If you want to have your own online business, whether you’re making the product yourself, or selling other people’s products, the technology is already there.
Here, we’ll discuss what you need to know to have a solid foundation for your e-commerce business 2020. Different types of business models, choosing the right target audience, validating ideas, and managing cashflow.
With a little planning, you can have a business that’s profitable, easy to get started, and defensible once it’s set up. You’ll be ready to launch your own store so you can share your great idea with the world.
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An online store can be incredibly exciting. You’re sending physical products to people’s doorsteps so they can enjoy them and live their best lives.
But before you open an eCommerce store, you need to do three things.
(1) You need to choose an eCommerce model.
(2) Choose who you’re selling to.
(3) And based on those choices, choose a very specific product to sell.
The first step is to evaluate the different business models.
Some of them like drop shipping are very easy to get into, and require zero startup capital. Others like manufacturing require a huge investment of your time and money up front, but give you other advantages down the line.
We want to help you find the model that works best for you. This could be about profit above all else.
About defensibility and building a business that can last decades. Or about how quickly and easily you want to get started. It’s easy to copy what someone else is doing, but it doesn’t mean you’re going to build the business you want. So by really digging into a few different business models, we should be able to find one that’s right for you.
Dropshipping, reselling, white labeling, manufacturing, and making it yourself.
By going through each of these models, we will look into some of the advantages and disadvantages. Specifically, how easy it is to get started. Some models take a lot of time or capital to get started. And if you don’t have those you might have to look at transitioning. We will look at how you can transition from one model to another, and why you might want to do so. Lots of these models are compatible with each other, and there is some overlap. So, you can start e-commerce with one model and end somewhere else.
In the end we are going to talk about how defensible the business is. It takes a lot of time, mental energy, and money to start a business. And some business models are really easy to copy. So if you go down a particular route, you want to know how to defend it so a bigger company doesn’t copy what you did and take your market share.
Let’s look at the different business models and find one that works for you.
The first model we’re going to look into is dropshipping.
Drop shipping is invisible to the consumer, so many people aren’t familiar with this model. A drop shipper is someone who doesn’t actually hold any inventory. They have an online store and they accept orders but they don’t do any fulfillment, which is shipping the products to the customers.
Instead, they receive an order and then pass along that information to another company who sends the product directly to the customer. So as a customer, I might buy an umbrella from you for one thousand rupees. Your store automatically orders that same umbrella from your supplier and sends it to me for eight hundred rupees.You, as the drop shipper, get to pocket the difference.
Oftentimes, you’ll see drop shippers for manufacturers who don’t want to do any marketing. They just want to make goods and they’ll use drop shippers, resellers or others to move their products.
There are four benefits to dropshipping. The first is a low barrier to entry. You don’t need any starting capital when it comes to dropshipping. You could start an online store for ₹3000, accept orders, pass along that information to your supplier, who then fulfills those orders. You very likely won’t need any outside capital like a loan from the bank to get you started. If you’re adverse to debt, this model is great. And unlike other business models, which we’ll get to later, you don’t have any order minimums. Some other models require you to buy a few dozen or a hundred or all the way up to 10,000 units at a time. But for dropshipping, you’re not storing any product at all and you can order products as needed.
Second, there’s no fulfillment. You’d be surprised how much work it is to organize hundreds or thousands of boxes. Even if you have a giant garage, it is a lot of work to find the right products, pack them up and send them out. And you also don’t have to worry about managing inventory. An inventory count can take days for larger companies, and with this model, you never have to do any of that.
Next is being location independent. Because you don’t manage any physical products, you can run your business from anywhere in the world, which is huge. We are a big fan of being able to work from anywhere and dropshipping makes that incredibly easy.
Finally, one of the best parts of a dropshipping business is that it’s scalable. If you get twice as many orders as normal, you don’t usually have to hire extra workers; you just make more money. Eventually, you’ll need to hire more customer support representatives, but you’re not as impacted by scale as other business models.
Dropshipping has a lot going for it, and lots of business owners love this model, but nothing is perfect, so let’s dig into a few of the challenges with this model.
First is the low barrier to entry. You may have noticed that low barrier to entry is both an advantage and a disadvantage. There is a reason for this. It’s great for you to get your foot on the door. It’s not great when everyone else can also get in that door. If a drop shipper, or even worse, a community of drop shippers, discovers your profitable niche, they can copy what you did and start selling the exact same product and drive your sales, and even your margins down.
