Every time I look at my Facebook feed, I see a brand new business guru pushing yet another ecommerce business model. And while most of these methods of making money online are in fact legit, the sheer number of choices is pretty overwhelming.
- Should I start my own website?
- Should I sell on Amazon?
- Should I do retail arbitrage?
- Should I sell wholesale?
While I don’t consider myself a “guru”, I do get quite a few emails from readers asking for advice on what type of business to start.
But here’s the thing.
Every time I publish an ecommerce article that encourages my readers to start their own business, I find myself tiptoeing across a very fine line.
Certain business models are very “easy” to start but much harder to make money with.
Other models are extremely profitable but have a much steeper learning curve or upfront investment.
On one hand, starting an ecommerce business is simple, relatively risk free and doesn’t require a lot of start up capital.
But on the other hand, running a successful business requires a ton of hard work, perseverance and a little bit of luck.
The problem is that when I emphasize the enormous amount of work that is required to launch a company, I tend to turn people away from starting a business.
However when I emphasize the simplicity, people tend to harbor unrealistic expectations and expect a quick path to riches.
So what’s the right business model to pursue?
All The Ecommerce Business Models Compared And Explained
What I hope to accomplish in today’s post is to discuss the pros and cons of 8 different ecommerce business models and let you decide for yourself.
Whatever you do, never pursue a business because of how “easy” it is to start. Instead, make sure you consider other factors like long term sustainability and probability of success.
Note: When I use the term “eCommerce business”, I’m referring to selling physical products online and not digital products
As you read about the various business models below, keep in mind that…
Some of these business models have low barriers to entry, low costs, low overhead.
Some of these business models are super competitive.
Some of these business models require a decent sized upfront investment.
Some require inventory. Some require a website etc…
Anyway, I’m going to discuss the pros and cons of all of the popular ecommerce business models based on the following criteria.
Each will be rated on a scale of 1-10 with 10 being the best.
- Ease Of Getting Started – How easy it is to launch your business. Does it require any technical knowledge? Upfront investment etc…
- Profit Velocity – How quickly you can make money?
- Sustainability and Risk – The defensibility of your business and its long term potential to create sustainable income.
- Level Of Competition – How hard is it to make money and can someone easily launch a competitor?
Now in case you haven’t been able to tell from reading my blog and listening to my podcast, I believe that the more work that you have to put in to be successful, the more sustainable your business will be in the long run.
In other words, if something is too good and too easy to be true, it probably is:)
Dropshipping With Your Own Website
The first business model I want to talk about is dropshipping with your own website.
For those of you out there who are unfamiliar with the term, dropshipping is when you put up a website to take orders online without carrying any inventory.
Instead of fulfilling products yourself, you send orders over to your vendor and your vendor is responsible for shipping the order to the end customer.
Dropshipping offers the following advantages
- No inventory – Because the vendor is storing all the goods, you don’t have to worry about inventory at all
- No order fulfillment – The vendor is responsible for shipping the product to the end customer
- Low start-up costs – All you need is a basic ecommerce website which can cost as low as $5/month.
- Simple to start – If you use a platform like Shopify, it’s straightforward to launch a website.
Here how it works.
First you must contact wholesalers directly to get approved as a retailer. Then once you are approved, you instantly have access to hundreds of products that you can list in your shop.
Because you’re selling everything on your own website, you’re in full control of your store brand.
But the downside of dropshipping is that your margins are super low because someone else is storing all the inventory and doing all the fulfillment for you.
Typically, the profit margins for dropship stores are anywhere from 10 to 30%.
Editor’s Note: To learn more about dropshipping from a dropshipping veteran, make sure you listen to this podcast episode with Andrew Youderian.
As a result, paid advertising becomes challenging because you don’t have enough profit margin to pay for traffic. Often times, you are limited to running Google Shopping campaigns only.
Furthermore, competing with other shops that are physically carrying inventory is difficult because your margins are less and you have less pricing flexibility (This can be mitigated somewhat by MAP pricing).
Also, because you’re selling other people’s goods, you aren’t in control of your product mix.
Let’s say your vendor decides not to carry a certain product any longer. Well guess what? You can’t carry that product either.
