E-commerce Business Models

Why This Matters

E-commerce business models aren't just labels—they're strategic frameworks that determine how value flows between parties, how revenue is generated, and how companies build competitive advantages online. When you're tested on e-commerce strategies, you'll need to demonstrate that you understand why a company chooses one model over another and how that choice shapes everything from marketing spend to customer acquisition costs to profit margins.

The models you'll encounter fall into distinct categories based on who's transacting with whom, how revenue is captured, and what assets the business controls. Don't just memorize definitions—know what strategic trade-offs each model represents. If an exam question asks you to recommend a model for a given scenario, you need to understand the underlying mechanics: Does this model require inventory? Does it scale through network effects? Who bears the risk? That's what separates surface-level recall from strategic thinking.

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Transaction-Based Models: Who's Buying From Whom

These models are defined by the parties involved in the exchange. The relationship between buyer and seller shapes everything from marketing approach to sales cycle length.

Business-to-Consumer (B2C)

• Direct sales from companies to individual end-users—the most recognizable e-commerce model, powering online retail giants and small shops alike
• Customer experience is the primary battleground, with brands competing on convenience, personalization, and emotional connection
• High marketing costs relative to transaction size, requiring strong branding and retention strategies to achieve profitability

Business-to-Business (B2B)

• Transactions between businesses such as manufacturers selling to wholesalers or SaaS companies selling to enterprises—typically higher order values but longer sales cycles
• Relationship-driven sales where trust, customization, and account management matter more than flashy marketing
• Complex buying processes involving multiple decision-makers, making content marketing and thought leadership critical for lead generation

Consumer-to-Consumer (C2C)

• Peer-to-peer transactions facilitated by platforms that connect individual sellers with individual buyers
• Platform trust mechanisms like ratings, reviews, and payment protection replace traditional brand reputation
• User-generated inventory means the platform doesn't hold stock—it provides the marketplace infrastructure

Consumer-to-Business (C2B)

• Individuals selling to companies—think freelancers offering services or influencers providing promotional reach
• Power dynamics shift as consumers set their own terms, prices, and availability
• Growing segment driven by the gig economy and the rise of creator-led marketing partnerships

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Revenue Capture Models: How Money Flows

These models focus less on who's transacting and more on the mechanism for generating revenue. The same company might use multiple revenue models simultaneously.

Subscription-Based Model

• Recurring payments for ongoing access to products or services—creates predictable revenue streams that investors love
• Customer lifetime value (CLV) becomes the key metric, shifting focus from one-time conversions to long-term retention
• Common across software (SaaS), media streaming, and curated product boxes—any context where ongoing value delivery justifies repeated billing

Freemium Model

• Basic tier free, premium features paid—designed to minimize friction for user acquisition while monetizing power users
• Conversion rate optimization is critical; success depends on making free valuable enough to attract users but limited enough to drive upgrades
• Balances reach with revenue, often used by apps and platforms seeking rapid growth before profitability

Affiliate Marketing Model

• Commission-based earnings for driving sales to other companies' products through content, links, or referrals
• Performance-based structure means affiliates only earn when they generate results—aligning incentives but creating income volatility
• Low barrier to entry makes it accessible for content creators, but success requires strong traffic and audience trust

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Platform and Intermediary Models: Connecting Others

These models generate value by facilitating transactions rather than producing goods directly. They scale through network effects—the more participants, the more valuable the platform becomes.

Marketplace Model

• Two-sided platform connecting buyers and sellers, earning revenue through commissions, listing fees, or transaction fees
• Network effects create moats—more sellers attract more buyers, which attracts more sellers, making established marketplaces hard to displace
• Amazon, eBay, and Etsy exemplify how marketplaces can dominate categories by aggregating supply and demand

Dropshipping Model

• Retail without inventory—the seller markets products but a third party handles storage, packing, and shipping directly to customers
• Low capital requirements make it attractive for entrepreneurs, but thin margins and supplier dependency create strategic vulnerabilities
• Quality control challenges since the seller never touches the product—customer experience depends entirely on supplier reliability

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Channel Strategy Models: Controlling the Customer Relationship

These models focus on where and how brands reach customers, emphasizing control over the customer relationship and data.

Direct-to-Consumer (D2C)

• Brands bypass retailers to sell directly to end customers through owned channels—websites, apps, and social commerce
• First-party data ownership enables personalized marketing, product development insights, and stronger customer relationships
• Higher margins but higher acquisition costs—without retail distribution, D2C brands must invest heavily in digital marketing to build awareness

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Quick Reference Table

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Self-Check Questions

1. Which two models both avoid holding inventory, and what's the key difference in how they generate revenue?

2. A software company offers a free basic version and charges for advanced features. Which model is this, and what metric should they prioritize to measure success?

3. Compare and contrast B2B and B2C models in terms of sales cycle length, marketing approach, and typical order value.

4. Why might a brand choose D2C over traditional retail distribution, and what trade-off does that choice create for customer acquisition?

5. An exam question describes a platform where individuals sell handmade goods to other individuals, with the platform taking a percentage of each sale. Which two model classifications apply, and why?