As an example, if you discover a company selling a product, but they hate running a website and taking online orders, you could dropship for them and take a cut of each sale. If a bunch of other drop shippers find similar products or even the exact same company, now you’re competing for those same customers, and your margins will go down. Margins for dropshipping are smaller than other eCommerce business models. This will of course change from supplier to supplier and from industry to industry, but you’ll probably see around 20% margins.
So if you sell ₹7000 worth of product, you can keep ₹140, and those ₹140 needs to cover all of your business expenses, like customer support, website maintenance, marketing, paper click and complicated shipping, which is the next challenge.
You might be lucky enough to work with one supplier, in which case this won’t affect you too much. But it’s likely that you’re going to work with a few different suppliers to offer all the products that your customers want. You then have to decide if you want to pass that cost on to your customer, or if you want to eat that cost.
High shipping prices is one of the biggest reasons that customers leave the checkout, so many drop shippers decide to cover some or all of the cost of shipping, which can very quickly turn slim margins into nothing.
The downside is you’ll have to handle complicated shipping logistics.
If you have an order with four items and each comes from a different supplier, that’s going to cost you four times as much as an order from one supplier. Keep in mind, your customers don’t know that you’re shipping from four different suppliers. To mitigate this, you want to spend time finding a supplier that can supply as much of your inventory as possible, and if you’re really lucky, work with just one supplier so you don’t have to worry about hiding multiple shipping costs.
Finally, is the lack of control.
Not having to ship products saves you a lot of time but when the people shipping your product do something wrong, you get blamed for it, which is a bummer. As a drop shipper, you have to accept that many things are out of your control. With a good supplier, you can expect one to maybe two percent of orders to have mistakes, and for you to offer a full or partial refund. With a bad supplier, it could be even higher than two percent, and you’ll have to live with a bad reputation.
So pick your supplier carefully.
As you can see, there’s a lot of advantages and disadvantages for drop shippers.
If you find just the right niche, you can run a highly-automated business that makes money for you.
But you can also get into a niche and then other people follow and copy you, which drastically affects how much money you can make.
Let’s go through some examples of the model to give you an idea of what these businesses might look like.
One of the most well-known drop shippers is Wayfair.com
Currently, they have warehouses for some of their products, but back in 2012, that 90% of their products were being shipped directly from suppliers, and they worked with over 4,000 different suppliers to ship out 93,000 items each week.
They built an incredible infrastructure around those suppliers to effectively manage all aspects including shipping logistics and returns.
Wayfair is a great example of a company wanting to grow to a certain size and to offer products themselves, but they started with a much simpler model which didn’t require a ton of cash on hand.
Another somewhat well-known store is TrollingMotors.net, not because of the trolling motor markets, but because it was sold by Andrew Youderian, who talked about it on his eCommerce podcast and blog. This store actually lost money in its first year. The owner invested in a lot of programming and SEO that took time and money, but by the third year, he was able to automate much of the business, and now he can operate the business with just two hours a day.
So if you’re willing to take three years to build a company that generates ₹45,00,000 a year for only two hours a day, then dropshipping might be right for you.
Reselling is the archetype of e-commerce and retail.
A reseller buys products from wholesalers, distributors, or manufacturers, and they sell them through their own store for more than they bought them for.
Functionally speaking, you have to have your own website where you accept orders and fulfill them yourself. You also have to store the products.
The big benefit is you’re selling other people’s products, and you don’t need to manufacture them yourself, which can take a few years.
Let’s talk about some of the benefits of reselling.
If you’re an expert in a niche, then you already know which products are in demand. What’s great about this is you don’t have to spend money on R&D to develop new products. You know what works, and you can sell existing products. So if you’re already an expert on birds, then you know what type of feeders are best, what food is best, and what binoculars are best. You can buy those from suppliers and sell them through your own website.
If you’re familiar with a niche, you can get a reselling business up and running quickly. With reselling, you’re storing products and fulfilling orders. That means you have a lot of control over shipping costs. And since it’ll likely all come from one warehouse, you can experiment with upsells and cross-sells to get users to add more to their cart, so you can maximize the profit with each order.
With reselling, when someone buys more, that almost always means you’re going to make more money. When you get products at a low cost, usually 50% of MRP, you’ll have some room to play with your margins. You can offer discounts, spend money on pay-per-click advertising, and other tactics to get the sale. When you have slim margins and the market changes, you can’t do much to respond to the change.