In addition, inventory and customer support can be a pain because you’re not in control of the fulfillment process.
Let’s say a customer contacts you to complain that they haven’t received their product. Because you are the face of the company, you have to take the blame and fix the issue even though it’s technically not your fault.
Sometimes vendors can be late and unreliable. And what sucks is that a poorly chosen vendor can destroy your store reputation.
Managing inventory issues can become problematic as well. Sometimes you might sell a product that is out of stock with your vendor so you have to make sure you are in sync with their warehouse.
Overall, what makes dropshipping fragile is that you’re heavily dependent on your vendors for your business reputation.
A vendor can cancel the arrangement at anytime. They can discontinue products. They can be unreliable with order fulfillment and because the margins are lower, search engine optimization becomes a huge factor of your success.
In other words, you will have to invest heavily in content marketing and depend primarily on Google for your sales and traffic.
Overall, here’s how I rate dropshipping on a scale of 1-10.
- Ease Of Launch – 8 – All you need is a website and wholesale vendors
- Profit Velocity – 3 – It can take quite a while to build up your search rankings and your margins are not sufficient to pay for most advertising methods.
- Sustainability and Risk – 6 – You own your own brand but you’re also at the mercy of your vendors and Google. Amazon sellers will also exert downward pressure on your margins.
- Level Of Competition – 3 – Lower margins and competition from other sellers selling identical product makes it a challenge to maintain profits.
Dropshipping From Amazon To EBay
The next business model I want to talk about is dropshipping from Amazon to eBay. This model is also known as EBay/Amazon arbitrage.
Here’s how it works.
First, you find products on Amazon that are selling higher on eBay. Then, you steal the images and the product copy from the Amazon product and post an eBay listing that is significantly higher in cost.
The reason this business model works is because people who shop on eBay tend not to shop on Amazon. And for some reason, there are lots of people on eBay who are not aware that they can buy the same goods cheaper elsewhere.
As soon as the auction closes on EBay, the seller then purchases that exact same product on Amazon and has it shipped over to the eBay customer.
In other words, you are leveraging Amazon fulfillment and the cheap prices on Amazon to make a quick Buck on eBay.
What’s funny about this is that the product usually ends up being delivered in an Amazon branded box which can confuse eBay customers.
Even though I absolutely detest people who do this, there are many attractive qualities to this business model.
- There are zero overhead costs.
- There is no website required.
- You don’t need to find vendors.
All you need is an EBay account and an Amazon purchasing account. In a nutshell, the process involves listing an item on eBay at a higher price and then buying that product on Amazon and having it shipped.
It’s very easy to get started but be aware. You may get nasty letters from brand owners because selling this way increases their support costs.
Sometimes people will purchase the item on eBay, receive an Amazon box, check on Amazon to find the same product at a lower cost and then complain to the brand owner instead of the EBay seller.
As a result, brands hate people who use this business model.
The other big downside is that you constantly have to be on the lookout for new products and you have to watch the prices on Amazon like a hawk.
In addition, because brand owners hate this practice, they can complain about image and copyright theft and potentially have eBay shut you down.
In fact, I’ve heard about several cases where EBay sellers have been banned for copyright or trademark infringement.
Overall, this business model is great for cash flow but has poor long-term business potential.
You constantly have to be on the search for new things and you’re not really adding any value at all.
Here’s how I would rate this model on a scale of 1-10
- Ease Of Launch – 10 – You don’t need anything.
- Profit Velocity – 2 – You can make sales immediately. However the margins will be low so you’ll have to make it up with volume.
- Sustainability and Risk – 1 – You are completely at the mercy of both Amazon, Ebay and the sellers you dropship from.
- Level Of Competition – 2 – Lower margins and competition from other sellers doing the same thing makes it a challenge to maintain profits. It becomes a pure volume game. There’s also an online course out there that is flooding the market with these types of sellers.
Retail arbitrage or RA for short, has become an increasingly popular business model in the last few years.
In fact, I had Jessica Larrew on the podcast and she was making 6 figures per year with this model.
Here’s how it works.
Most liquidation stores often sell products at rock bottom prices that are far lower than Amazon retail prices.
