Major Business Models in Online and Mobile Retailing

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Aniket Deolikar
Consultant, India

Major Business Models in Online and Mobile Retailing

Retailing involves selling products and services to consumers whereas in online and mobile this is done through online channels such as websites and apps. The delivery of the products to the end consumers is a major aspect in online retailing as it is the only physical transaction between the consumer and the company.

In online (and mobile) retailing there are 3 main e-commerce models being used:
  1. The Drop Shipping Model: In this model, the retailer has tie-ups with various manufacturers for displaying their products on their website. When a customer places an order on the website, the retailer notifies the supplier/manufacturer about the order and the manufacturer ships the product directly to the consumer. The advantages of this model are that the retailer does not incur any inventory holding cost, less capital is required and the overhead expenses are low. But the disadvantages of this model are that there is no control over the customer experience as usually there is a single large supplier and usually a low margin is there in this model as the supply chain is handled by the manufacturer. The internet and information technology are key enablers. More on Drop Shipping.
  2. The On Demand Sourcing Model: In this type of model, only after a retailer receives an order from a customer, the retailer quickly orders the product(s) from the supplier/ manufacturer to their distribution/packaging center. Here the products are stocked and a quality check can be done before dispatching the product(s) to the consumer. The advantages of this business model are that almost no inventory is needed since only orders received before from customers have to be called from the manufacturer. The disadvantage is that there is a need to synchronize the orders very quickly as to when a customer places an order. Here also the internet and information technology are a key enablers. Still this model can be quite complex and difficult for suppliers who lack the knowledge and experience necessary to effectively carry out such process.
  3. The Stocking Model: This E-commerce model is the traditional retail model which has been there for many years, but sales is done over the internet Here the retailer has his own warehouses and stocks all products listed on their website. The products are shipped as soon as they receive the order from the customer. The advantage of this process is that there is control over the customer experience as the retailers can predict the delivery dates of the products with more confidence, also they can add more of a branding touch to the product packaging and better and very fast delivery can be provided to the customers. The disadvantages of this model are that a major capital investment is needed in inventory (although less than in case of small traditional retailers) , supply chain and the logistics, specialized inventory management system should be in place as the management of inventory is an important aspect, especially if the demand is not constant.
E-retailers can use only one or several of these models depending on the product and other factors as it suits their needs and those of the customers. A small online retailer may prefer drop shipping while a huge player might go for the traditional stocking model or a mix of models in some geographies.

⇨ Please add any other business models for e-commerce you are aware of. Thanks.

Sources:
Corey Ferreira, "What Is Dropshipping?", shopify. In, January 2020.
Mary Kleespies, "On-Demand Sourcing: Helping Suppliers Succeed In Today's Economy", January 2012

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