Larger margins mean flexibility, which can save your business when eventually the market does change. If your store starts growing, you can expand into other areas. Since you aren’t inventing new products, you just have to find a supplier who already offers these products and then stock them.
Oftentimes, you can order a case of products, which might only be 12 to 24 units, so it costs very little to experiment with new product types. And we highly recommend constant experimentation to see which products and niches are most profitable.
Resellers have incredible flexibility when it comes to overhead. You can choose to run a very lean operation and outsource fulfillment, or you can keep it in the house and keep a higher percentage of each sale. If you want to keep overhead low, you can use services like Amazon FBA or other third-party logistics companies to store and ship your products. It will eat into your margins but will keep your business completely remote, so you can work from anywhere in the world. Or if you want to run your own warehouse and shipping setup, you can do that too. This can lead to higher margins for you, so you make more with each order, but it will take time and energy to manage.
As a brand-new reseller, you might be able to start with a small inventory stored in your garage, which makes it very easy to get started. With reselling, you have the choice to build your own infrastructure and make more money per order or outsource it and run a lean and efficient machine, focusing more of your time and energy on your products and marketing.
Let’s talk about some of the drawbacks.
When you’re a store selling someone else’s products, you risk another store coming along and selling the exact same products, which can threaten your business.
If you sell Apple computers and another store down the road also sells the exact same product, that will put pressure on your business. To mitigate this, you need to add value to your products in some way.
An example of that might be expert staff that knows the product inside and out, or you could offer a bigger selection in a niche.
So, for example, a computer store could compete with a big-box store that has some computers but doesn’t specialize.
You can also offer bundled services, for example, a computer warranty or free classes, which come with a purchase or add value in some other way that someone else can’t easily copy.
To be a reseller, you need to have the capital to buy products at a low price, with the goal of reselling them at a much higher price, and often you want to have hundreds if not thousands of SKUs or separate products.
Let’s say you want to offer a hundred products, and you’re selling products that cost you ₹350 each initially to buy.
And you need to order a minimum of 12 units of each product.
That’s going to cost you, at a bare minimum, ₹4,20,000 to invest in a product, and this is the best case.
Many stores need to order a lot more than this.
Expect to spend 7 or 14 Lakhs rupees to start a reseller business.
Since capital is so important with reselling, you need to plan large purchases from suppliers and time them, so you have enough cash flow to pay your other bills. You need someone on your team who is good with projections.
They need to understand how fast you’ll get a product in, how much it’ll cost, and how long it’ll take to start earning a return on that investment.
Reselling is a great way to get into e-commerce and maybe someday create your own products. It is cash intensive and requires someone with good planning and logistics skills. It also has a lot more margin and flexibility than other models.
We’ve talked about drop-shipping. Now let’s focus on reselling.
Online, there are a lot of smaller resellers that focus on a particular industry, like HoopsKing.com HoopsKing is a site that teaches your kid to be the best basketball player. It has a lot of informational products about how to train your kids to be great at basketball, and they sell physical tools that complement their informational products.
In this case, they make their own info products, and they supplement it by reselling the equipment. The unique information products get people to their site and build trust, and reselling other people’s physical products is a nice way to make more money off of each customer. And it’s great for the customer since they’re getting products from someone they already trust.
When you go into a grocery store and you see the name of the store on a can of food, that’s called “white labeling” or “private labeling.” It’s where someone else makes a product and they put your label on the product at the end. And it’s a step between reselling and creating your own product.
Private labeling is similar to reselling, so most of the benefits and drawbacks are the same. But there are a few extra benefits that are worth pointing out. The biggest benefit is being able to do your own marketing and branding. You can create your own name, description, taking product photography, etc. Anything you want to do, you can. That means you can focus on what you want to focus on.
You could focus on price or quality or being environmentally friendly. When you private label you can take advantage of a gap in the market. One of the benefits that come with building a brand is you’ll be able to build a fan base of loyal customers. If you just resell products, it can be really hard to build loyalty.
When you think about your favorite brands, you probably aren’t thinking about the warehouse that offers the cheapest product. There’s probably something about that brand that appeals to you and draws your attention, even if a rival brand releases a similar product. If you private label great products, people will remember you. And you can market to them and get another sale from them down the line.
