[0:00]In this video, I'm going to go over all the different e-commerce business models in depth, so you can decide which one makes sense for you based on your personality.
[0:11]Before we get started, make sure you subscribe to this channel. That way, as I release more content like this, you will get notified. And if you are on YouTube, click on the alert notification button. Now, every time I look at my Facebook feed, I see a brand new business guru pushing yet another e-commerce 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 website? Should I sell on Amazon? Should I do retail arbitrage? Should I sell wholesale? Now, why I don't consider myself a guru, I do quite get 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 e-commerce article that encourages my readers to start their own business, I find myself tiptoeing across a very fine line. Now, 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. Now, on one hand, starting an e-commerce business is simple, relatively risk-free and doesn't require a lot of start-up capital to begin. But on the other hand, running a successful business requires a ton of hard work, perseverance, and a little bit of luck. And 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 is the right business model to pursue? So what I hope to accomplish in today's video, is to discuss the pros and cons of eight different e-commerce business models and let you decide for yourself. And 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. Now, note, when I use the term e-commerce business, I'm referring to selling physical products online and not digital products. And as I tell you 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. And what I'm going to do is I'm going to discuss the pros and cons of all of the popular e-commerce business models based on the following criteria. So each business model will be rated on a scale of 1 to 10 with 10 being the best. So ease of getting started: How easy it is to launch your business and does it require any technical knowledge, upfront investment, etc.. Profit velocity: How quickly can you make money? Sustainability and risk: The defensibility of your business and its long-term potential to create sustainable income. The level of competition: How hard it is to make money and can someone easily launch a competitor? Now, in case you haven't been reading my blog or listening to my podcast or watching my YouTube channel, 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. So in other words, if something is too good to be true and too easy to be true, it probably is. Now, the first business model I'm going to talk about is dropshipping with your own website. Now 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, send orders over to your vendor, vendor is responsible for shipping the order to the end customer. Now 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 e-commerce website, which can cost as low as $3.95 a month. And it's simple to start: If you use a platform like Shopify, it is straightforward to launch a website. Now, here's how it works. First, you got to contact wholesalers directly to get approved as a retailer. And then once you are approved, you instantly have access to hundreds of products that you can list in your shop. And because you're selling everything on your own website, you are 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. And typically, the profit margins for dropship stores are anywhere from 10 to 30%. Now, as a result, paid advertising becomes very challenging because you don't have enough profit margin to pay for traffic. And oftentimes, you are limited to just 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. Now, also, because you're selling other people's products, you aren't in control of your product mix, either. So let's say your vendor decides not to carry a certain product any longer. Well, guess what? You can't sell that product anymore. In addition, inventory and customer support can be a pain because you are not in control of the fulfillment process. So 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 actually 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. Now, 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. So overall, what makes dropshipping fragile is that you're heavily dependent on your vendors for your business reputation. A vendor can cancel an arrangement 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 for your success. So in other words, you will have to invest heavily in content marketing and depend primarily on Google for sales and traffic. So overall, here's how I rate dropshipping on a scale of 1 to 10. In terms of ease of launch, I give it an 8. In terms of profit velocity, I give it a 3. Sustainability and risk, I give it a 6. And level of competition, I give it a 3. The next business model is dropshipping from Amazon to eBay. Now, this model is also known as eBay Amazon arbitrage, and 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's significantly higher in cost. And the reason this business model works is because people who shop on eBay tend not to shop on Amazon. And for some reason, there's lots of people on eBay who are not aware that they can buy the same goods cheaper elsewhere. And 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. Now, what's funny about this is that the product usually ends up being delivered in an Amazon branded box, which can confuse eBay customers. Now, even though I absolutely detest people who do this, there's actually some attractive qualities to this business model. One, there's zero overhead cost, there's no website required. You don't need to find vendors, all you need is an eBay account and an Amazon purchasing account. And 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 beware, you may get nasty letters from brand owners because selling this way increases their support costs. Some 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. Now, 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 the image and copyright theft, and potentially have eBay shut you down. And I've heard several cases where eBay sellers have been banned for copyright or trademark infringement. In addition, this business model is actually illegal and against eBay's terms of service, even though a lot of people still do this. So overall, this business model is good for cash flow but has very 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, not to mention that it's illegal and against eBay's terms of service. So here's how I would rate