3 Common Online Business Models

Launching a business online gives small business owners a chance to build a business with more ease and less capital investment than they would if they had to open a brick-and-mortar location. For example, if your friends all tell you that you make the most amazing spaghetti sauce and that you should turn it into a business, you can start right away by building an online presence for your business and its products, before you've even actually produced one jar of sauce.

One question remains, though, after you decide to create your business online. What online business model is the best for your internet business? While you might decide that it's best to make a product, such as your winning spaghetti sauce, this is one option, though certainly not the only one. 

Take the time to consider the best internet business model for your new idea and you will dramatically increase your odds of success.

Which Online Business Model Fits Your Plans?

There are three basic business models for online businesses, and you can choose the one that best fits your vision:

• Sell a physical product
• Sell a service
• Sell an information product

If you don't want to deal with the manufacturing, storage, or shipping of a physical product, and you don't want to provide a service, you can try another form of business that has become very popular online, which is affiliate marketing. Affiliate marketing is the concept of promoting other people's products (physical or digital) or services and simply receiving a commission when a sale is made.

Selling Physical Products Online

This is often the first model that comes to mind for many people. Create a shippable, physical product and market it online. It could be sold via your own e-commerce storefront, an auction site, or you can sell your products on a third-party site, like Amazon.com.

Pros Explained

• Doesn't require a physical storefront: Customers can check out your product offering without having to go to your physical location (if you even have one).
• Customers get the entire business experience in one place: Your patrons get to see all of your options including things like customer reviews, ingredient lists, and related recipes or uses. Videos and photos of your product in use and FAQ sections can give customers more information than they would ever have in a brick-and-mortar store.
• Bigger reach: As more and more consumers are switching their buying habits to online, you'll be able to reach more people and increase sales from an online presence.

Cons Explained

• Physical goods management: You have to actually make something. And warehouse it. Then ship it. If you're selling perishable physical goods like, say, spaghetti sauce, they can spoil and are time-consuming to produce, inventory and ship.
• Returns: With physical goods, inventory control is a challenge. If you make too much and it spoils, you lose. If you make too little and you run out of stock, you lose potential sales and maybe clients who will look elsewhere for a more reliable supply.

Selling Services Online

Services are ideally suited for online sales. There are two basic ways services are sold online.

You can use a website as your sales tool. Many offline businesses use their website as a sales tool for services delivered in person. Their site serves as more of a company brochure than a storefront.

You can find (and qualify) a carpenter, dentist or massage therapist all through their online presence. The one thing they have in common is that you physically receive all of these services. This is a great method for generating and qualifying leads for a service-based business.

You can also choose to provide services that are sold (and delivered) online: Examples of these services include web marketing, travel, and entertainment. All of these items are sold and delivered via the vendor's computer. Customers can get instant gratification by completing their purchase directly online rather than having to wait to speak with someone or make an appointment.

Pros Explained

• Cost-effective lead generation: It can be much less expensive to capture leads and customers via a well-built and marketed website than through traditional, offline methods. Customers receive lots of information about your product and don’t have to travel to check out their options. Well-built sites with lots of relevant content may outperform weaker sites over time.
• Easier setup: Regardless of whether you use a brochure or storefront platform, this business model is faster and easier to set up than one selling physical goods.

Cons Explained

• It can be hard to get traffic for sought-after keywords: There are high levels of competition, especially for specific keywords. If you are a plumber in Seattle, you might have a hard time ranking for the keyword “Seattle plumber”.  
• Requires a marketing plan that includes content creation: You’ll have to consider an aggressive content marketing plan. Because you generally don’t get the chance to establish an in-person relationship with your customer, an engaging blog with videos plays an important role in this business model. If you don't have the skills to write content, you may have to hire someone to do it for you.
  

Selling Information Products Online

Making money online by selling information products is the business model of choice for lifestyle entrepreneurs and internet marketers. When you sell products or services a bottleneck often develops. Business owners frequently hit a level of sales that they can’t grow beyond without changing their business - hiring more staff, buying more equipment, etc.