By buying up all of the clearance and liquidation merchandise from stores like Marshalls, TJ Maxx etc…, you can profit by selling these goods on Amazon FBA at much higher prices.
The reason this model works is because a lot of consumers don’t have access to liquidation outlets and are willing to pay full price on Amazon.
What’s nice about this model is that…
- You don’t need a website
- You can leverage Amazon’s huge marketplace for instant sales
- There are few startup costs except for your inventory.
But the major downside is that your business is 100% at the mercy on Amazon and you need to constantly find or go shopping for new goods to list on the platform.
This basically means that retail arbitrage is very difficult to scale because you end up spending most of your time hunting for bargains.
In addition, Amazon has introduced new rules that strongly discourage this business model going forward.
For example, Amazon has been preventing sellers from selling certain brands without express approval from the manufacturer.
So let’s say you just invested $2000 in a killer clearance sale of Legos. “Lego” is a brand that Amazon recently banned sellers from selling.
So guess what? All of a sudden, you’re stuck with $2,000 worth of inventory that you can’t get rid of because you can no longer sell on Amazon.
In fact, all it takes is one such incident to shut your business down and for that reason I believe that retail arbitrage is at great risk right now.
Amazon is placing more focus on supporting brands which does not favor those who sell other people’s products.
I’ve also heard that Amazon is charging a large upfront cost to sell certain brands on the order of thousands of dollars.
They are also enforcing GS1 barcodes purchased from valid outlets so your barcode must now match your brand.
Bottom line, I would probably avoid retail arbitrage for now until things settle down.
- Ease Of Launch – 8 – All you need to do is go shopping and sign up for an Amazon account
- Profit Velocity – 5 – You can make money right away but it’s not easily scalable
- Sustainability and Risk – 2 – Amazon’s new policies make this model risky
- Level Of Competition – 5 – Low margins and competition from other sellers selling identical product makes it a challenge to maintain consistent profits.
Dropshipping On Amazon
Dropshipping on Amazon is very similar to dropshipping on your own website. The main difference of course is that you are dropshipping the goods directly to Amazon customers.
Here’s how it works.
First, you must find distributors willing to dropship on your behalf. Then you list the item on Amazon as merchant fulfilled.
Whenever you make a sale on Amazon, you contact the distributor and the distributor ships your product to the end customer.
It’s important to note that this business model does not use FBA (fulfilled by Amazon) so you are responsible for filling the order in a timely manner.
Overall, this model is attractive because..
- There are no start-up costs
- You don’t need a website
- You can instantly have hundreds of products at your disposal that you can immediately sell on Amazon
Now the problem with this business model is that anyone can contact the exact same wholesaler and get access to the exact same product mix.
The other thing that’s extremely dangerous about this business model is that Amazon has very stringent requirements on seller quality and on-time shipments.
So let’s say it’s Black Friday and you sell a whole bunch of product. But when you go and contact the distributor, all of a sudden they tell you that the item is out of stock due to an inventory glitch.
Well guess what? Amazon is probably going to ban your account.
Anytime a shipment is cancelled or delayed, you run the risk of getting banned from ever selling again.
In episode 108 of my podcast, my friend John Rampton was making millions of dollars dropshipping on Amazon but lost his 7 figure business overnight.
You should definitely listen to the episode for all the details but basically he got banned because an inventory glitch with his dropshipper resulted in a bunch of sold orders that could not be fulfilled.
He literally lost millions of dollars in potential revenue overnight.
Overall, it’s really easy to start a drop-shipping business on Amazon and the profit potential is pretty good but this business model is just way too risky because you’re depending on someone else for your Amazon reputation.
The past has also shown that Amazon can be quick with the ban hammer because the consumer always comes first.
Here’s how I rate this business model.
- Ease Of Launch – 8 – You just need a dropship vendor
- Profit Velocity – 7 – You can make instant sales albeit at low margins
- Sustainability and Risk – 1 – An inventory glitch or late shipments can get you banned.
- Level Of Competition – 3 – Low margins and competition from other sellers selling identical product makes it a challenge to maintain profits.
