The advantages of starting a business-to-consumer (B2C) ecommerce business are minimal barriers to entry, large potential market giving long-term potential to grow, simplicity of operating the business, ability to diversify into other areas to grow revenue and margins. Disadvantages include the intense competition, the cost of finding customers, the need to source, buy and handle products, the cost of managing product returns, the need to provide customer services, the dangers of fraudulent transactions and payment "chargebacks" (refunds given to payment cardholders that are deducted from the money you receive as a merchant).
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Barriers to entry
In most countries, including the US, it is relatively easy to start a B2C ecommerce business. You must:
- register a domain name
- incorporate a company
- setup your website including your product catalog
- contract with a payment services provider so you can enable customers to pay
- decide how you will fulfill orders
- launch your marketing to find customers
- handle orders as they are received and deal with payment issues, customer services queries, returns and refunds
While there is complexity in each step, choices that have to be made and some money that has to be invested, none of this is particularly challenging. With a little guidance from someone who has done this before you can normally get this running in anywhere from a week to three months. Bigger companies with significantly more complexity in their operation might take from nine to eighteen months to complete a project to build and launch a new ecommerce website.
Barriers to entry - Advantage
Large potential market
The market for B2C ecommerce is absolutely enormous. In the US alone the market is over $375 billion per year (Source: Statista). Amazon's revenue alone is $386 billion. Once you factor in international sales, safe to say the market is large enough that the potential is huge. If you are successful and target a wide enough range of products and customers there will always be potential for growth.
Large market - Advantage
Simplicity of operations
A traditional B2C ecommerce business operates in the same way as a retail store. The business identifies a range of products to sell to its customers, finds suppliers for these products, buys them, locates them in a warehouse and then sells them through the website, replenishing the stock as it runs low. The difference between the selling price and the purchase price is the gross margin you make, from which you have to pay for the warehouse operations, marketing, website, payment services, management and leave enough profit for the shareholders. This is of course a hugely simplified description and there are variations in how the business can be run.
The "dropshipping" model is where you do not buy any stock in advance, you wait until you receive an order and then pay a supplier to ship the ordered product directly to the customer. You do not have to hold stock and therefore eliminate the cost of warehousing and the risk you are unable to sell your stock.
Operational simplicity - Advantage
Once your B2C ecommerce business is established, you can use this as a base from which to diversify into other fields.
Some very successful online businesses have chosen to open physical retail stores in order to gain additional market share, provide additional recognition and authority for the business and provide another means to interact with customers and engender loyalty and advocacy for the business.
Some B2C ecommerce businesses can diversify into services, for example an electronics retailer can offer installation of the product, pre-purchase consultation and design services for home theater, sell third party warranty services alongside the physical products or connect customers to sources of finance for larger purchases. Each diversification provides potential additional revenue and profit for the B2C ecommerce business.
Diversification - Advantage
The flip side of the huge market & low barriers to entry already discussed, is the huge competition that is present in the B2C ecommerce market. There are so many ecommerce businesses already operating in almost every conceivable product category that it can feel overwhelming when starting a new business. Competition inevitably includes price competition, too. You must be able to compete against established businesses with purchasing power and efficient, low-cost operations. You will need to learn to live with competition and find a way to attract customers despite this.
Competition - Disadvantage
Finding and retaining customers
As a direct consequence of the huge competition you have to design and fund marketing efforts that are successful for your business. Marketing is a whole science in its own right, but the essence of this is to understand in exacting detail who your customer is, what is important to her, how she likes to research, be inspired by, purchase and receive the types of product you are selling. You need to design your whole operation around serving your customer niche. If you do this, you can still be successful despite the competition. Nevertheless you need to be prepared to pay significant amounts of money on marketing, to find and attract your customers. It is not exceptional to have to spend 30% or more of an average order value in order to attract one new customer. At this level of spend your business may only be break-even or even be loss making. Therefore it is critical that once you have a customer you find ways to keep them coming back, as the cost of selling to existing customers is much lower than the cost of acquiring new ones. Your existing customers are your source of profit whereas your new customers are your source of sales growth.
Finding and retaining customers - Disadvantage
Sourcing, buying and handling products
Even once you know your customer niche in great detail, their motivations, desires and preferences, you need to provide products that they will find inspiring, useful, compelling or otherwise attractive. This can be a difficult process, fraught with uncertainty and incurring risk that stock you have bought might not sell.
