3 Most Common Online Business Models

Discover the Best Business Model for You

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3 Online Business Models. Copyright Gregor Schuster

Let’s say that you make the most amazing spaghetti sauce and your friends tell you that you should turn it into a business. What business model will you use?

“Well,” you say, “I’ll make a product and sell it.” This is one option, but certainly not the only one. 

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

What’s Your Business Model?

There are three basic business models for online businesses.

  1. Sell a physical product.
  2. Sell a service.
  3. Sell a digital information product.

Another source of income, which allows you to earn additional income regardless of which model you decide to go with, is affiliate marketing.

Let's take a look at each of these models in more detail.

Selling Physical Products Online

Sell a physical product: This is probably the first model that comes to mind. 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.

Benefits to selling physical products online: Compared to selling from a physical location, there are several benefits to selling your goods online. First of all, customers can check out your product offering without having to go to your physical location (if you even have one). Customers 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.

Drawbacks to selling physical products online: You have to actually make something. And warehouse it. Then ship it. Physical goods can spoil and are time-consuming to produce, inventory and ship.

And then there are the 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.

Note: Another way to sell physical products online without the hassles of having to create products, handle shipping, etc. is to start an online drop shipping business.

Selling Services Online

Sell a service: Services are ideally suited for online sales. There are two basic ways services are sold online.

  1. Site as a Sales Tool: Offline business use their site as a sales tool for services delivered offline. Many offline businesses use the internet as a sales tool for their service. 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.
  2. Site as a Storefront: Services are sold (and delivered) online: Examples of these services include web marketing, travel, and entertainment. All these items are sold and delivered via the vendors server. The benefits of this model is that customers can get instant gratification by making the sale directly online rather than having to wait to speak with someone or make an appointment.

    Benefits to selling a service online: 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 content will outperform weaker competitors every time. Regardless of whether you use a brochure or storefront platform, this business model is faster and easier to setup than one selling physical goods.

    Drawbacks to selling a service online: 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”.  A Google search serves over 2.5 million results. Because of this, 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.

    One of the most effective ways to promote a service based business is by using Facebook advertising. You can target your audience by geographic location, demographic information, and targeted interests as well. And the good news is that compared to other advertising mediums, Facebook is still relatively inexpensive and cost effective for small businesses.

    Selling Information Products Online

    Sell information products: 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 is automatically handled by your shopping cart and payment gateway. You can process one order per day just as easily as one thousand transactions.

    Information product sales can be broken into two categories.

    1. Downloadable Material: The most common downloadable material is an ebook. They range in price anywhere from $3.99 to $49.00 and up. Other downloadable material can include audio (MP3), video (MP4) and worksheets. The 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.
    2. 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.

    Benefits to selling information products online: 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. 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.

    Drawbacks to selling information products online: 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.

    Tip for Selling Information Online

    People aren't willing to pay for just any old information. Most frequently the material needs to solve a current, pending problem. Think along the “how to” line. If you know how to accomplish a difficult or confusing task, maybe this would be a good basis for an information product. Don't think that people will pay for information that resembles a typical blog post. Make sure that it is comprehensive and that it solves a real problem.

    The real key to being successful with selling information products online is being able to write very good, compelling website copy. Mastering copywriting is the number one thing you need to be successful selling information products online (of course it can help with any type of business and marketing as well).

    What Every Online Business Needs

    Regardless of the 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 into your business to capture the information of the people visiting your website and following up with them to increase your initial and repeat sales.

    What Online Business Model Will You Choose?

    So back to your delicious spaghetti recipe. What business model will you choose?

    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 styled 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.

    Sell 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?