Selling Private Label Goods On Amazon
Private labeling is the act of placing your own brand or label on a product that you manufacture yourself.
And the way this business model works is that you first have to find a manufacturer to produce products for you in bulk where they allow you to use your own brand. In most cases, this vendor can be found overseas or in China via Alibaba.
Once you’ve produced your product, you then ship your goods off to Amazon FBA and take advantage of Amazon’s huge marketplace to sell your goods.
Because you are manufacturing and buying your products in bulk, there is a much larger upfront cost.
As a result, I recommend that you be willing to invest a minimum of $500-$1000 on your initial inventory.
But in general, there are relatively few barriers to entry.
- You don’t need a website to sell.
- You don’t need to generate your own traffic because you’re leveraging Amazon’s Marketplace
- There are no inventory requirements
Overall, this business model is a bit more challenging than the others because it often requires interaction with a vendor outside of the country.
But what’s nice about private labeling is that you own your brand. You own your products and the margins are super high (>66%).
And because Amazon’s marketplace is so large, you can make a lot of money very quickly.
The main downside is that you’re dependent on Amazon and you are subject to all the negatives of selling on their marketplace
For example, any reasonably successful listing will attract piggybackers and hijackers.
You will also have to constantly monitor your products for negative feedback and product quality issues because Amazon could ban your products or your account at any time.
Also because you’re investing a large sum up front for inventory, getting banned on Amazon could cause you to get stuck with a lot of unsellable product.
I’ve been selling private label products on Amazon for a couple years now and because the market place is so cutthroat, I’ve also encountered many unscrupulous sellers.
And some of the these sellers have been downright low and despicable.
But overall, selling private label products is very attractive because you own the brand, you own the product and you have the option of selling on your own website.
Selling a private label product is by far the most sustainable way of making money on Amazon of any of the other models presented in this article.
- Ease Of Launch – 6 – You need to find a manufacturer and invest a decent chunk of change on inventory
- Profit Velocity – 10 – You can make instant sales
- Sustainability and Risk – 7 – There’s a possibility of getting banned by Amazon but you own the brand.
- Level Of Competition – 8 – Outside of product sourcing and niche selection, there’s not much to it.
Selling Wholesale Goods On Amazon
Another business model that is closely related to selling private label products on Amazon is selling wholesale products using FBA.
To sell wholesale products on Amazon, you first must find distributors who offer a variety of products for sale.
Then, you essentially buy those products (usually from your home country with low minimums) and list them on Amazon using FBA. Margins are typically on the order of 50%.
Similar to private labeling there are very few barriers to entry. You don’t need a website and all you need to do is find wholesalers with large product catalogs who will allow you to sell on their behalf.
Once you’ve signed on with a few vendors, you can instantly have hundreds of products to sell at your disposal. Overall, the main advantage over private labeling is that you can often buy in extremely low unit quantities and the turnaround time is super fast.
In many cases, the minimum order is on the order of hundreds of dollars.
But the main downside to this business model is that you are selling the exact same product as other sellers which will eventually lead to eroding prices.
Sure, you could find a profitable product to sell on Amazon temporarily. But since everyone has access to the same products, it’s just a matter of time until your wholesale cash cow gets discovered and the prices sink.
This is exactly what happened to my friend Lars. For about a year, he was the only seller of a gardening product on Amazon. But as soon as it was discovered, it was only a matter of months before the prices plummeted reducing his profits to nothing.
Here’s how I rate this business model
- Ease Of Launch – 7 – All you need is a wholesale vendor and an Amazon account
- Profit Velocity – 7 – You can make instant sales
- Sustainability and Risk – 3 – Because your product portfolio is being sold my multiple sellers, your prices will plummet sooner or later.
- Level Of Competition – 3 – There are many courses pushing this model right now and it’s only a matter of time before it gets saturated.
Selling Wholesale On Your Own Website
Selling wholesale on your own website and carrying inventory is what most people think of as the traditional ecommerce business model.
The way domestic wholesale typically works is that margins tend to be in the 50% range and you sell using your own website.
You also need to handle your own inventory or use a 3PL(3rd party logistics firm).