Since you aren’t reselling the exact same product as a competitor, your potential customers can’t compare prices. We know plenty of consumers who look for a SKU and then do a search for the cheapest version of that SKU online. When you private label, you can make your own SKU or not have one at all.
Brands put a lot of money and time into advertising and building a brand. For that reason, they cost a little more for you to purchase. If you buy a white-labeled product and you sell that, you get to keep a bigger slice of the pie.
If you know certain products are very popular in your store, we highly recommend white-labeled versions of those products so you can keep a higher percentage of those sales. Again, many of the advantages and disadvantages are the same as reselling, because they’re very similar. But there are a few extra considerations we are going to point out.
One of the hard things about private labeling is it forces you to create your own brand. If you sell sunglasses, you have to convince consumers that your sunglasses are just as good as another brand. If you were to resell a name brand pair of sunglasses, you don’t have that problem.
Building a brand is hard work and it can take a long time, but it’s usually worth it for some of the benefits above. If you’re looking to make a killing in the next year, this might not be the right strategy for you. Since private labeling includes the manufacturer adding your logo to the product, this is more capital intensive than reselling products. You might have to order a few hundred or a thousand units.
When you resell products, there’s a lot more flexibility to buy products on shorter notice and you don’t need as huge quantities. These requirements will vary industry by industry, but typically white labeling a product requires a bit more capital and time. White labeling gives you many of the same benefits as reselling.
In some ways, it’s a step between reselling and manufacturing, or creating your own product. You can start building a brand and a loyal following.
If you have a popular product in your store, we definitely recommend looking into white labeling, or private labeling, your own version of that product so you can sell your version and keep a higher percentage of that sale.
Let’s talk about some stores that sell white labels, a.k.a. private labeled, products – Floyd’s Barber Shop.
They offer great haircuts and in the end, they always offer to gel your hair and I really like the way it looks.
Even though we could probably find a similar product elsewhere, because we have seen how good it looks, we want the same look without doing hours of research. So we buy their private labeled product because it’s easy.
Manufacturing is one of the most challenging models because it not only requires huge capital investments to buy thousands of units, but you also have to spend time and money developing a product from scratch.
Having said that, it’s one of the most defensible models, meaning it’s really hard for someone else to copy you. If you create a hit product, you’ll be able to reap the rewards for a long time before someone else can even come close to copying or emulating you.
Let’s talk about some of the benefits of manufacturing your own products.
The first and most obvious one is that you can create just about anything.
Do you want to make a mattress with a hole in the middle so you can cuddle your romantic partner and play Rock ‘Em Sock ‘Em Robots? Well, when you manufacture your own products, you could actually do that. In all seriousness, having this flexibility means you can control everything. The color, size, shape, packaging, etc. If you have specific experience in mind, designing your own product and getting it manufactured might be the only way to do so. Otherwise, you have to live with other people’s choices.
When you manufacture your own products, you have access to all three types of intellectual property. Copyright, trademarks, and patents. And you can use these to protect your brand and product.
Even if you don’t have a patent or some other form of intellectual property, it’s still very hard for someone to copy you. If you start selling the newest, greatest thing, and someone wants to copy you, they’ll have to reverse engineer your designs, find a manufacturer, get quotes or samples, select a manufacturer, order the products, and then wait for them to arrive. And then finally start selling them. This could easily take a year for someone else to copy what you did. And at that time, you could further improve your product and dominate the market.
Manufacturing is a long process, which can be a good thing to protect what you’ve built.
Let’s talk about some of the downsides.
One of the harder parts of manufacturing is actually making the product. It’s not just coming up with the idea, but executing on that idea. You have to figure out how to turn a napkin sketch into a real product. Some creators get stuck on this step, even when they have a great idea. You need to have access to the tools and skills to make a prototype. Some industries have professional prototyping services and some manufacturers will help you prototype products. Of course, this takes time and money. If you don’t have a prototyping service for your industry, hopefully, you can find a maker space where there are 3D printers, laser cutters, hand tools, and a community around design.
When you’re working with a manufacturer, there’s a good chance you’ll be working with someone overseas because the costs are dramatically lower. But working with overseas partners adds an extra challenge, which is language.As you’re refining your design with a manufacturer or just trying to explain your design, you’ll run into language barriers. And if they interpret something incorrectly, you could have a completely broken product or a sub-par product. One thing you can do to mitigate this is to work with a manufacturer that has native English speakers on staff. I’ve gotten quotes from multiple factories and I’ve had the best communication with a manufacturer with native English speakers. Even though they might cost a little bit more, it’s worth the extra cost for the peace of mind when you’re investing ₹7,00,000 or more on a manufacturing run.
