Different models for e-commerce

Ok, I get a few queries pertaining to the idea of having passive income via e-commerce.

Personally, I do doubt one can be really ‘passive’ when it comes to e-commerce. But first, let’s look at the various ‘models’ of e-commerce. It is not just getting a product and selling online. After all, there is more than one way to skin a cat.

While listening to podcasts, one seasoned seller highlighted that initially, when he started out,  he was into Apps or Software marketing. Then one of his friends suggested that he try selling physical items online. His friend argued that selling physical items online is easier than selling digital items – after all, physical items do have inherent values (they are not completely worthless so to speak). How true that is – I do not know, but for that seasoned seller, he did find success.

I am not an expert when it comes to e-commerce.. but while researching into it, I did come across various models:

1) Setting up online shop: This is probably the most straightforward way of selling. You set up an online store probably via Shopify.com or tictail.com, and customers visit that online store and order direct from there.

The downside to this model is that you do not have a ready stream of customers from a well-established marketplace (unless your product is really well-known). You would need to constantly direct ‘eyeballs’ to your website via online advertisements or promotions.

2) Selling via online marketplace like Ebay or Carousell: Here you have a ready customer base. You just need to list your product online and compete with the other sellers in the same niche. When the customers order, you pack and ship the items to them (or if they are in Singapore, you can physically hand it to them).

The issue with this model is that if you are doing large volumes, you need to spend a lot of time packing and shipping the products yourself. You also need space to store your inventory.

3) Selling via more niche online marketplace: This is somewhat similar to item 2. However, there are sites such as Etsy that cater to more specialized or niche items. In the case of Etsy, people typically look for handmade, DIY or crafted items (eg. jewelry or handicrafts). Well, if you are knowledgeable and talented in a certain niche, it may be more worthwhile.

However, like item 2, you need time to pack and ship the product yourself. Also if you are crafting the product yourself, you would need a lot of time to make the products.

4) Retail arbitrage (aka RA): As the name suggest (arbitrage), the seller is typically doing a trade. He is buying low and selling at a higher price (well, but then again which seller isn’t). Basically, the seller will go to a hypermart (like Walmart), warehouse sales, garage sales, etc to look for cheap bargains. He may be armed with a smartphone which can scan barcodes (there is an App from Amazon), and see what price the item is selling online. If the selling price is higher than the retail price, he would then buy in bulk and sell online.

Well, I find this model the most time-consuming. Not only do you constantly need to shop around for bargains, you would then need to pack and ship the products. And the downside is — what if your customers find out about the bargains. There are many instances whereby the buyers complain directly to Amazon or eBay about the products saying that these are selling at a lower price at Walmart… the seller could then risk being delisted.

5) Online arbitrage (aka OA): This is somewhat similar to item 4. However, in this case, the seller is looking for bargains online. He could be searching for bargains in Walmart online store and sell them on eBay or Amazon at a higher price. He may not even physically need to touch the goods. He can just order from Walmart online and ship to the buyer direct (once the buyer buys from him on eBay or Amazon).

There is a Singaporean lady I know who look for bargains in Amazon and list the same items on Amazon at a higher price. Once a customer orders from her listing, she then orders from Amazon and asks them to ship to this customer (well the customer won’t know right since the item is in the Amazon package box). I don’t think it is less time consuming than item 4, although there are paid websites or programmes online that help your search online through the various online stores looking for bargains (prices selling lower than what is listed on Amazon or eBay) and you don’t need to physically search the hypermart.

6) Dropshipping: In this model, the seller lists the item on an online marketplace. Once a customer order online, he would then contact his suppliers or manufacturers (probably from another country like China or Africa) and then ask them to ship to the customer. This may be a less time-consuming model than the above-mentioned models (but still rather time-consuming in my opinion).

However, the flaw of this model is that there is typically a time lag in the shipment of the items (the buyer may complain on the long waiting time), and the profit margin is typically lower. Most manufacturers are not willing to ship small quantities at intervals and the shipment charges are higher when you don’t ship in bulk.

7) Fulfillment by Amazon (aka FBA): In this model, Amazon takes care of all the back-end process. In very simple terms, you are responsible for shipping the products to Amazon Fulfillment Centers. Actually, you may or may not even physically see your products. You can ask your manufacturer or supplier to ship directly to the Amazon Fulfillment Centers. Once there, your product listing will become active. When a customer buys your item online, Amazon will pack and ship the items to the customers, and be at the front end should the customers have any queries.

Yes, in a way, it may be the most passive of the various models. However, there are certain flipsides. For one, you would need to pay for the services that Amazon renders, and the storage fees.

8) Private Label via Amazon FBA: There is a spin-off from item 7. Typically sellers are wary of competitors selling the same items on the same listing page. There are many ways for sellers to prevent this and have the listing page to themselves. For example, they can come up with customized packaging, bundling the items (with items not easily found), adding a customized ebook with their products, they can sign up for Amazon brand registry, or they can trademark their brands. Basically, if their product is selling well, it is hard for others to hijack their listings (and potential customers) and sell similar products. Another way is that they seek out other well-established brands and offer to be their distributors to sell on Amazon or eBay etc.

The downside to this model is that for some manufacturers, you have to meet their minimum order quantity before they agree to your request for customization (be it packaging or just imprinting your logo onto the product). So yes, you may have to buy in bulks. The upfront cost may be higher.

9) Online marketplace X, Fulfillment via company Y: Let’s say you are selling via Amazon FBA, and you want to expand to another online marketplace like eBay or Etsy. You could list your item on eBay or Etsy and once a customer orders from there, ask Amazon fulfillment centers to pack and ship your product to the customer.

The downside is that I have yet to know a program that automates this process and link eBay or Etsy to Amazon FBA- eg. Currently, for each order on eBay or Etsy, you have to go to your Amazon seller central account and manually key in the customer address and configure Amazon to ship the item there. So this is rather time-consuming.

The other downside is, the item will come in Amazon packaging box (with Amazon company logo imprinted on it) and your customer might get confused (after all, he or she ordered from eBay or Etsy not Amazon). There are also companies that do just fulfillment services (eg. Red Stag). They typically do not have online marketplaces. They just store, pack and ship your products. So in a way, Amazon is unique in this sense. It has a huge and successful online marketplace and has many gigantic fulfillment centers spread out across the United States and in many other countries.

In summary

I do come across articles or podcasts about sellers who have set up a semi-passive system. Perhaps they have a found a niche neglected by most. Or their item is extremely specialized, so it is hard for new competitors to come in.

Each model has its pros and cons and is suitable for different kinds of sellers. A retiree with lots of time, but limited capital may opt for RA or OA. While a busy corporate executive with limited time but some spare capital may opt for Private Label via Amazon FBA.

Having said that, e-commerce is constantly evolving and there would always be new competitors and new products.

As to how ‘passive’ e-commerce is… you be the judge.

Actually, if you ask me which is the most passive way to earn money from e-commerce… I think it would probably be to just buy and hold Amazon shares. :p