With information products, you don't have the hassles of traditional businesses like overhead, inventory, employees, being confined to a single location, etc.

Products are almost exclusively delivered electronically and automatically. Payments and invoicing are automatically handled by your shopping cart and payment gateway. You can process one order per day just as easily as one thousand transactions.

Basically, you create the product once then only have to focus on marketing and driving website traffic. Every other part of the business is completely automated.

Information product sales can be broken into two categories: downloadable material and membership sites.

Downloadable Material

A common type of downloadable material is an ebook. Pricing starts at $0.99 on a popular site such as Amazon. If you're thinking about offering a course for your customers, higher-priced courses often include a combination of PDF and audio/video files. Because these products are delivered digitally and there are no costs involved you get very high-profit margins on these types of products.

Membership Sites

These range from online access to newspapers/magazine to full-blown training sites with video, audio, and interactive forums all behind a membership gateway. These often bill monthly or annual membership fees. Sometimes they are set to automatically deliver a set amount of content to each new member—like course lessons—over a set period of time.

The goal of this “drip” method is to avoid overwhelming new subscribers with too much content and to keep them paying for a longer period of time. Having a membership site where members are charged monthly is a good way to get stable, recurring revenue into your online business.

Pros Explained

• Recurring billing: Many of these online service vendors provide ongoing information which means a recurring billing model. With monthly or annual billing, you’ll require a much lower number of clients to be successful.
• Low-maintenance: This business model requires very little maintenance time, once the product is actually created. Because of the scalable model, you can easily handle large numbers of buying clients without hitting the typical bottleneck that is common in product and service businesses.

Cons Explained

• Conveying the value of your information can be tough: Information vendors struggle with conveying the real value of their material. With so much free information available online, it is a challenge to convince someone to pay you for your content. Also, digital content is easy to copy and steal. You will need to think about how to protect your content and how to handle the theft of it. A key skill you will want to develop especially when it comes to marketing and selling information products is copywriting.
  

Examples of Online Business Models at Work

The following examples show you what your business could look like if your specialty is spaghetti sauce.

Selling a Physical Product

Your delicious spaghetti sauce could be produced in volume, packaged, warehoused and shipped to pasta lovers worldwide. You can offer a variety of bottle sizes (individual, family, party), flavors (meaty, spicy, organic) and styles (sauce only, with noodles, dry spice mix).

You’ll need to either set up a factory or outsource the production. Either way, this is expensive. You’ll need to consider: payment gateway, drop shipper, manufacturing, claims, and returns.

Selling a Service

Your special recipe could be the basis for an Italian-styled catering company. Using a brochure-style website you could market your catering business. Or you could offer in-house training to restaurants. Maybe you could offer personalized coaching to individuals who want to learn to cook an authentic and delicious spaghetti meal.

Setup time and investment will likely be less complicated and less costly than with an actual physical product. It should be easier to differentiate your offering by selling a service.

Selling an Information Product

This is probably the least complicated (and thus the least stressful) option. You could write a simple ebook teaching the process and ingredients in your famous recipe. Or you could turn this into a full-blown cooking membership site complete with videos and member forum. Your content can grow as your membership does. 

And who's to say you can't do all three business models having a spaghetti sauce based physical product, service, and information product empire incorporating all of these online business models based around your passion, know-how, and expertise.

Strategies for a Successful Online Business

Regardless of the online business model you choose, you’ll need a content marketing strategy. Without solid content on your site, you’ll never attract search engine traffic or give your prospects a reason to come back to your website. And potential customers won’t have the information they need to make an informed purchase - so they probably won’t make one at all.

You should also consider implementing an email marketing strategy that caputres the information of the people visiting your website. Follow up with them to increase your initial and repeat sales.

Frequently Asked Questions (FAQs)