A Short Guide on The Various E-Tailing Business Models

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Online retail is not about a single entity being in business. There are a lot of merchants, who are selling their products through various styles. They all have their business models based on what they feel represents their brand in the most correct manner. Broadly speaking, there are four models on which businesses are built. They are:

1.       Omni-channel merchants
2.       Virtual merchants
3.       Catalog merchants

4.       Manufacturer-Direct merchants

Omni-Channel Merchants:

Also called omni-channel merchants, bricks-and-clicks companies have a network of physical stores as their primary retail channel, but also have online offerings. Omnichannel firms include Walmart, Macy’s, Sears, JCPenney, Staples, OfficeMax, Costco, Target, and other brand-name merchants. While bricks-and-clicks merchants face high costs of physical buildings and large sales staffs, they also have many advantages such as a brand name, a national customer base, warehouses, large scale (giving them leverage with suppliers), and a trained staff.

Acquiring customers is less expensive because of their brand names, but these firms face challenges in coordinating prices across channels and handling returns of Web purchases at their retail outlets.
However, these retail players are used to operating on very thin margins and have invested heavily in  purchasing and inventory control systems to control costs, and in coordinating returns from multiple locations. Bricks-and-clicks companies face the challenge of leveraging their strengths and assets to the Web, building a credible Web site, hiring new skilled staff, and building rapid-response order entry and fulfillment systems.
Virtual Merchants

Virtual merchants are single-channel e-commerce firms that generate almost all their revenue from online sales. Virtual merchants face extraordinary strategic challenges. They must build a business and brand name from scratch, quickly, in an entirely new channel and confront many virtual merchant competitors (especially in smaller niche areas). Because these firms typically do not have any physical stores, they do not have to bear the costs associated with developing and maintaining physical stores but they face large costs in building and maintaining an e-commerce presence, building an order fulfillment infrastructure, and developing a brand name. Customer acquisition costs are high, and the learning curve is steep. Like all retail firms, their gross margins (the difference between the retail price of goods sold and the cost of goods to the retailer) are low. Therefore, virtual merchants must achieve highly efficient operations in order to preserve a profit, while building a brand name as quickly as possible in order to attract sufficient customers to cover their costs of operations. Most merchants in this category adopt low-cost and convenience strategies, coupled with extremely effective and efficient fulfillment processes to ensure customers receive what they ordered as fast as possible. In addition to Amazon, other successful virtual merchants include Newegg, Overstock, and Shoebuy. Recently, a new group of virtual merchants have emerged that use a subscription revenue model as well.

Catalog Merchants

Catalog merchants such as Lands’ End, L.L.Bean, CDW Corp., PC Connection, and Cabela’s are established companies that have a national offline catalog operation, but who have also developed online capabilities. Catalog merchants face very high costs for printing and mailing millions of catalogs each year—many of which have a half-life of 30 seconds after the customer receives them. Catalog merchants typically have developed centralized fulfillment and call centers, extraordinary service, and excellent fulfillment in partnership with package delivery firms such as FedEx and UPS. Catalog firms have suffered in recent years as catalog sales growth rates have fallen. As a result, catalog merchants have had to diversify their channels either by building stores (L.L.Bean), being bought by store-based firms (Sears purchased Lands’ End), or by building a strong Web presence.

Manufacturer-Direct

Manufacturer-direct firms are either single- or multi-channel manufacturers that sell directly online to consumers without the intervention of retailers. Manufacturer-direct firms were predicted to play a very large role in e-commerce manufacturers, but this has generally not happened. The primary exceptions are computer hardware, such as Apple, Dell, and Hewlett-Packard, and apparel manufacturers, such as Ralph Lauren, Nike, Under Armour, Manufacturer-direct firms sometimes face channel conflict challenges. Channel conflict occurs when retailers of products must compete on price and currency of inventory directly against the manufacturer, who does not face the cost of maintaining inventory, physical stores, or sales staffs. The direct model simplifies the company’s operations, eliminating the need to support a wholesale and retail sales network, as well as cutting out the costly associated markup, and gives Dell complete control over its customer database. In addition, Dell can build and ship custom computers nearly as fast as a mail-order supplier can pull a computer out of inventory and ship it to the customer.

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