this business model on a scale of 1 to 10. Ease of launch will be a 10, because you don't have to do anything. Profit velocity is two because you can make sales immediately but the margins are going to be super low. Sustainability and risk, I give it a one because you are at the complete mercy of Amazon and eBay, plus it's illegal, if you get caught, you're going to get banned. And for level of competition, I give it a two. Alright, the next business model is called retail arbitrage, and it's become an increasingly popular business model in the last couple of years. And I've actually had a few people on the podcast making six 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. So by buying up all the clearance and liquidation merchandise from stores like Marshalls, TJ Maxx, you can profit by selling these goods on Amazon FBA at higher prices. And the reason this business model works is because a lot of consumers don't have access to liquidation outlets and are willing to pay full price on Amazon. And what's nice about this model is that you don't need a website. You can leverage Amazon's huge marketplace for instant sales, and there are few start-up costs except for just your initial inventory. But the major downside is that your business is 100% at the mercy of Amazon. And you need to consistently find or go shopping for new goods to list on the platform. Now 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. So for example, Amazon has been preventing sellers from selling certain brands without express approval from the manufacturer. So let's say you just spent $2,000 in a killer clearance sale of Legos. Well, 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 no longer can sell it on Amazon. And 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. Amazon is placing more focus on supporting brands, which do 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. So bottom line, I would probably avoid retail arbitrage for now until things settle down. So in terms of ease of launch, I give it an 8, all you got to do is go shopping and sign up for an Amazon account. In terms of profit velocity, I give it a 5. You can make money right away, but it's not easily scalable. In terms of sustainability and risk, I give it a 2, because Amazon's new policies make this model very risky. And finally, in terms of level of competition, I give it a 5 because low margins and competition from other sellers selling identical products makes it a challenge to maintain consistent profits. The next business model is dropshipping on Amazon. Now dropshipping on Amazon is very similar to dropshipping on your own website, except the main difference is that you are dropshipping the goods directly to Amazon customers. So 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. And whenever you make a sale on Amazon, you contact the distributor, and the distributor ships your product to the end customer. Now it's important to note that this business model does not use FBA or fulfilled by Amazon. So you are responsible for filling the order in a timely manner. But 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. But 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 canceled or delayed, you run the risk of getting banned from ever selling again. And in episode 108 of my podcast, my buddy John Rampton, who was making millions of dollars dropshipping on Amazon, lost his seven figure business overnight. Now you should definitely check out this 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. And he literally lost millions of dollars in potential revenue overnight. So overall, it's really easy to start a dropshipping business on Amazon, and the profit potential is pretty good, but it is way too risky because you're depending on someone else for your Amazon reputation. The past has also shown that Amazon can be very quick with the ban hammer because the consumer always comes first. So here's how I rate this business model. In terms of ease of launch, I give it an 8, because all you need is a dropship vendor. In terms of profit velocity, I give it a 7, because you can make instant sales, albeit at low margins. In terms of sustainability and risk, I give it a 1 because any inventory glitch or late shipment can get you banned. And in terms of level of competition, I give it a 3 because low margins and competition from other sellers selling identical products makes it a challenge to maintain profits. The next business model is selling private label goods on Amazon. Now private label 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. And in most cases, this vendor can be found overseas or in China via Alibaba. And once you produce your product, you then ship your goods off to Amazon FBA and take advantage of Amazon's huge marketplace to sell your goods. Now, because you are manufacturing and buying your products in bulk, there is a much larger upfront cost. And as a result, I recommend that you be willing to invest a minimum of $1,000 to $2,000 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. And 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, greater than 66%. And because Amazon's marketplace is so large, you can make a lot of money very quickly. But the main downside is that you're depending on Amazon, and you are subject to all the negatives of selling on their marketplace. So 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. And because you're investing a large sum upfront for inventory, getting banned on Amazon could result in you getting stuck with a lot of unsellable product. Now, I've been selling private label products on Amazon for many years now, and because the marketplace is so cutthroat, I've also encountered many unscrupulous sellers. And some of 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. And selling a private label product is by far the most sustainable way of making money on Amazon out of any of the other business models presented in this video. So in terms of rating this business model, ease of launch is a 6 because you need to find a manufacturer and invest a decent chunk of change in inventory. Profit velocity is 10 because you can make instant sales at very high margins. In terms of sustainability and risk, I give it a 7 because there's a possibility of getting banned on Amazon, but you do own the brand. And then finally, in terms of level of competition, I give it an 8 because outside of product sourcing and niche selection, there's actually not much to it. Alright, the next business model is selling