In this week’s article, we discuss the different types of eCommerce business models and what it takes to make each one profitable on its own.
Too often, a seller is profitable in one part of his business but loses money in another. When he looks at his business as a whole, he can be profitable but if he would analyze each part separately, he would find some parts aren’t profitable.
For example, we had a client that sold mainly on Amazon and sold on other marketplaces. He needed to hire an experienced employee to help him run his business. When we analyzed his numbers, we saw he wasn’t profitable on any of the other marketplaces because the new employee was only needed for the other marketplaces. If he would have only sold on Amazon, he wouldn’t hire this guy.
To avoid this, we need to analyze each aspect of your business separately and make sure that each is profitable.
Let’s explore the 4 main eCommerce business models in more detail and find out what it takes to make them profitable.
Here are the 4 main business models:
1. FBA-only seller
2. FBM & Multi-Channel seller
3. DTC brand
4. Combination of the above
Now, let’s take a closer look at the first model.
FBA Seller:
Is a seller who sells only on Amazon and uses Amazon’s fulfillment Centers to run his business.
What are the Pros of being an FBA seller?
- You have access to a lot of customers.
- You don’t need a warehouse or a team to run your business.
- You can find a lot of tools to help you see your numbers clearly.
- Most of your expenses are direct costs making it easier to be cashflow positive.
What are the Cons of being an FBA seller?
- Amazon fees are high, making it hard to be profitable.
- You are completely dependent on Amazon which makes your business riskier.
- Your customers are not really yours.
Bottom-line, to have a profitable FBA business you need a product with a strong profit margin and be willing to take the risk of being on amazon only.
Now let’s look at the next type of model.
FBM & Multi-channel Seller:
Is a seller who sells on a few online marketplaces and has a warehouse or 3pl to fulfill his orders. Usually includes FBM, Walmart, eBay, Esty, and other platforms.
What are the Pros of being a multi-channel seller?
- You get exposure to more customers.
- You are less dependent on Amazon putting your business at a lower risk.
- Other marketplaces have overall lower selling fees, making it easier to be profitable.
What are the Cons of being a multi-channel seller?
- Your overhead increases for payroll and warehousing making it harder to have positive cashflow.
- You need to put together a bigger operation.
- Your numbers are all over the place making it hard to know which channel is making or losing money.
- Your customers are not really yours.
Bottom-line, to have a profitable multi-channel business you need to sell a lot since your overhead expenses have increased.
Now let’s take a look at the third business model.
DTC brand:
Is a seller that sells his own products directly to his customers through his own website.
What are the Pros of being a DTC brand?
- You don’t have any selling fees, making it easier to have a higher gross profit margin.
- You are not dependent on Amazon making your business less of a risk.
- Your customers are yours and you can have them return and purchase again if you provide an excellent experience.
What are the Cons of being a DTC brand?
- You need to build a skilled team with a bigger operation.
- You have less exposure to the customers out there.
- Your overhead is very high.
Bottom-line, to have a profitable DTC brand you must drive traffic to your website and sell enough to cover your overhead, as well as build a strong team and operations.
Now, let us look at the 4th type of model.
Multi-type seller:
This is a seller who sells on FBA, FBM & multi-channel, and his own website.
What are the Pros of being a multi-type seller?
- Your business gets the most exposure and sells the most.
- You are not dependent on a single source of income making it less risky.
- You can build a strong brand presence.
- You can drive your Amazon customers to your own website.
What are the Cons of being a multi-type seller?
- You need to build a strong team.
- You’ll have a lot more overhead.
- Your numbers are all over the place making it hard to know if you’re making money or not.
Bottom-line, to have a profitable Multi-type seller business you need a lot of work and focus, along with a clear understanding of how each part of the business is performing.
The only way to really get a grip on each channel’s profitability is by creating a Profit and Loss report for each channel separately and see if each one on its own is profitable.
Hope this provides you with some insights. If you have friends that would find this article useful, please share it with them.
