Hey Boomers!
Chances are you’ve bought something from Amazon or another online marketplace before, but how could you get into this game as an entrepreneur? E-Commerce is just 6% of all retail sales in the United States as of 2014, and there’s still a lot of room for this market to grow.
It’s Terry from Build My Online Store and today we’re going to talk about the different business models within the physical products space, also known as E-Commerce.
In a previous podcast episode I did with Charlie, we went into this topic briefly but didn’t get into the nitty gritty details. In this post, we’ll go more in depth on the different business models within e-commerce so you can decide which one is right for you.
Drop-Shipping
This is one of the easiest ways to get started with the least financial requirement. As a drop-shipper, you are essentially an online retailer for an existing product and do not own any inventory.
An agreement would be made with the supplier or distributor to make you an authorized retailer. When a sale comes through a website that you created, the supplier charges you a wholesale price for the product and ships it to the customer from their warehouse. You just run the website, generate traffic, and take a cut of the sale.
It’s a very hands-off approach to getting started in e-commerce, but the challenge is finding a profitable market and driving traffic because anyone can start a website and sell the same products.
Because a typical sale nets you around 10-25% margins, most dropshippers that find success sell very specialized and expensive products that cost over $300 in order to make the math work.
Some examples are chandeliers, boat motors, massage tables, or hunting equipment.
Manufacturing
This comes with the highest risk and rewards when it comes to starting an online store. You are creating a new product, designing it, manufacturing it, and ultimately selling it as the brand owner. You will need to lay out money for inventory, storage, warehousing, customer service, marketing, and more. But the rewards have more upside potential than drop-shipping because you control on manufacturing, branding, and pricing.
You can also list your products on other channels such as Amazon or eBay for extra traffic and sales. Over the long-term, there is much more room to scale this business model compared to drop-shipping as you are building a brand that is hard to copy or steal.
However, it will take time, money, and energy to scale as you are starting from zero because online businesses now are cheap to start, but expensive to grow.
This is the model that I’ve ultimately used for my own online store at ballerleather.com, where we sell ultra-slim handmade leather accessories like card holders and wallets. We import the leathers from Italy and France, handcraft them at a small boutique shop in Asia, and send them to a warehouse in New Jersey that ships the orders for me.
Private Labeling
This model is a middle ground between manufacturing and drop-shipping. If you’ve ever bought the Kirkland brand of vitamins, peanuts, or trash bags from Costco, this is private labeling in action. It involves taking an existing product on the market and rebranding it into your own through the packaging, messaging, and pricing.
Private labeling allows you to enjoy the benefits of not having to manufacture or design your own product from scratch while owning a brand. However, like dropshipping, other people can do the same thing relatively easily. If you look at the market for vitamins, over the counter medicine, or health supplements, you’ll notice a vast array of choices that the consumer can choose from.
Amazon And Ebay
One of the easiest ways to get started is to just sell your old books and stuff laying around the house on Amazon or eBay. It’s not going to make much money, but it’s a great way to learn how an online store works through receiving orders, packaging, shipping, and handling customer service.
Some folks are able to combine private labeling and using Amazon or eBay as the sales channel, but the operation is quite complicated and you must make sure the math works out in the end.
Both Amazon and eBay charge 15% listing fees when you make a sale, and when you take into account shipping, seller fees, and other costs, there is not much profit left unless you can manufacture your own product and can absorb that hit.
No Silver Bullet
As with starting any online business, there is no silver bullet that can guarantee your success and it will take a lot of hard work. Every business model has a learning curve whether you choose drop-shipping, manufacturing, private labeling, or listing on a marketplace.
I’m a big advocate of physical products over digital products because most of the things we consume on a daily basis are still physical – clothes, cars, computers, food, accessories, kitchenware, and more. People are used to buying real products online and this trend is not going to stop anytime in the future.
If you’re looking to start an online store in physical products, hopefully this breakdown has been helpful to you. You can find out more by checking out my podcast, where my co-host Travis Marziani and I talk about behind-the-scenes action on our stores every Sunday.
Feel free to get in touch me with via Twitter at @itsmerrylin or check out my online store at ballerleather.com. I’ll also keep an eye out in the comments section to answer any follow-up questions.
Cheers!
Terry Lin is an Ecommerce expert and the the host of the hit podcast, Build My Online Store. Terry helps emerging eCommerce entrepreneurs build their online stores, streamline their branding, and increase their sales. On his podcast, Terry interviews the best ecommerce industry experts about what it takes to to build a thriving online store.
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