wholesale goods on Amazon. Now, another business model that is closely related to selling private label products on Amazon is selling wholesale products using FBA. Now, to sell wholesale products on Amazon, you must first find distributors who offer a variety of products for sale. And then you can use these online arbitrage tools to help you find them. Then you essentially buy those products, usually from your home country with very low minimums, and list them on Amazon using FBA, and margins are typically on the order of 50%. Now, similar to private labeling, there are very few barriers to entry. You don't need a website, and all you need to do is to find wholesalers with large product catalogs who will allow you to sell on their behalf. And once you've signed on with a couple of vendors, you can instantly have hundreds of products to sell at your disposal. Now overall, the main advantage over private labeling is that you often have to buy in extremely low unit quantities and the turnaround time is super fast! And in many cases, the minimum order is in 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 can find a profitable product to sell on Amazon temporarily, but since everyone has access to the same product portfolio, it's just a matter of time until your wholesale cash cow gets discovered and the prices start to plummet. Now, 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. So here's how I rate this business model. In terms of ease of launch, I give it a 7 because all you need is a wholesale vendor and an Amazon account. In terms of profit velocity, I give it a 7 because you can make instant sales. In terms of sustainability and risk, I give it a 3 because your product portfolio is being sold by multiple sellers, and your prices will plummet sooner or later. And finally, in terms of level of competition, I give it a 3 because there's many courses pushing this model right now, and it's only a matter of time before it gets saturated. Now, the next business model is selling wholesale on your own website. Now, selling wholesale on your own website and carrying inventory is what most people think of as the traditional e-commerce business model. And 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. Now, 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. And 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 still be challenging. So here's how I rate this business model. In terms of ease of launch, I give it a 5 because you need to find a wholesale vendor and launch your own website. In terms of profit velocity, I give it a 4 because you got to pay for ads and build up your own traffic, even though the margins are on the order of 50%. In terms of sustainability and risk, I give it a 6, you're in charge of your own brand and shopping experience, but you're under pricing pressure from other vendors and Amazon. And then finally, in terms of level of competition, I give it a 5 because finding a unique value proposition is going to be difficult, and you will likely need to differentiate yourself with content marketing. Now the final business model is the one that I like the best, which is selling private label products on your own website. Now, selling private label products on your own website has the highest long-term potential. And this involves manufacturing your own products and driving traffic to your own e-commerce store. And 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 literally 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 is by far the most secure way to run an e-commerce business, and it is very easy to own your list and get repeat customers. And just as an example, repeat customers represents over 36% of our annual revenues. Now when I rate this business model in terms of ease of launch, I give it a 4 because you need to source your own goods and launch a website. In terms of profit velocity, I give it a 7 because you got to pay for ads and build up your own traffic, even though margins are on the order of 66% plus percent. In terms of sustainability and risk, I give it a 10 because you are in charge of your own brand, your own destiny, and your own shopping experience. And then finally, in terms of level of competition, I give it a 9 because finding a unique value proposition is much easier when you are in full control over everything. So now that you have an overview of all the different e-commerce business models, it's important to note that there's nothing that excludes you from combining the different models. So for example, just because I run my own site does not mean that I can't sell on Amazon as well. And just because I sell my own private label products does not mean that I can't dropship a couple of products on my site, too. And just because I sell private label products on Amazon, doesn't mean that I can't sell wholesale products on Amazon, too. So I suggest that you give all 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 to launch an online store, you may as well choose a business model that is sustainable in the long run. Now for my e-commerce 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. And in the past, we also dropship a couple of items to fill out our store. But the key thing to remember is that the more effort you place on your business, the more defensible it will be. And 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. So just be conscious of your cash flow needs and decide whether you'll be satisfied with temporary cash versus something built to last. Now, one of the main reasons I like running an online store that sells private label products is because the barriers to entry are a lot higher. Now, 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. And because I manufacture many of my own products and control my own website, it is also much more difficult for someone else to carry the exact same products that I carry or to copy my site. Now, the additional barriers to entry means that once my business is off its feet, it has much more staying power in the long run. Now, 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 online business, then click on the links below. Hope you enjoyed this video. Now, if you like what you saw, there's actually a lot more where that came from if you subscribe to my channel below. And if you are interested in learning how to sell physical products online, then click over here and take my free 6-day mini course, where I'll walk you through everything that you need to know to get started in e-commerce. Thanks for watching.