As mentioned earlier, when you sell your product you need to develop a brand. People have to know who you are and they have to believe your product works. Building your reputation takes time, so hopefully, you can start building a following before your product comes out so you have customers ready to buy the day your product is available.
Manufacturing requires huge amounts of capital and time, not to mention the time and skills involved in creating prototypes to prove that your product works. It’s one of the hardest models to get started, but it also gives you access to intellectual property, to protect your product, and you have full creative control over the product. You can literally create something that never before existed. If you can create an amazing product, this is one of the best ways to get it into as many hands as possible. Once you get to a certain scale, it is nice to start making your own products however you want. That’s where manufacturing comes in.
Enchroma makes glasses that let people with color blindness see colors that they couldn’t normally see. The promise of the product is amazing, but they had trouble launching because people didn’t want to spend ₹24,500 on a product unless they knew it worked. Eventually, they started including multicolor balloons with their product, and their customers started sharing unboxing videos, which convinced people around the world that the product works and the company started to grow. This is a great example of a company with a great product that wasn’t succeeding until they built that strong brand and displayed social proof.
You might think, in today’s day and age that handmade products are out of style, but that couldn’t be further from the truth. There are plenty of artisans who still make products by hand and can make a living or at least a side business.
Going into some of the benefits.
If you have a skill at making things, you can get started right now. Nothing is easier when you have the tools in your own home. You could build a simple website today and take orders tomorrow. This is also a great way to see if a market exists for what you’re selling. Make a few items by hand, and see if they sell. If they do, then you can look into mass-production if you want to go that route.
Handmade products are often a lot more expensive than mass-produced products. That means you need a lot fewer customers. So if you’re selling dice, instead of selling 1000 dice and making ₹70 from each one for a total of ₹70,000, you might only sell 100 dice and get paid ₹70 each so you can make the same amount of money. This reduces a lot of logistics, cash flow, and management problems.
When you do small-batch or one-off products, you typically sell these directly to customers either through your own site or a marketplace. You can also offer a custom quote where you get paid to build a specific product for a specific person. This is essentially getting paid to do customer research. Instead of manufacturing 10,000 units and hoping that they sell, customers tell you what they want and pay you to do the custom work. After a few months of doing custom work, you should have an idea of what the market wants, and you can choose to go into manufacturing if you want. It is a win-win.
Of course, there are some drawbacks.
The biggest is that handcrafting products is very time-intensive. Maybe it takes you eight to 20 hours to make a product. Each hour you spend making products is an hour you can’t spend on your business overall. This isn’t necessarily a bad thing, but be aware that you need to price your product so that you’re actually paying for your time. If it takes you eight hours to draw a custom illustration for someone, and you charged ₹70, you’re going to go out of business. We recommend coming up with a price point that pays for your time and doesn’t worry about it being too expensive. There’s always an upscale market willing to pay for custom products.
Handmade products are especially hard to scale. It’s usually a unique skill that you have, so you can’t just hire anyone. This makes it tricky around the holiday Season where orders pick up. Do you want to work hardest right before the holidays? Because you might have to. If you want to scale your business, you have to put effort into writing a process that anyone can follow.
Overall, handcrafting is the easiest way to get started with e-commerce. If you have a skill and the equipment, you could get started selling today. There are a lot fewer logistics to juggle because you have a lot fewer, but more expensive orders. You do have to use a lot of your time creating products. You might want to look into creating extra products ahead of the holiday Seasons, so you aren’t working through the holidays. And it is a challenge to scale.
You want to look into building systems and processes so you can have someone help you. If you like this model, give it a go, because it’s very easy to test, and if you find a really profitable niche, you can always scale up into manufacturing.
Finally, let’s take a look at a business that succeeds with handcrafted products.
Busy Wizard Dice creates custom dice. You could buy a set of dice similar to these in a store for ₹70 to ₹210. Busy Wizard Dice creates small runs of dice for ₹4450 a set, and they do 100% totally unique commissions for over ₹1400 a set. That is 2000 percent more expensive then the dice, you could buy at a game store, and people still buy them because they love the product. So if you’re fine using some of your time this way, then handmade products aren’t a bad idea. We hope these examples make it clear that all of these business models are viable, and it’s more about finding the right business model for you.