e-commerce-business-models

E-Commerce Business Models In A Nutshell

We can classify e-commerce businesses in several ways. General classifications look at three primary categories:

  • B2B or business-to-business, where therefore a business sells to another company.
  • B2C or business-to-consumer, where a business sells to a final consumer.
  • C2C or consumer-to-consume, or more peer-to-peer where consumers sell to each other.

Rather than getting bogged down in too many classifications, we’ll very practically look at the revenue streams of several successful e-commerce businesses, and see if we can borrow any of those elements and apply them back to our e-commerce business model.

Amazon hybrid model

amazon-business-model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services,  Amazon AWS, Subscription Services, Advertising revenues and Physical Stores.

What can we learn from Amazon? Amazon is an interesting example, as it had the time to evolve over two decades.

So from Amazon, we can get what worked and see if that might work in building up our own e-commerce platform.

Amazon e-commerce, is structured around few lines, that make it solid:

Sell your own products to kick off the e-commerce

You might not know, but Amazon also sells a wide variety of brands that are owned by Amazon.

Therefore, over the years, the company internalized some of the successful products on the platform so it could gain better control over sourcing and perhaps customer experience.

Therefore, if you’re kicking off e-commerce, think of some simple products you can develop and start to sell to kick off the platform. And from there expand on third-party products

Host other physical stores that need a digital presence

In addition to that, Amazon hosts a wide variety of third-party products. Therefore, Amazon is an e-commerce platform, hosting other small e-commerce brands.

Here it’s important to offer a great hosting platform that works out well, and it’s smooth. And from there, you can build other revenue streams.

Transaction-based: Most of Amazon’s earnings as e-commerce is based on getting a commission on the transaction happening on the platform.

At the same time, Amazon also offers some related services. Thus, once the e-commerce has been kicked off, you can start offering some related services.

Build services on top of your e-commerce

Over the years, Amazon developed its fulfillment part, which comprises an inventory of products for third-party sellers, and shipping. When third-party e-commerce jin into Amazon fulfillment services, they don’t have any more inventory and delivery expenses, as they outsource them to Amazon.

However, they give up a good chunk of revenues, as Amazon will collect more from. the transaction.

When kicking off the e-commerce platform, and you have a critical mass of sellers, think of all the ways you can make their life easier (analytical tools, shipping tools, and so forth).

This will make them stick longer, and perhaps also create an additional revenue stream for your business.

Build membership services to abate shipping costs for customers

Building up also a related subscription-based service, on top of e-commerce, can be a great idea, to increase repeat customers, by making it more convenient to shop on e-commerce, by, for instance, abating the shipping costs.

That is what Amazon achieved with Prime, by offering a playlist of movies and entertainment (similar to Netflix).

You don’t have to go that far. All you need to do is to create a membership program, that gives access to special discounts and perhaps free delivery (we’ll see how Walmart has successfully implemented that).

Offer premium listings, or paid visibility

Once you do have kicked off the e-commerce you can also have it, in part subsidized, by other businesses selling their products. For instance, you can sell more visibility on e-commerce just like Amazon does. Indeed, Amazon e-commerce also has a successful advertising line, that enables better product placement and visibility.

eBay complex fee-based model

ebay-business-model
eBay core business is a platform business model that makes money from transaction fees happening through its marketplaces (eBay and StubHub). eBay also makes money through advertising on its classifieds marketplace and other services. The company primarily makes money by charging fees on successfully closed transactions.

eBay is also a great example, as the company makes money primarily through fees collected on successfully closed sales on eBay and StubHub.

In addition to that, eBay also built a classified ads platform and a few other seller services.

eBay is a classic example of an e-commerce platform, that enables people to sell any sorts of things. The company has a compelling value proposition, which the company expresses in:

  • Easy listing, with a quick and simple set up.
  • Free listing, as sellers, can have up to 50 items for free every month, and only pay when they sell.

In addition, eBay counts over 170 million buyers and a stable and secure platform.

fees-from-ebay

eBay collects fees in four ways:

Insertion fees as an entry-point

As explained on eBay:

When you list and sell items on eBay, we charge selling fees. There are two main types of selling fees: an insertion fee when you create a listing, and a final value fee when your item sells.

Therefore, the seller has 50 free per month products to feature, and beyond that, the fee for listing in mostly $0.35, but it can vary.

Final value fees to make it compelling to selers to join

In final value fees, the e-commerce platform only makes money if the transaction is closed. On the eBay case, those fees can be 10% or lower.

Listing upgrades as additional option

examples-of-listing-upgrades-from-ebay-website

With optional upgrades like international site visibility, larger photos, bold character, more space to images, and more, listing upgrades can be a great option for sellers and a good way for the e-commerce platform also to subsidize it.

Fees in selected categories and based on selling-volume

Fees are different for certain categories and depending on whether the seller is a low or high volume. Therefore, eBay has a more complex fee structure, built over the years, also based on its experience.

low-volume-seller
Example of fees for high-volume sellers, based on the vehicle category (eBay seller website).
fee-seller-ebay
Example of low-volume sales fees based on the vehicle category (eBay seller website).
optional-fees-ebay
Example of optional listing (eBay seller website).

Etsy simple fee model

etsy-business-model
Etsy is a two-sided marketplace for unique and creative goods. As a marketplace, it makes money via transaction fees on the items sold on the platform. Etsy’s key partner is comprised of sellers providing unique listings, and a wide organic reach across several marketing channels.

Etsy is an incredible example of a two-sided e-commerce platform, also called a marketplace, as it enables smooth interactions between creative and buyers.

etsy-two-sided-marketplace
category-suggestion-etsy

Etsy has a solid mechanism of category-suggestion when sellers are entering their items on the platform.

Etsy also has a very simple fee structure:

etsy-fee-structure

Etsy made its fee structure straightforward, and broken down in:

  • Listing fee.
  • Transaction and payment processing fee.
  • Offsite ads fee (only. for those who opt-in to Etsy offsite advertising program).

Etsy also offers seller tools to make their presence on the platform more valuable:

etsy-seller-tools
Seller tools are key elements of e-commerce platforms built to host third-party sellers.

GrubHub bidding system

grubhub-business-model
Grubhub is an online and mobile platform for restaurant pick-up and delivery orders. In 2018 the company connected 95,000 takeout restaurants in over 1,700 U.S. cities and London. The Grubhub portfolio of brands like Seamless, LevelUp, Eat24, AllMenus, MenuPages, andTapingo. The company makes money primarily by charging restaurants a pre-order commission and it generates revenues when diners place an order on its platform. Also, it charges restaurants that use Grubhub delivery services and when diners pay for those services. 

GrubHub has an interesting business model, comprised of several brands. There are a couple of things worth exploring for GrubHub:

  • The pre-order commissions charged to restaurants as soon as diners place an order on the platform. Therefore, the company generates revenues primarily when diners place an order; this commission is born by restaurants.
  • Bidding revenues: restaurants can choose their level of commission rate, at or above the base rate. A restaurant that pays a higher rate will have a higher prominence and exposure to diners on the platform.

Shopify subscription-based service

shopify-business-model
Shopify is an e-commerce platform enabling merchants to commercialize their products via a monthly subscription fee, and additional services provided by the platform. Its core business is subscription-based, even though in 2018, the company made over 50% of its revenues from another stream called merchant solutions.

Shopify is an e-commerce platform, that hosts other sellers’ websites. As such, it has a very simple pricing structure, made of three tiers:

shopify-pricing-tiers

Those pricing tiers are made of a few key elements:

  • Store’s features: store features comprise things like product uploads, support, SSL certificates, professional reports, and more.
shopify-features
  • Shipping: it comprises discounts which are higher for those with the more advanced plans.
shopify-shipping
  • Payment: fraud analysis, credit card rates that decrease with higher-priced packages.
shopify-payments

Connected Business Frameworks, Concepts And Tools

Blitzscaling Canvas

blitzscaling-business-model-innovation-canvas
The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.

Business Analysis Framework

business-analysis
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

Digital Marketing Circle

digital-marketing-channels
digital channel is a marketing channel, part of a distribution strategy, helping an organization to reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.

North Star Metric

north-star-metric
A north star metric (NSM) is any metric a company focuses on to achieve growth. A north star metric is usually a key component of an effective growth hacking strategy, as it simplifies the whole strategy, making it simpler to execute at high speed. Usually, when picking up a North Start Metric, it’s critical to avoid vanity metrics (those who do not really impact the business) and instead find a metric that really matters for the business growth.

Virtuous Cycle

virtuous-cycle
The virtuous cycle is a positive loop or a set of positive loops that trigger a non-linear growth. Indeed, in the context of digital platforms, virtuous cycles – also defined as flywheel models – help companies capture more market shares by accelerating growth. The classic example is Amazon’s lower prices driving more consumers, driving more sellers, thus improving variety and convenience, thus accelerating growth.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Growth Matrix

growth-strategies
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Marketplace Business Models

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c-business-model
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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