The Advantages and Disadvantages of the Ecommerce Business Model

An ecommerce business is an attractive option for entrepreneurs of all kinds. Whether a small service business that has been established for years or a new one that just opened its doors, the ecommerce business model can help their sales. The world has seen ecommerce sales soar past $1.03 trillion last year and you can expect that number to continue to rise. 

Many factors have contributed to the growth of ecommerce transactions. The convenience and accessibility it offers to consumers is a main one. Online shopping allows people to browse and purchase products from anywhere at any time. All without having to leave their homes or offices. This became especially important during the recent pandemic.

In addition to convenience, ecommerce has also been fueled by advancements in technology. It is easier than ever to build and launch an ecommerce store. Just about anyone who wants to start selling online can find a platform where they can start the process. 

And how could I not mention the rise of social media? Social platforms have encouraged the growth of online shops and made it easier for creators to sell their products from their social profiles. Social media has become a powerful marketing tool for all businesses, not just creators. Many online retailers have now integrated social media into their ecommerce platforms.

The future of commerce will include ecommerce in some capacity. However, this type of business model is not without its drawbacks. But before potential entrepreneurs decide to utilize ecommerce, they need to know the advantages and disadvantages of this business model. 

Advantages of the Ecommerce Business Model

1. Lower costs

One of the major benefits of running an ecommerce store is the lower startup and operating costs. For example, if you wanted to open up a traditional retail store, you can expect to pay anywhere from $10,000 to $150,000. These costs would include things like rental space, tables, racks, utilities, and staff, just to name a few.

However, an ecommerce clothing store would cost someone anywhere from $500 to $1,500 to get started. This is a sizable difference.

Cost savings is something entrepreneurs need to consider when launching their store. They should look to use those savings to reinvest in things like their website user experience as well as marketing and advertising.

2. 24/7 Availability and Global Reach

Online stores are always open. This means customers can shop at any time, from anywhere, and can take as much time as they need to make a decision. Unlike physical locations which have business hours when the doors open and close. This 24/7 availability allows businesses to cater to a broader customer base. Including those who may not be able to visit a physical store due to their schedule or location.

This brings us to another advantage of the ecommerce business model; global reach. Local businesses no longer need to be just local. Small businesses can take advantage of the fact that customers can enjoy their products from anywhere. 

3. Easy scalability

Scaling an ecommerce business is relatively easy compared to a brick-and-mortar store. As the business grows, it can easily accommodate increased traffic, add more products, or expand to new markets without significant investments in infrastructure or personnel.

To scale an ecommerce business, owners need to be proactive. They need to focus on activities that will help their store reach the next level quickly. Again, one of the benefits of the ecommerce business model is that scaling can come at a lower cost than with the brick-and-mortar model. 

Here are a few ways to do it:

• Utilize your most efficient marketing strategy-
• Automate when possible-
• Focus on customer retention
• Test website for optimization
• Seek organic search and social media traffic

4. Efficient Inventory Management

Anyone who has worked in and around retail understands the pains of inventory management. Retail owners also understand how poor inventory management can cost a business big. Take inventory shrinkage, for example. Inventory shrinkage occurs when the number of products in stock is fewer than those recorded on the inventory list. The National Retail Federation found that retail shrinkage made up $94.5 billion in losses.

With fewer employees and physical customers, ecommerce businesses can better manage their inventory. Businesses can take advantage of advanced inventory management systems. These systems can streamline the process of tracking, replenishing, and managing stock. All of which will minimize losses that will show up in the profits of the business.

Disadvantages of the Ecommerce Business Model

1. High competition

The ease of starting an ecommerce business has led to a saturated market, with a multitude of stores vying for customers’ attention. The high level of competition means businesses must invest heavily in marketing and differentiate themselves from the competition to succeed.

It is estimated that there are anywhere between 12 million and 24 million ecommerce stores online in 2023. And that number is growing each day. This means that there are a lot of shops online that are competing for customers.

However, there is good news. The ecommerce sales market is expected to grow 23% each year for the foreseeable future. Despite this, 46% of small businesses still do not have an ecommerce store. Although there is competition in the market, there is also still a lot of opportunity.

2. Technical issues

Running an ecommerce store requires maintaining a website and dealing with technical issues that may arise. Website downtime, slow loading speeds, and broken functions and features can damage a business’s reputation. All of which deter customers from making purchases. 

Another important technical issue revolves around security and privacy concerns. Since ecommerce businesses collect personal data, they are sometimes targeted by hackers. To keep customers safe, ecommerce businesses need to invest in robust security measures. Using encryption, secure sockets layer (SSL) certificates, and firewalls to protect their customers’ data can help build trust. Investing in robust systems and expert technical support can prevent and resolve these issues quickly.

3. Limited Customer Interaction

Unlike the brick-and-mortar business model, ecommerce businesses lack face-to-face interaction with customers. Many customers enjoy the ability to interact with the person or people they are purchasing from. Seeing and interacting with a human in real life can build trust and long-term loyalty. With an ecommerce site, most if not all communication is via email. While some ecommerce sites are utilizing chat bots, they have yet to acquire the ability to replicate real human interactions.

To overcome this hurdle, businesses need to invest in effective communication channels. While using chatbots is efficient, they should not replace human customer service agents. Be sure to add a human touch to your email communications as well. Customer service members, leaders, and anyone who is communicating with customers should add things like profile pictures to their email avatars or signatures.

4. Shipping and logistics challenges

When selling in person, each customer is handed their products at the time of purchase or soon after. However, the ecommerce model involves the shipping and delivery of every physical product sold. This means that ecommerce businesses must navigate the complexities of shipping and logistics. Including things like shipping costs, delivery times, and handling returns. These challenges can be particularly daunting for small businesses that lack the resources to negotiate competitive shipping rates or build efficient fulfillment systems.

A good way to deal with this is by partnering with third-party logistics providers. They can help alleviate some of these burdens. You can also create your own shipping and logistical processes. This may take more time but it will allow you to save on costs and also be more in control of everything surrounding shipping and logistics.

5. Customer Hesitancy

Despite the popularity of online shopping, some customers are still hesitant to make purchases online due to concerns about product quality, the inability to physically inspect items, or the fear of being scammed. Ecommerce businesses must address these concerns by providing clear product descriptions, high-quality images, and transparent customer reviews. Additionally, offering easy returns and refunds can help reassure hesitant customers.

Conclusion

The ecommerce business model offers many advantages. Too many to name in just one article. And, there are several types of ecommerce business models to choose from. However, there are also several challenges entrepreneurs need to consider when launching their online store.

For potential entrepreneurs considering the ecommerce business model, it’s essential to weigh the pros and cons and carefully evaluate if this model aligns with their business goals. They need to take the time to evaluate their resources and capabilities. By addressing the challenges head-on and leveraging the benefits, ecommerce businesses can thrive in today’s digital landscape.

Also Read:

What is the Retail Business Model and How Does it Work?

5 Internet-based Business Models and How they Work