When you’re starting a business online, you have a lot of choices to make. Outside of the product you choose to sell, one of your biggest decisions is what business model to pursue.
In this article, we’ll share a high-level breakdown on the eight major choices to consider when starting your business, so you can make the best decisions possible right from the beginning.
It’s important to understand each of these methods in order to make the right choice for your small business. There are pros and cons to each of the methods and, depending on your product, market, and cost structure, one may be more suitable for you and your business than the others.
Discover the right business model for you 🏗️
What is a business model?
The term “business model” refers to a company’s core framework for operating profitably and providing value for customers. The features of a good business model explain the customer value proposition and pricing strategy. It identifies the products and services a company offers, its target market, and future expenses.
Business models are essential for both new and established businesses. They help companies understand their customers, keep employees motivated, attract investment, and provide a sustainable competitive advantage by identifying opportunities to grow.
Think of your business model as a live asset for your company. It’s healthy to update it regularly to stay on top of trends and obstacles ahead. If you’re planning to fundraise or look for partnerships, active business model innovation shows stakeholders you can adapt and meet changing market demands.
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Common business model types
There are four main types of business models that describe most transactions between customers and businesses.
The business-to-consumer (B2C) business model refers to commerce between a business and an individual consumer. For example, when you buy a shirt from a retailer online. While this includes brick-and-mortar business, it’s also become associated with ecommerce, or etailing.
Business-to-business (B2B) refers to any commerce between two businesses. For example, when a SaaS company sells software to another company. Wholesale retailers typically fall under this category, versus companies that sell at a retail level.
Brands can also include business-to-business offerings as a retailer. For instance, a coffee brand can sell its beans to shoppers on its website (B2C), but also sell in bulk to coffee shops (B2B).
The consumer-to-consumer business model is when a consumer sells a product or service to another consumer. For example, when you sell a used laptop on Facebook Marketplace. Individual sellers often begin selling on online marketplaces then start an online store to build a brand and capture more profits.
The rise in the creator economy led to a spike in consumer-to-business (C2B) companies. This business model refers to when a consumer sells their own products or services to a business or organization. If you want to become an influencer or a photographer selling photos online, this is the type of business model you’d use.
Top business model examples
Business models can take a variety of forms involving different manufacturing and shipping methods. Let’s look at some unique ecommerce business models you can use to start your business.
- Digital products
- Direct to consumer
Dropshipping is far and away the least expensive option for starting a new business. It attracts people who prefer to keep startup costs as low as possible and are less concerned about margins. Dropshipping is also a great business model for someone who doesn’t want to hold and manage inventory.
- Low cost to start. The biggest advantage of dropshipping is the low startup cost. Because you're never carrying inventory you have no inventory costs, which generally are the most substantial expense for a new ecommerce business.
- Low risk. Since you don’t actually purchase your inventory upfront, you aren’t taking the risk of holding items you can’t sell.
- Streamline sales. Dropship partners will take on the tasks of picking, packing, and shipping your product for you. The dropship option provides convenience and efficiency, so you can manage your business from anywhere in the world.
- High competition. Because dropshipping has such low barriers to entry, you can bet that a lot of people are doing it. Competition is stiff and it’s hard to set yourself apart from the crowd.
- Low margins. Low margins makes it difficult to compete with paid advertising space, which means you’ll have to rely more on building content, service, etc. Low margins also means you have to sell at significant volume to make decent profit.
- Inventory syncing (back orders). Because you’re relying on someone else’s inventory, the occasion may arise where you place a shipment request to the wholesaler but the product is sold out. This longer than normal delivery time can reflect badly on the retailer.
Your profit is the difference between what the customer pays and the price the dropshipper charges you. Typically, with dropshipping your profit margins are slim, around 20%.
Dropshipping is low risk in terms of potential financial loss because you never buy inventory upfront nor do you have to worry about shipping products. Additional risk comes in the form of very slim margins and high levels of competition. Slim margins mean you have to move a lot of units to make decent profit.
A dropshipping success story
Subtle Asian Treats is a top dropshipping business on Shopify selling cute plushies and cases for AirPods and iPhones. It was founded by Tze Hing Chan, a young Malaysian entrepreneur, to jump on the bubble tea trend happening in Asia.
The brand attracted thousands of bubble tea fans from the area by giving people a unique selection of products at a fair price. It’s also done a great job at building awareness on social media to share user-generated content and appeal to customers with any budget.
- What is Dropshipping?
- How to Start a Dropshipping Business: A Complete Playbook for 2021
- The Best Dropshipping Products to Sell in 2021 (And Ideas to Market Them)
- Dropshipping Fulfillment: Understanding the Supply Chain and Fulfillment Process
Making your product is a common approach for many hobbyists. Whether it be jewelry, fashion, or natural beauty products, making new products yourself allows for precise control over quality and your brand but comes at the cost of limitations, time, and scalability.
The primary costs associated with making your own products include the purchasing of raw materials, the storage of inventory, and labor. The most important thing to note here though is that not all products can be made by hand. Your product choices are limited to your skills and available resources.
This option is for the do-it-yourselfer, someone who has their own unique ideas, can physically produce the goods themselves, and has the resources available to do so. Making your own products is also for people that want to maintain full control over the product quality and their brand and who have the desire to keep startup inventory costs low.
- Low startup costs. When you make your own products, you generally don’t have to produce a large number of units upfront to have on hand like you would have to purchase if you were having your products manufactured. This allows you to enjoy relatively low production costs, which for many ecommerce businesses make up the bulk of their startup expenses.
- Brand control. Making your own product means you can create any brand you wish with no limitations.
- Price control. Going hand in hand with brand control is the ability to price your products as you see fit.
- Quality control. When making your own products, you can closely control the quality, ensuring they live up to your expectations, as well as those of your customers.
- Agility. Making your own products can give you the greatest level of agility for your business, letting you adjust quality, features, and even the entire product on the fly.
- Time consuming. Depending on your exact product choice, making your own products can be a time-consuming process, leaving you less time to focus on actually building your business.
- Scalability. Making your products can become an issue when your business takes off. Although you have the option to look to a manufacturer for help as you scale up, this might not be easy or possible if your customers have come to expect your products to be handmade.
- Limited product choices. As mentioned prior, your choices of potential products are limited to your skills and the resources you have available to you. This will vary from person to person.
A maker success story
Old World Kitchen began as a family-owned business selling door-to-door in its local area. It went through a period of growth where Etsy was the best move for getting the business online.
The brand, which specializes in handcrafted kitchen utensils, wanted to expand further, but to do that, it needed full control over pricing, branding, and quality control—things Etsy couldn’t offer.
After moving from Etsy to Shopify, the brand saw a sharp increase in online conversions. It was also able to partner with relevant brands and increase its prices, all while staying true to selling goods made by hand.
- How I Build and Sell Handmade Products in My Spare Time
- The Business of DIY: 14 Things to Make and Sell Online
Manufacturing your product is good for those people with a unique idea or a variation of a currently existing idea. It's also for people that have validated the market for their product and are fairly confident that it will sell. This is important, as manufacturing will require the greatest financial investment upfront.
You can look at manufacturing through two lenses: private label and white label.
A private label product is created by a manufacturer and sold under the businesses name. The business controls everything from what goes in the product, how it’s packaged, and what the labels look like. Private label is best for brands who want to create unique products.
A white label product is created by one manufacturer and sold to various retailers under their own brand names. They are generic products that you can sell to wider customer segments.
- Lowest cost per unit. It’s not uncommon for manufacturing to garner the lowest cost per unit, giving you the greatest margins on your product.
- Brand control. Having your product manufactured means you can build your own brand around it and aren’t constrained by others.
- Price control. Along with the ability to build your own brand comes the ability to set your own prices for your product.
- Quality control. Unlike dropshipping or purchasing wholesale, when you manufacture your own product you’re in more control of the quality of your final result.
- Minimum order quantities. The startup costs required for initial orders can be quite high. Depending on the costs of your product and the manufacturer, your inventory investment can reach thousands or tens of thousands of dollars, easily.
- Trouble with manufacturers. Nothing will bring your business to a halt like being scammed by an overseas manufacturer.
- Time to get up and running. Manufacturing can be a long process of prototyping, sampling, refining, and production. The difficulty of this process can be amplified, even extended, if you plan on using an overseas manufacturer, as language, distance, and cultural barriers can arise.
When you manufacture your product, your margins can vary greatly based on the particular product, the manufacturer, and order quantity. Usually however, manufacturing your own product gives you the greatest margin potential over other methods, like purchasing wholesale and dropshipping.
- How to Find a Manufacturer or Supplier for Your Product Idea
- Alibaba Dropshipping: How to Safely Buy and Source Products from Alibaba
Purchasing products wholesale is a good option if you want to get up and running quickly or if you want to sell a variety of products and brands. Wholesaling provides a wide range of opportunities, as there are many products available for wholesale.
- Selling established products. Buying wholesale is typically lower risk. You’re dealing with brands that are already validated on the market, so you don’t run the risk of wasting time and money developing a product no one wants.
- Brand familiarity. Selling already established brands can help position your business by creating an aura effect around your own brand.
- Product differentiation. Selling already established products can work for you as well as against you. Because the products are available from multiple retailers, you'll need to fight extra hard to differentiate yourself and convince potential customers to purchase from you.
- Price control. Selling other brands means to some extent you have to play by their rules. Some brands will enforce price controls to prevent you from discounting their products.
- Inventory management. When purchasing wholesale you will likely have to purchase a minimum order of each product. The minimum order will depend on the product and manufacturer, however, you will have to stock and hold inventory as well as manage that inventory for re-order.
- Dealing with supply partners. If you’re carrying an array of products, dealing with multiple supply partners can become difficult to manage. Requirements may vary from supplier to supplier.
The margins for wholesale are typically good compared to dropshipping, which we’ll cover later on, but not as profitable as manufacturing. Wholesale might be considered a safe middle ground between manufacturing and dropshipping. Although each case is unique, it’s typical to see a 50% margin on wholesale goods resold at retail pricing.
Buying wholesale still carries risk. Wholesaling will require the purchase of inventory with no guarantee that you can see it. Perhaps the greatest risk comes from figuring out how to differentiate yourself from the many other retailers selling the same products.
A wholesale success story
Pernell Cezar Jr. and Rod Johnson founded BLK & Bold with the goal of helping local communities through selling coffee. The company pledges 5% of all profits to programs that assist youth programs, improve workforce development, and eliminate youth homelessness.
BLK & Bold leverages wholesale and direct-to-consumer channels to drive sales. The majority of its wholesale partners include coffee shops, restaurants, offices and co-working spaces, and hospitality providers such as boutique hotels, Airbnbs, and classic bed and breakfasts.
Partners can offer various in-house roasted blends, organic speciality coffees, and seasonal teas, and can request a custom coffee and tea experience for their customers.
- How to Create a Wholesale Channel and Sell to Other Retailers
- Handshake: A New Way to Do Wholesale on Shopify
- Bean to Bar to Business: The Story Behind Soul Chocolate
Print on demand
Print on demand is a way to sell made-to-order products that feature your designs. You simply make the design and, when a customer orders a product with the design, a third-party printing service creates, packs, and ships the order.
Similar to dropshipping, this model reduces the cost of entry into selling online. You don’t have to pay for a product until you make the sale, so there is little upfront investment. This frees up funds you can put toward your marketing and advertising strategies.
When using print on demand, everything from printing to packing to shipping is handled by your printing partner.
- Create products quickly. Once you create the design, you can make the product and sell it in your online store in minutes.
- Automated shipping. Shipping and fulfillment is handled by your supplier. After you make the sale, you’re only responsible for providing great customer service.
- Lower cost upfront. Since you don’t hold any inventory, it’s easy to add and remove products, test new business ideas, and create products for niche markets.
- Less control over shipping. Shipping costs can get complicated, as they often vary for different products. Your options also may be limited if you want to create a standout unboxing experience.
- Limited customization. What you can customize depends on the vendor and the product. You’ll have to determine base costs, printing techniques, and available sizes when deciding which products to customize.
Print on demand is also a great business model for creatives because the offerings are endless. You can sell products like:
- Duffle bags
- Yoga leggings
- Face masks
- Watch bands
- Canvas prints and posters
- Throw pillows
On-demand products typically yield thinner profit margins, depending on your pricing strategy and customer acquisition costs. But it’s a good low-risk business model for those new to ecommerce or who want to test new revenue streams for their existing business.
A print-on-demand success story
Liz Bertorelli, founder of Passionfruit, really wanted a French bulldog. In 2013, she set a goal for herself: if she could make an extra $5,000, she would get one.
Even though she had a full-time job at the time, she started Passionfruit, an online print-on-demand t-shirt company, to meet her goal quickly.
Fortunately, Liz reached that goal in a matter of months. Eight years, one dog, and a full rebrand later, her LGBTQ+ apparel brand and ecommerce store are alive and well. And, her “Protect Trans Kids”' t-shirt sales surged after one just like it was featured on Saturday Night Live.
- Print-On-Demand: A Low-Risk Way to Sell Custom T-Shirts, Books, and More
- A Canvas for Creativity: Here Are 10 Print-on-Demand Products You Can Sell (Without Holding Inventory)
- 10 Print-On-Demand Companies for Selling Your Own Custom Products
A digital product is a nonphysical asset or media type that can be sold and distributed online, repeatedly, without restocking inventory. These products often come in the form of downloadable, streamable, or transferrable digital files, such as MP3s, PDFs, NFTs, videos, plug-ins, and templates.
The upfront costs of creating a digital product can be high, but the variable costs of selling them is comparatively low. Once an asset is made, it’s incredibly cheap to deliver to customers.
- Lower overhead costs.You don’t hold any inventory or run up any shipping charges.
- Scalability. Orders can be delivered instantly, letting you be hands-off with fulfillment. As the business grows, you can easily convert tasks into automation to free up time.
- Extensive product offerings. There are various routes you can take: a freemium model where you provide products for free with upgradable features, monthly paid subscriptions for access to exclusive content, or licenses to use your digital products. You can build a business solely around digital products or incorporate them into your existing business.
- Good future outlook. You have a huge opportunity to grow your business and impact with e-learning, an industry expected to be worth $374 billion by 2026.
- High competition. People can probably find free alternatives to your digital products. You’ll have to consider the niche you target, provide superior products, and know how to build your brand in order to succeed. It's helpful to do a SWOT analysis of your competition to find an edge.
- Piracy and theft. You’re at risk of people stealing and reusing your products as their own.
- Selling restrictions. For example, you can only sell physical products through Facebook and Instagram according to their commerce policy.
Because your income doesn’t depend on owning physical assets, you don’t need any large-scale upfront investment for a digital product business. It also means you can charge lower prices than physical competitors. Moreover, there is no recurring cost of goods and services, which means you retain most of the profits.
The direct-to-consumer business model means you sell products directly to consumers, without wholesalers, middlemen, or third-party retailers like Amazon. It's a new business model gaining traction as the multichannel retailer model slows down.
Think about the latest trending brands: Warby Parker, Barkbox, Bonobos, Casper. What do they all have in common? A DTC business model. Even brands like Apple and Tesla are leveraging mobile commerce as a main channel for DTC sales.
These brands eliminate the hassle of researching and choosing from hundreds of competing brands, making the entire shopping experience easier for customers.
- Own the customer relationship. When someone shops at a retailer like Nordstrom and buys a Canada Goose jacket, they become a customer of Nordstrom, not Canada Goose. The brand can’t communicate with these customers, email them updates, or do anything with the relationship at all. Selling direct helps you own more relationships and increase customer lifetime value.
- Collect customer data. Selling direct lets you collect first-party data you can use to personalize customer communications and experiences.
- Higher profits. You don’t have to share profits with any third-party distributors.
- Get feedback faster. Since you can communicate with customers directly, you can easily collect feedback to improve your products and customer experience.
- Costs of direct distribution. There’s no sharing of shipping or storage costs. DTC businesses need to invest more upfront to get their business operating smoothly.
- No built-in audience. One advantage of working with retailers is that customers can find your products easier. If you’re a new brand, you’ll have to market yourself. You also don’t benefit from the distributor’s experience or salesforce.
By interacting with your customers directly, you retain control of your products and their performance. While it may take time and money to establish reliable distribution channels, selling direct is a smart business model for building a loyal customer base and improving profitability over time.
