of your operation, and how to promote and grow. The business plan will help ensure profitability by taking expenses, pricing, and other challenges into account.
As you go through this process, you may realize that many business models can work for your vision. This is not a problem—you don’t have to strictly fall into one category. You can operate with multiple business models under the same business. For example, you may sell clothing in a B2C retail store or on your website, but you may also sell wholesale orders to other retailers in a B2B wholesale model. Using a variety of business models can sometimes be the best way to achieve your goals.
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About Your Successful Business Model
Most products will fall under one of these basic business models. Depending on your product or niche, you may not have a choice regarding the e-commerce business model you choose.
A lot depends on the type of product you plan to sell. Some products may automatically fall into certain categories. However, the model in which you end up selling will define part of your identity and shape your entire business plan moving forward.
Use the different business models above as a launchpad you can rely on. Then, continue to innovate in how you deliver value to your customers. You will soon start to see the impact of a good business model, avoid one of the many common mistakes in business, and start your path to entrepreneurship in the right way.
Frequently Asked Questions about Business Models
What are the main types of business models?
There are four main types of business models: Business to Consumer (B2C), Business to Business (B2B), Consumer to Business (C2B), and Consumer to Consumer (C2C).
How can you build a business model?
You can build a business model by writing a business plan. A business plan will help you determine which business model is best for you.
What is a lean business model?
A lean business model is one that allows for agility and quick adaptability so that the business can pivot quickly when needed. It aims to help the business operate with minimal cash or inventory without running out of either.
What is the purpose of business models?
The purpose of business models is to clarify how commerce happens and money exchanges hands, who participates in each transaction, and how the company makes money.
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