It’s plain to see why ecommerce is all the rage nowadays. Global retail ecommerce revenues are projected to reach a staggering $7.4 trillion by 2025, representing nearly 22% of total retail spending worldwide. And those projections were made before the COVID-19 pandemic, which turbocharged online shopping’s growth as consumers flocked to the internet during lockdowns.

For entrepreneurs and small business owners, this presents an exciting opportunity to build an online store from scratch and grab a piece of the booming ecommerce market. Just imagine—your humble little website could be raking in thousands or even millions in sales each month!

But slow your roll before letting visions of dollar signs obscure the practical steps needed to make that dream a reality. Choosing the right business model is one of the most fundamental yet overlooked decisions when starting an ecommerce venture.

Not all online store strategies are created equal. The model you select will impact everything from your startup costs, inventory requirements, and operational expenses to your long-term profit margins and scalability.

For instance, do you want to hold inventory yourself or dropship products as needed? Will you resell finished goods or manufacture your own? What ecommerce software and fulfillment processes suit your product type? How much control do you want over branding and the customer experience?

This article will help you find the ideal approach by outlining the most common ecommerce models, along with the core pros/cons and considerations of each. My goal is to give you an in-depth understanding so you can determine the best fit based on your product, target customers, access to capital, and overall vision.

Ecommerce Business Model Options

There are a variety of ecommerce business models to choose from, each with its own advantages and disadvantages. Here are some of the most common models:

Dropshipping 

With dropshipping, you sell products from a third-party supplier or manufacturer, who then ships the order directly to the customer. This means you never have to handle or store inventory yourself.

When a customer places an order, you forward their order info to the supplier, who fulfills the order on your behalf. The supplier will also handle all returns and exchanges. You simply focus on marketing products and managing customer relations.

Wholesale  

A wholesale model involves purchasing inventory in bulk from suppliers at wholesale prices, then reselling the products at a markup on your online store. You handle sourcing, housing, and shipping products yourself.

This requires more upfront capital and storage space, but gives you full control over inventory, leading to higher profit margins. You also own the customer relationship end-to-end.

Manufacturing

If you manufacture your own products to sell online, you design products, oversee manufacturing operations, and sell directly to customers. 

This requires substantial upfront investment in R&D, materials, manufacturing equipment, and skilled labor. But you can control product quality and enjoy higher margins.

White Labeling 

White labeling involves purchasing finished products from a supplier, then slapping your own branding and logo on them to resell as your own. 

The products are manufactured by someone else, while you focus on branding, marketing, and selling. This takes less capital but gives you less control over inventory and production.

Subscription

With a subscription model, customers sign up for recurring delivery of products, usually on a weekly, monthly or annual basis. Popular subscriptions include meal kits, beauty boxes, and curated children’s products.

The benefit is predictable, recurring revenue. But subscriber acquisition and retention becomes critical. You also need systems for automated fulfillment.

Hybrid  

Many ecommerce sellers use a hybrid model, combining elements from multiple strategies. This provides flexibility to capitalize on multiple revenue streams.

For example, you may dropship hobby items but stock and ship your bestsellers yourself to improve profit margins. Or you might manufacture signature products but supplement with white labeled goods.

Key Factors to Consider

When selecting an ecommerce model, here are some important factors to consider:

Product Type

– What type of product do you plan to sell? Some models are better suited for certain products.

– For unique, handmade, or high-touch products, manufacturing or wholesaling may be best. 

– Mass-produced commodity items like phone cases suit dropshipping. Perishable goods work for subscriptions.

Target Customer 

– Who are you selling to? Business models should align with customer preferences.

– For deal-seeking budget shoppers, dropshipping may appeal more. Design-conscious shoppers may favor high-end branded goods.

Startup Costs

– How much funding do you have access to? Some models require more upfront capital.

– Dropshipping and white labeling have lower startup costs. Manufacturing and wholesale require more substantial inventory investments.

Profit Margins

– How much margin do you want to earn on each sale? Your fulfillment costs will impact this.

– Models like manufacturing and wholesale offer greater control over pricing and margins. But dropshipping margins are thinner.

Scalability

– How quickly do you want to scale your catalog and sales volume? Some models make this easier than others.

– Dropshipping and white labeling allow rapid expansion since you don’t have to house and manage inventory.

Fulfillment and Shipping

– Do you want to handle fulfillment and shipping yourself? This contributes to overhead expenses.

– Dropshipping and white labeling allow the supplier to handle fulfillment. Wholesale and manufacturing require you to take care of logistics.

Customer Experience

– How much control do you want over the post-purchase customer experience? This includes exchanges, returns, quality control, etc.

– Dropshipping and white labeling give suppliers more post-sale control. Wholesale and manufacturing put this in your hands.

Pros and Cons of Each Model

Now let’s explore the key upsides and downsides of each major ecommerce model in more detail:

Dropshipping

Pros:

– Very low startup costs – you can launch quickly

– No need to store inventory – reduces overhead

– Wide selection of products available – capitalize on trends

– Supplier handles fulfillment and shipping – less labor for you

Cons: 

– Low profit margins on each item 

– Limited control over product quality or shipping speed

– Can be hard to stand out from competitors dropshipping same items

Wholesale

Pros:

– Ability to control branding, product mix, quality

– Higher profit margins by pricing at your discretion

– You handle fulfillment – better customer experience 

– No reliance on suppliers for shipping and delivery

Cons:

– Requires significant upfront capital to stock inventory

– Storage costs for housing inventory 

– Labor-intensive to handle sourcing, stocking, shipping

– Risk of getting stuck with unsold inventory

Manufacturing

Pros:

– Full control over product design, quality, materials

– Higher potential margins by making goods in-house

– No reliance on third-party suppliers at all

– Can build a recognizable brand around signature products

Cons:  

– Very high startup costs for equipment, materials, labor

– Need expertise in manufacturing processes 

– Labor-intensive daily operations

– Risk of overproducing goods that go unsold

White Labeling

Pros: 

– Low startup costs – no need to design initial products

– Ability to focus on branding and marketing 

– Supplier handles manufacturing and fulfillment

– Rapidly test products under your own brand

Cons:

– Very low control over product quality or materials

– Low margins since not making goods yourself

– Little ability to differentiate beyond branding

– Can run into stock issues if supplier sells out

Subscription  

Pros:

– Predictable recurring revenue once customer base is established

– Receive regular payments without prompting every sale

– Can plan shipping and fulfillment in advance

– Opportunity for upsells/cross-sells with each shipment

Cons:  

– Requires big upfront investment to acquire customers

– Churn can erode revenue if subscribers cancel 

– Needs robust fulfillment operation for automated shipments

– Customers may fatigue of repeated deliveries 

Conclusion

When starting an ecommerce business, one of the most fundamental decisions you’ll make is choosing the right business model. Each approach has its own pros, cons, startup costs, operational considerations, and risk factors. 

Key determinants in the decision include your product type, target customer, access to capital, appetite for complexity, and desire for control over quality, branding and margins.

Dropshipping offers the easiest entry point with minimal startup costs, but less ability to differentiate. Manufacturing provides maximum control over products and profits, but requires deep expertise and substantial funding.

Wholesaling, white labeling and subscriptions are somewhere in the middle on the spectrum. Many businesses find success by starting with one model and evolving into a hybrid over time.

There’s no one-size-fits-all or inherently “best” model. You need to carefully assess your own goals, resources and risk tolerance to determine which strategy is right for your online store. With the right business model, you’ll be well on your way to ecommerce success.