A DTC success story
Handcrafted leather shoes and “Made in Italy” go hand in hand. Consumers who wear this type of footwear have traditionally accepted its high price tag—thanks to an industry flooded with distributors, agents, resellers, and retailers.
It wasn’t until Velasca, a Milanese footwear startup, stepped into the scene in 2013, with a goal to disrupt the industry by connecting consumers directly to shoemakers.
Velasca was born out of a casual conversation between co-founders Enrico Casati and Jacopo Sebastio in the back of a taxi. It has since grown into a blossoming DTC brand, selling hundreds of thousands of shoes in over 30 countries.
- Direct-to-Consumer Ecommerce: Data, Benefits, & 12 Enterprise Examples [Shopify Plus]
- Drinking in The Haus: How Funding Helped This Booze Brand Grow 500% During The Pandemic
- How This Direct to Consumer Brand Disrupted The Handcrafted Footwear Industry
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The subscription ecommerce market is projected to reach $473 billion by 2025. A subscription business model charges customers a recurring fee—usually monthly or yearly—to access a product or service. Subscription models help businesses capitalize on ongoing customer relationships. If they continue to see the value in your offer, they’ll continue to pay your fee.
It doesn’t matter if you’re an ecommerce business or online educator, you can start a subscription business across many industries, including:
- Streaming services
- Monthly subscription boxes
- Membership communities
- Food services
A recurring revenue model can lead to higher revenues and stronger customer relationships. Though a subscription membership, the longer customers use your product or service, the more valuable it becomes to them.
- Predictable revenue. Monthly recurring revenue helps you forecast sales, plan inventory, and understand how much to reinvest for business growth.
- More cash on hand. Receiving monthly payments upfront means more cash flow (and piece of mind) for your startup.
- Loyal customers. Regular purchases give you deeper insight into customer behavior, so you can continually improve products and keep customers coming back for more.
- Easier cross-selling and upselling opportunities. The more customers use your products, the more trust you build with them. This makes it easier to sell additional products to them, because they already know you provide value.
- High risk of churn. One drawback of the subscription business model is churn. You have to constantly keep people interested and engaged for them to keep paying you.
- Varied products. Products become dull if they don’t change often. Netflix adds and removes movies every month. Trunk Club promises to invest in your changing styles over time. You need to keep products fresh to maintain a subscription business.
- Small issues, big problems. Most subscription services give their customers the same thing, at the same time, every month. While this seems simple, if there’s one small kink in your system, it can turn into a big problem fast if you don’t plan for it.
A subscription success story
Subscription businesses come in many forms. B2C ecommerce retailers can include a subscription model in their offering, similar to John’s Crazy Socks, a popular online sock brand. The company, built by 22-year old John Cronin, has grown into a multimillion dollar business since its launch in 2016.
The brand offers a Sock of the Month Club where John, the founder of the company, will pick his favorite high-quality socks for subscribers each month. Every package gets a thank-you note from John, some candy, and discount cards for future orders. Moreover, 5% of each subscription goes to support the Special Olympics.
- How to Start a Subscription Business: A Brief Guide
- How to Launch a Subscription Box: Lessons From a Successful Korean Beauty Business
Finding a successful business model
Most products will fall into one of these core business models. Depending on your product or niche, you may not have the option of which ecommerce business model you choose.
Much depends on the type of product you plan to sell. Some products will naturally fall under certain categories. However, the model you end up selling under will partially define and shape your entire business plan going forward.
Use the different business models above as a launchpad to building a foundation you can rely on. Then, continue to innovate how you deliver value to your customers. You’ll soon start to see the impact of a good business model first hand and kick off your path to entrepreneurship the right way.
Illustration by Pete Ryan
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Business models FAQ
What are examples of business models?
- Print on demand
- Digital products
What are the 4 types of business models?
- Business-to-consumer (B2C)
- Business-to-business (B2B)
- Consumer-to-consumer (C2C)
- Consumer-to-business (C2B)
What is a good business model?
How do I choose a business model?
- Determine the value of your product to the customer segment.
- Confirm that your product solves the problem.
- Choose a proven business model example.
- Create a business plan or business model canvas.
- Test your sales channels and distribution strategy.
- Run a pilot program.
- Collect customer feedback.