The Five Business Models of E-Commerce

Needless to say, a lot has happened in ecommerce since this article was published in 1998! We’ve produced a newer version of this article, looking at the ecommerce business models which are popular in 2016. Many of which simply didn’t exist in 1998… 

There’s no such thing as a free lunch!

While this simple economic aphorism seems to have been forgotten in the world of cyberspace, it holds true as much today as it ever has. First, let’s establish the fact that no site is free — every web site costs money. The web site is stored on a computer, uses web server software, accesses telecommunication resources, and must be maintained. Someone must pay for the computers, software, telecommunication charges, and time. The omnipresent cost either comes from your pocket or some benevolent benefactor.

The cost and potential revenue constitutes a business model. Therefore, even the “free” sites have a business model. A public site offered by a library, school, or university has a business model. Free email service has a business model. Even free home pages fit into a business model.

Bottom line: Every site in the entire world wide web has a business model. Each of them, of course, are different.

In actuality, five distinct e-commerce business models form the basic structure for the wide variety of web sites today. The five categories are called vanity, information, advertising, subscriptions, and storefront sites.

While not all of the models derive revenue directly, they all incur costs. In addition, many sites combine several of the five identified business models. Each of the five models have unique characteristics which differentiate them from the other types. So it’s important to understand their differences.

Vanity Sites

Many web sites started as vanity sites. These sites are often created by individuals as an outlet of self expression, to share a hobby, promote a cause, or find others with similar interests.

The sites are created with no intention of deriving revenue, and no illusions of grandeur. It could be as simple as a one-page family site or a complex forum on a specific topic. The costs are borne either by the individual or by some altruistic enterprise such as universities, libraries, communities, associations, and even businesses. Nevertheless, the costs are real on these “free” sites.

Information Sites

Information sites (also called brochure or billboard sites) are designed to derive economic benefit through indirect means from either referred sales, reduced cost, or both. Revenue comes from creating awareness of its products or services via the web with the actual purchase transaction occurring offline.

Just like a billboard on a highway, success is measured on viewership as ‘net citizens “surf” by and are influenced to purchase product. Most corporate sites today put up these electronic brochures to provide information about their products, employment opportunities, investor relations, or customer service. Economic benefit is created through the indirect purchase of the goods or services from existing physical outlets and cost savings through the elimination of infrastructure or inefficiency.

Some businesses feel this is the best way to avoid channel conflict — a potential pricing disparity between different supply chains.

Advertising Sites

Network television, radio, and many periodicals follow the advertising model. All programming and content is funded by advertising dollars with consumer viewership being the measurement of value. Agencies conduct sophisticated surveys to measure the value and establish the pricing. For e-commerce, advertising can be in the form of banners, sponsorships, ezine ads, and other promotion methods.

This is a much ballyhooed but still largely unproven model on the web. While there are a few sites that are entirely supported by advertising dollars, the lack of web-savvy viewership statistics hinder mass adoption by advertisers. As the knowledge of consumer behavior is further understood, experts will prepare purchase pattern analyses providing advertisers with empirical data to support their promotion campaigns.

Subscription Sites

In other media, the subscription models are well established — accepted by subscribers and nurtured by publishers. On the web, subscriptions are not yet widely accepted by consumers. Of those that are accepted, the subscription model caters to sites targeted to particular niches of individuals who have specific needs. These sites are often specialized with expert content and timely information. The subscription revenues fund the development and maintenance of the site.

Subscriptions can be paid on a weekly, monthly, or annual basis. Payment through a credit card account is a common payment scheme for subscription sites because of the ability to periodically process the purchase transaction electronically.

Storefront Sites

To some people, a products-offered site is narrowly defined as a “true” e-commerce site. A web site that offers products for sale is the electronic version of a catalog. These virtual storefronts are built to describe the offering with pictures and words, offer promotions, provide a “shopping cart,” and complete the purchase transaction.

Once the product is purchased, the cyber enterprise arranges for product fulfillment including shipping and handling. The fulfillment is sometimes completed by the web site enterprise or directly from the manufacturer in a drop shipping arrangement. Some manufacturers are now passing up the intermediary wholesalers and retailers by offering their products directly to consumers. This collapsing of the supply chain is called disintermediation.

Although the vast majority of these sites offer tangible products, they can work for service products, too. The primary characteristic of these types of sites is the ability to make a one-time purchase with no future obligations.

While it is impossible to predict the future in this fast-moving media, it is obvious that all five business models will remain viable for the near-term. Each model will continue to mature both in its acceptance and sophistication. Consumers will increasingly look to the web for physical commerce alternatives because of the limitlessness of the media both in terms of geography and shopping hours.

For ‘net entrepreneurs, each model should be examined carefully to understand which model provides the maximum benefit. With the understanding of the business models, financial projections can be easily created, and business plans finalized. With the business plan in hand, you will realize even in cyberspace, there is no such thing as a free lunch.

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