Many small businesses are completing sales and reaching customers like never before thanks to ecommerce technology.
In this latest episode of Small Biz in :15, Steve Chou, the founder of MyWifeQuitHerJob.com, sits down with Small Business Trends Executive Editor and tells the truth about ecommerce and small business.
Check out this edited transcript of their discussion:
Shawn Hessinger: When we’re talking about ecommerce, what kind of businesses are we specifically talking about?
Steve Chou: I mean, technically, ecommerce is really just a sale of things online, but the specific type of ecommerce that I refer to as ecommerce is the act of selling physical products online.
The 4 Main Ecommerce Business Models
During the show, Chou discusses 4 common ecommerce business models.
Shawn Hessinger: There are all kinds of ecommerce businesses. Could you give us just a broad overview of what you’ve seen?
Steve Chou: At the core, it’s about selling physical products, but that’s the sourcing. And the delivery mechanism will change. There’re different models for that one.
For one, there is drop shipping. Drop shipping is when you take orders in your store, and you have this agreement with the supplier when an order comes in. The supplier stores the inventory and ships it to the end customer.
And a good drop shipper will actually include your brand in the packaging so that it appears to be coming from your store. And the drop shipper is really just a supplier. Essentially, this is the cheapest way to get started in e-commerce because you don’t have to worry about inventory. You basically take the sale and perform customer service.
The second type is the one that most people are familiar with. This is where you buy someone else’s product. Let’s say I want to carry iPhones, and I buy them at the wholesale price, which is usually 50%. Then, I store it.
Afterward, when a sale comes in, I deliver it to the end customer. That has a much higher margin than drop shipping. But obviously, you are responsible for and have to deal with the inventory.
The next business model is called private label. This is where you create your own branded product. Like, you’re literally working with the factory. You create something that you call your own, you put your brand on it, you have to buy in large quantities, and then you sell them.
But the margins are infinitely higher in this business model, and you have full control over the entire process, including sales, customer service, and the entire supply chain. Incidentally, private label is probably the best way to start a long-term business because you’re building your own brand at this point.
And then the final business model is what I would call selling on Amazon or relying on a marketplace. So I categorize it like Etsy, eBay, Amazon, Walmart, etc. They are all in this category. This is where you’re basically outsourcing your customer base.
Here, I’m taking advantage of Amazon’s traffic, right? So, I list something on Amazon. Amazon already gets a ton of traffic. I get a sale, they take a big cut – and in the case of Amazon, they’ll actually handle your fulfillment for you as well.
I would say those are the four main business models of e-commerce.
How to Start Your E-Commerce Business
Shawn Hessinger: If you were going to give advice to somebody who is just starting out, what would you tell them to start?
Steve Chou: For starters, the kind of e-commerce model is going to depend on what your starting budget is going to be.
One, if you have less than a hundred bucks, you’re pretty much limited to drop shipping. Two, if you have $1,000, then go with wholesale. In the US, the minimum orders are on the order of like 100 or 200 bucks for the product. Three, if you have $3,000, it’s a good idea to go with private label. I think private label should be everyone’s end goal because you want your own brand.
Now, that’s not to say that you can’t do all three, right?
Shawn Hessinger: When somebody asks you, “What are the best products to sell online,” what do you say?
Steve Chou: I think it just depends on your skill set. I would say that the best way to get started is thinking about a product you need yourself.
I can think of a bunch of things I could potentially want to sell. Like, right now it’s cold in California. I like to play Ultimate Frisbee, but when I play, my hands get really cold and numb.
If I go out and buy football gloves or soccer gloves for it, they’re too thick. So, I lose the feel of the disc. I don’t know if anyone’s selling these ultimate Frisbee gloves. And that’s something that I might pursue.
So, scratch your own itch. That’s one way to do it.
Another way to do it is to use tools. There are tools out there like Jungle Scout that scrape all the Amazon listings and will tell you approximately how much money they’re generating in a given month.
And what you can do if you want to do your research on Amazon is to look at a couple of products. You can look at the sales numbers, and you can look at the number of reviews. The number of reviews reflects how mature a particular Amazon listing is. And what you want to see in general is listings that have like less than 100 reviews that indicate that that product isn’t that mature.
You also want to see an even distribution of revenue. And most importantly, you want to make sure that if you see a product that’s selling pretty well, that you can put your own spin on it. And again, this all kind of leads to the private label realm. You want to sell something better than everyone else or different. You have to stand out. And by doing that and using a tool, you can make the research process much faster.
Be sure to catch the entire episode where Steve Chou gives listeners more secrets on how to start an e-commerce business, including:
- Where to find a supplier if you have an original idea for a product and want to go the private label route.
- How to find a good drop shipper or where to get inventory if you’re not getting it manufactured.
- Why it’s a good idea to validate your product on e-commerce platforms like eBay and Amazon before building your own e-commerce website.
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