There are three main types of products to source to sell through your B2C ecommerce business.
- Branded products are those that are developed by a manufacturer with a brand name known to the customer and which are sold by a number of B2C businesses who will be your competitors. Take an example of a Hoover vacuum cleaner. This is developed by the manufacturer and sold to businesses like yours. They do some marketing to ensure consumers are aware of the Hoover brand and the features and advantages of their products. If you decide to sell these, you must be able to attract customers over your competition who are offering exactly the same model. Price wars are common and margins can therefore be thin, especially when you are starting out and buying in small quantities and unable to negotiate low purchase prices.
- Private label products are often generic products that do not have the backing of a brand manufacturer. They are still produced in a factory, but the task of making consumers aware of them and their benefits falls to you. The advantage of these is that you do not have competition for the exact same model, although you will still have competition for the same type of product. The disadvantage is that you need to persuade a customer to buy your product without the brand behind it. You may also find it more difficult to select the right products to sell that will appeal to your customer.
- Customizable products are those where the customers themselves are involved in specifying the product. For example, if you sell backyard sheds and allow the customer to specify the number, size and location of windows, the type of doors, the thickness of the framing material and so on. In this case you are typically assembling the product to order and therefore have reduced your stock risk inherent in branded products, and your customization options provide a compelling reason to buy from you over a generic private label product. One disadvantage is the complexity of the website required to show the acceptable options and combinations of options and the difficulty of providing returns process for products that have been assembled to a specific customer request.
Once you have chosen the product range you must still find a supplier (a distributor or manufacturer) from which to buy stock, unless you are running a dropshipping business. You will also require somewhere to store the product and people to process orders, pick the right product(s), pack them, produce carrier labels and dispatch them to their destination. This of course takes time, costs money and is a process that can go wrong in a multitude of ways.
If a customer returns a product you must then receive, appraise, refurbish or repack it and place it back into stock. These are not easy processes to do at the scale required to make money from ecommerce. Many B2C ecommerce businesses outsource this to a logistics service provider (a so-called 3PL or third-party logistics). Amazon, with its Fulfilment By Amazon (FBA) service, is one example, but there are many other smaller providers able to do this at less cost.
However, all-in-all the physical product side of running a B2C ecommerce business is challenging and potentially costly.
Sourcing, buying and handling - Disadvantage
When you sell to consumers, there is an expectation (including in law) that you will provide service to them before, during and after a sale. This can be as simple as providing a contact email address or telephone number. But you will need people to answer queries and provide accurate responses and to operate the policies you decide on for refunds, exchanges, returns and product support. This can be expensive to provide compared to the value of the products you sell, therefore it is best to try to limit the number of contacts your customers make per order to minimize your cost. To reduce the number of contacts, you should provide very clear, honest, accurate and detailed information on the product, the payment, shipping and returns processes. You should also respond to questions from customers quickly and by providing full information to avoid another follow-up contact.
Having to provide customer services is, on the whole, a disadvantage of B2C ecommerce.
Customer services - Disadvantage
Whenever you are selling products there is a risk that those buying them are not who they say they are, or are using payment methods they have stolen or are in some other way unauthorized to use. Failing to detect fraud is a significant risk with B2C ecommerce, especially for higher priced items and those that are easy to sell on. For example if a customer places an order with a stolen credit card number and you ship an expensive product to that fraudster, then the true owner of that card will raise a dispute with their card provider who will raise a chargeback against the payments service provider (PSP) you are using to handle the payments on your website. The PSP will in turn charge that amount to you. That is, for a $100 purchase, your PSP will reduce the money they remit to you that month by $100. That is, you lose both the product and the money that was fraudulently used to buy it. This is a quick route to going out of business. It is essential to invest in fraud detection services from your PSP, or contract with a third party fraud management supplier to minimize the risk of failing to spot fraudulent orders and the associated chargebacks.
Fraud - Disadvantage
In summary, while there are many advantages and disadvantages to B2C ecommerce, there are ways to reduce your exposure to downside risks and B2C ecommerce still remains a fantastic business to be in. If you can find a winning combination of product, price and customer, and have the ability to learn how to attract new customers affordably, give them great service when they buy, and encourage repeat purchases, you can scale your B2C ecommerce business and be very successful.