What Is E-commerce Business? An Introduction and Examples

The rise of businesses utilizing e-commerce over the last 20 years has been incredible. Major retail stores are now receiving a large percentage of their sales from online shopping. If anything, this year has shown us that e-commerce is not going anywhere and how important it is to have an online business for consumers to access.

This will be a key component in the majority of businesses from physical products to services going forward. People love convenience and new technology is making it more efficient for businesses to reach and serve customers. Let’s run through the definition and some examples of the e-commerce industry.

e-commerece

The Definition of E-commerce Business

First off, what is the definition of e-commerce?

It’s commerce done via the internet. That’s it. Done.

Any company that you do business with or purchase their goods online is an e-commerce business. This includes activities such as buying your groceries online from Publix, getting clothes from Macy’s online, ordering furniture from Ikea, or getting your business set up through Legal Zoom.

There are countless ways we do business online through e-commerce. It’s completely changed the way we do business, especially with the advent of Amazon and similar distribution business models.

Small businesses can greatly benefit from an online space since they can access more potential customers and you don’t always need a lot of overhead when running an online business. There are plenty of online business models where you can keep costs low and maintain healthy profit margins.

If you have a product or service that people want, it can improve your marketing and sales greatly. If you are a business owner or thinking about starting a business, the e-commerce industry can be a great choice.

E-commerce Business Beginnings

Per the Merriam Webster Dictionary, the word “e-commerce” was first used in 1993. I remember getting one of our first computers with a 56k dial-up modem and Prodigy web browser around that time. How things have changed.

If you recall the early 90’s, the internet was still very much the wild west with a litany of different companies and people trying to figure its capability. I’m only going to go off my personal knowledge here, which is lackluster at best, but two of the major players that were able to capitalize on the e-commerce space were Amazon and eBay. As you know, they are still around today. I recall Webvan which was an early online grocer that would deliver people groceries but they didn’t last.

Thousands of companies began to go online and try to figure out how to make a business out of it. This eventually lead to the tech bust in the early 2000s due to anybody and everybody getting funding that had an idea and was a tech company during that time. Little regard was given to the fundamentals of their businesses. That is a separate story though.

If you want to see a high-level overview of the e-commerce industry you can see a good timeline here.

E-commerce Business Types

If you take a step back to think about all the different types of businesses we use that are online it is pretty incredible. A lot of people focus on who the business is and who they are selling to – like business to business (B2B) or B2C (business to consumer). To me, this is common sense and revolves around who you’re marketing towards.

E-commerce Business Models

I would like to highlight the more nuanced attributes of e-commerce different business models or ways to structure a business to make money.

White label

This is where you are licensing your product to other companies to put their name on it. An example of this would be a software company that allows you to rebrand their product as your own, such as a client portal or SEO service. This way the customer doesn’t know any different and thinks it is your own. It helps with branding and consistency.

If you have a product or service that businesses need, you could license it to them for a fee for them to brand it as their own. This helps the business owner be more cost-effective and gain access to the white label companies’ resources and knowledge.

Private label

Private label is when you are going directly to the manufacturer for products. This is popular in cosmetics, apparel, and phone accessories industry. This allows the business owner to control the product design and branding by directly dealing with the manufacturer. This can keep costs down and therefore help achieve higher margins. You can deal with overseas manufacturers or domestic depending on your need.

Manufacturing

This is where you’re actually doing the manufacturing. The design, creation, and distribution of the product is on you. In this instance, you could be creating products for the private label companies with who you can do business with online. This is obviously much more expensive and requires more capital than other e-commerce businesses. Computer or tech companies may manufacture their own products.

Wholesale

Wholesalers are either producing the product or buying it in bulk to then turn it around and sell it to the retailers who then mark it up. Typically, retailers are reaching out to wholesalers to buy in bulk to achieve higher discounts to keep costs down. They then sell this product online to the end consumer.

Walmart is a great example of someone who has a ton of buying power and buys products in massive quantities at massive discounts. They then are able to pass these savings on to their customers and offer products that are cheaper than their competitors.

Distribution

Distribution is exactly what it sounds like. You are responsible for holding inventory or shipping the products out to customers. Amazon’s distribution or fulfillment centers are great examples of this. Another product is going from the supplier to the distribution center which is then sent to the customer.

Businesses need help getting their products delivered so if you can figure out a way to assist with this both quickly and cost-effectively you could have a great business on your hands.

Dropshipping

Dropshipping is where an online store can ship their goods directly to the consumer without having to carry the inventory. They are using a third party supplier to order the product and get it delivered.

Typically, margins are much smaller with this type of business model because there is not a lot of flexibility or uniqueness around design to differentiate the product. Phone cases and accessories or jewelry could be products that a drop shipping business could focus on.

Subscription services

Subscription services seem to be exploding these days. The growth trajectory for this model is massive.

Just think about all the products you subscribe to on a monthly basis from your streaming apps to your accounting software. There are a ton of e-commerce businesses that have their businesses completely online and are selling software products for a monthly subscription. These can range anywhere from very cheap to very expensive depending on the product or service. If you have a problem that needs to be solved and software can achieve this. Find someone who can build it and then sell it to the right people.

Retail

Retail is where a company is selling directly to the consumer at full price. Retail can be thought of as your popular stores like Target or Best Buy that are selling their products online to the consumer. Think of it as setting up a website and hanging your shingle to sell to your ideal customers. It is considered a business to consumer model.

E-commerce Business Industry Growth Trajectory

There are countless ways to make money on the internet. I’m always fascinated by the creativity around some of the business models and ideas people come up with. As technology becomes more efficient and inexpensive this will only help businesses leverage themselves and their ability to meet consumer’s needs in a more profitable way.

According to eMarketer, e-commerce sales will account for about 14% of all US retail spending for 2020. I know 2020 has been an outlier year in how people are spending their time and money, but I don’t see this slowing down any time soon. This is also on pace with a CAGR or compounded annual growth rate of the industry which is projected to be 14.7% from 2020 to 2027. This included both B2B and B2C models inclusive of both domestic and international markets.

This space is extremely exciting to me. If anything, 2020 has shown us the importance of digital and e-commerce in all industries and businesses. People are learning how to utilize technology more efficiently to produce products and services making them accessible online. If you are a business owner an online presence needs to be at the top of your priority list. It could substantially change your bottom line by expanding your reach and increasing margins.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER, at Applied Capital. Email him at [email protected] or fill out a contact form.

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This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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