Since hosting Audacia’s first Startup Summer Camp, I’ve been asked the same question over and over again: what’s the best business model for launching an e-commerce site? As we frequently go through this stage when we’re creating new Audacia Ventures projects, I thought it would be interesting to bring together all the main points we take into account, when we’re putting together new business models, which are the true foundation of any e-commerce project.
The first thing to think about before building your online business is: how are you going to generate revenue? Your business model will define most of the key elements of your e-commerce business and therefore lead you to profitability. That’s why you have to ask yourself this question beforehand. You also have to clearly define how you’re going to sell your products or services and in what form you’re going to charge your customers.
Understanding the e-commerce business model
The business model is the profitability strategy you define for your company in an existing market. In order to establish your business model, you need to make sure you understand the context and trends of your market, and in relation to this, you’ll need to have defined the overall strategy for your business. In e-commerce, you’ll discover that the possibilities are fairly limited, but you shouldn’t miss out on vital aspects like after-sales service, which will increase the quality of your brand. Even if the framework you create evolves over time, it’s essential to lay a solid foundation by using the Business Model Canvas.
This model includes 9 elements that you have to define initially:
– Value proposition
– Customer relationship
Since e-commerce is already a very distinct sales channel, here are a few aspects to consider if you’re starting from scratch:
– Will you sell products or services?
– If you sell products, will you sell them directly, using a simple shopping cart function or will you establish a recurring sales model (subscription sales)?
– If you sell services, will you sell them on a retainer, recurring, or on a one-off basis?
– Can your service be freemium (free version to convert the customer afterwards)?
– Do your products sell as a basket/package?
– Do you have loss-leader products, generic products and/or supplementary (complementary) products?
– Do you intend to sell a basic product at a discounted price, which drives the customer to buy another, dependent product that results in a profitable transaction for your business (freebie marketing/razor model)?
By answering these questions, you’ll gradually work out which model to apply to your product/service. But, keep an open mind and don’t rule out opportunities that may develop later on in your adventure.
How do I establish my business model?
First, write it down in black and white. Put your idea on paper and the logic will soon start to flow from it. There’s a well-known diagram called the Business Model Canvas (The Business Model Foundry) that will help you ask yourself the right questions and break down the key elements of your business.
Most of the elements will seem obvious to you, but it’s part of the exercise to write everything down. You can see this process as “mapping it all out”. If you’re standing in front of a mountain, as obvious as it may seem, you’ll need to define the mountain’s base and highest point. Knowing which type of ground you can expect at each altitude level will help you anticipate its difficulties and your limitations. Here’s the diagram you’ll follow and which can be used in the creation phase, and also later on for new product launches.
In order to populate the above diagram, let’s go through each of its phases by asking a few questions:
This part represents all the people and organizations you’ll create value for.
– Who do I create value for?
– Who are my most important customers?
– Is my customer base a mass market, a niche market, a segmented market, or a diversified and multi-sided market?
Group the offerings, services and products that create value for your customers.
– What value do I offer to my customers?
– What problems do I help solve for my customers?
– What sets of products and services do I offer to each customer segment?
– What customer needs do I meet?
These are the points of contact where you can reach your customers, and where you can deliver value to them.
– What are my customers’ favourite channels?
– How do I currently reach them?
– How are my channels integrated?
– Which ones work best?
– Which ones are the most profitable?
– How can I integrate them into customer behaviours and routines?
Describe the type of relationship you want to build with your customers.
– What type of relationship does each of my customer segments expect me to establish and maintain with them?
– Which ones have I already established?
– How are they integrated with the rest of my business model?
– How much do they cost?
Revenue streams highlight how and through which pricing mechanisms your business model captures value.
– What prices are my customers actually willing to pay?
– What prices are they currently paying?
– How do they currently pay?
– How would they prefer to pay?
– What is the contribution of each revenue stream to the overall revenue?
List the infrastructure needed to create, deliver and capture the value proposition.
– What are the key resources required by my value propositions?
– My distribution channels?
– The customer relationship?
– Revenue streams?
Group the activities that you need to control to run your operations successfully.
– What are the key activities required by my value propositions?
– My distribution channels?
– The customer relationship?
– Revenue streams?
Key partners are those who bring a value-adding effect to your business.
– Who are my key partners?
– Who are my main suppliers?
– What key resources do I get from my partners?
– What are the key activities performed by the partners?
The cost structure is derived from the elements listed above.
– What are the most important costs inherent in my business model?
– Which key resources are the most expensive?
– Which key activities are the most expensive?
Following this exercise, you should be able to see the way forward more clearly and establish a framework that you can follow to sell your products/services.
Take the time to write down these ideas in a structured and dedicated manner, using meaningful and clear language. This will significantly help you during your project development phase, but also later on if you’re involving more people down the line.
This outline should enable you to map, design, discuss and even create new business models whether you’re a start-up, an SME or an executive in a large corporation.
What you need to remember
The business model should be the centre of your strategy.
The way you choose to exchange your products/services for money will define your model.
Your business model will evolve over time.
Victor is a business developer with a strong entrepreneurial passion. With a background in hospitality, he enjoys starting businesses from scratch and driving projects with inspiring teams. He co-founded Base7booking (2012, sold to trivago in 2016), Njørden (2019) and gained a various sets of skills in product development and business growth. Currently heading up the Ventures’ team at Audacia group, a private investment firm focused on corporate investments in Switzerland and Europe (since 2020). His topics of interest include product management, e-commerce, hospitality development, human psychology & reasoning.