Like selling wholesale on Amazon, you can contact a wholesaler and receive access to a bunch of products right away without a large upfront cost.
If your wholesalers are in the US for example, the minimum order is often on the order of $100.
The best part is that you are in control of your own store brand but competing with other shops selling the exact same item will be challenging.
Here’s how I rate this business model.
- Ease Of Launch – 5 – You need to find a wholesale vendor and invest in your own website.
- Profit Velocity – 4 – You must pay for ads and build up your own traffic. Margins are on the order 50%
- Sustainability and Risk – 6 – You are in charge of your own brand and shopping experience but under pricing pressure from other vendors and Amazon
- Level Of Competition – 5 – Finding a unique value proposition can be difficult. You will likely need to differentiate yourself with content marketing.
Selling Private Label Products On Your Own Website
Finally, the last business model with the highest long-term potential is selling your own private label products on your own site.
This involves manufacturing your own products and driving traffic to your own online store.
Along with selling private label on Amazon, this requires some upfront capital and investment but also carries the greatest long-term sustainability.
By having your own branded products on your own branded website, you are in control of everything.
You can set pricing and define your product however you want and you can never get banned by anyone.
So in the long run if you’re willing to put forth the work selling your own branded products on your own site, it’s the most secure way to run an e-commerce business.
- Ease Of Launch – 4 – You need to source your own goods and launch a website
- Profit Velocity – 7 – You must pay for ads and built up your own traffic. Margins are on the order 66%+
- Sustainability and Risk – 10 – You are in charge of your own brand and shopping experience..
- Level Of Competition – 9 – Finding a unique value proposition is much easier when you are in full control.
Putting It All Together
Now that you have an overview of the different ecommerce business models, it’s important to note that there’s nothing that excludes you from combining the different models.
For example, just because I run my own site does not mean that I can’t sell on Amazon as well.
Just because I sell my own private label products does not mean that I can’t drop ship a couple of products on my site too.
And just because I sell private label products on Amazon does not mean that I can’t sell wholesale products on Amazon too.
I suggest that you give all of these business models a try to see which one fits your personality.
Overall, I always recommend selling private label products both on Amazon and on your own online store. Because if you’re going to spend the effort launching an online store, you may as well choose a business model that is sustainable in the long run.
For our ecommerce business, we sell private label products on Amazon, we sell private label products on our own store and we also sell a few wholesale products as well.
In the past, we’ve also dropshipped a few items to fill out our store.
The key thing to remember is that the more effort you place on your business, the more defensible it will be.
If there’s one key takeaway here, it’s that you don’t want to be tempted into doing something quick and easy because chances are it won’t be sustainable.
With retail arbitrage, Amazon is already changing the rules by preventing any arbitrary seller from selling certain brands.
Just be conscious of your cash flow needs and decide whether you’ll be satisfied with temporary cash vs something built to last.
One of the main reasons I like running an online store that sells private label products is because the barriers to entry are higher.
Because I have to source products and establish relationships with vendors, that is one extra task that a competitor has to do in order to copy my business idea.
Because I manufacture many of my own products and control my own website, it’s much more difficult for someone else to carry the exact same products that I carry or to copy my site.
The additional barriers to entry means that once my business is off its feet, it has more staying power in the long run.
Editor’s Note: I cover most of these business models in my course on how to start a profitable online store. So if you’re interested in learning how to start your own ecommerce store, then
- How Much It Costs To Start An Online Store And Should I Dropship Or Carry Inventory
- Should You Sell On Amazon And Will It Cannibalize Your Online Store Sales?
- The Dangers Of Selling On Amazon And Horror Stories From Real Amazon Sellers
- Dropshipping Vs Carrying Inventory – An Inside Look At The Financials Of Two Live Online Shops
- Create A Profitable Online Store In 5 Easy Steps
Have you read these?
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- 3 Ways Our Business Improved By Doing Nothing – Sometimes You Just Have To Stick Around And Good Things Will Happen
- The Tradeoffs Of Owning Your Own Business Vs Working A Day Job
- How To Use Comparison Shopping Engines To Increase Sales For Your Shop
- Are You Cut Out To Be An Entrepreneur?