Overview of eCommerce Business Models
The eCommerce industry has undergone great change since it’s rise in popularity during the 1990’s and early 2000’s. As the separation between offline and online has nearly disappeared, most companies adopt some sort of hybrid or omni-channel approach to marketing their products or services. This guide outlines the most popular types of eCommerce business models.
Given the wide range of business models and approaches, we’ve created this guide to help you quickly understand the various approaches, and think about how to best setup your own business, or how to financially evaluate an eCommerce business using a financial model.
Below is an illustration of the main types of eCommerce business models. The three highlighted in gold will be discussed in more detail.
The first main category in the top left of the diagram is marketplaces. These are the various places where sellers can list their products or services, with the marketplace operator providing a platform that connects buyers and sellers. The marketplace charges a transaction fee for it’s service. Classic examples include eBay (B2C and C2C), Amazon (B2C), Alibaba (B2B), and fiverr. Marketplaces can expedite buying and selling of both goods and services.
When building a financial model (there are various types of financial models) for a marketplace, it’s important to build the model starting with Gross Merchandise Value (GMV), which is the total value of goods and services transactions on the platform. From there, the commission structure determines revenue for the platform, and costs can vary widely depending on the business.
In most cases the sellers handle fulfillment (whether they pay for it themselves or charge the customer), but in some cases, such as Fulfilled By Amazon (FBA), the marketplace will also take care of delivery.
From a financial modeling perspective, it’s important to clearly map out the revenue model and expenses in a logical and easy to follow way.
In the direct model, retailers are responsible for finding their own customers and have full control over the customer experience. The direct business model typically requires a significant marketing spend and a means of driving traffic to the website. Unlike marketplaces which primarily just facilitate transactions, retailers often try to provide a curated experience for their customers and help guide them through a unique discovery process.
Retailers typically don’t own their own brands, and instead sell other companies’ brands. Given the pressure online retailers are feeling from both sides of the buying and selling environment (marketplaces offering the most competitive prices, and major brands now selling direct to customers), they are probably in the most challenging position of the eCommerce business models outlined in our diagram.
Brands are now using their own websites and social media accounts to sell directly to customers. A classic example of this is Nike, which has made their direct channel (their company website) a top business priority and expects it to be one of their largest revenue segments by 2020.
Brands are on the other end of the spectrum from marketplaces – they have the most focused selection, highest level of customized experience, and strongest connection with the customer. In comparison to other eCommerce marketplaces, they have a more limited selection, and also bear full responsibility for marketing and fulfillment of their products and services.
Winners and losers
There are pros and cons to each of the various business models, and while the size of the total eCommerce pie is still growing, there remains a massive divergence between winners and losers in today’s rapidly changing and increasingly global economy.
Online marketplaces and brands are best positioned to be winners, while retailers are most likely to be squeezed as they sit in the middle between brands and marketplaces.
At the end of the day, it all comes down to the customer lifetime value versus customer acquisition cost to determine if the eCommerce business model makes sense for a particular business. The ratio of lifetime value to acquisition cost will largely be a function of Return On Ad Spend (ROAS).
The focus for marketplaces will be price, service, execution, and selection. The focus for brands will be connection and relationships with the customer, exclusivity, and experience.
From a financial modelling perspective, it’s important to think how about the eCommerce business you’re modeling will benefit or struggle from the issues described above.
More eCommerce resources
As you think about the various types of eCommerce business models, and which is the best for your company – or working as a financial analyst, for the company you’re trying to value – the following resources can be a helpful guide: