When first setting up an online business, you’ll need to understand your business model – in other words, how you’ll earn revenue. By identifying and developing your business model early on, you’ll be in a better place to answer the questions that plague every small business owner’s mind.
A good starting point is looking at the merchant model. This is a common ecommerce model that is used to sell goods directly to customers through an online storefront.
In this article, I’ll explain what the merchant business model is and lay out all the pros and cons, to help you decide if it’s right for your business. I’ll tell you how it compares to other business models and even share some expert tips.
What Is the Merchant Model?
In simple terms, the merchant model is when an online business sources goods from manufacturers and sells them to customers through a webstore. It’s a very common online business model and works for an array of B2B and B2C companies, including new businesses and established businesses that want to expand their customer base.
Businesses that use the merchant model don’t rely on research and development of their own products, but rather purchasing pre-manufactured products. The business is responsible for website upkeep, branding and marketing, inventory, and secure payment processing.
Many new business owners start with an online-only merchant model, as it is generally simple to set up. The merchant model can work for physical goods that are private label or resells, digital products such as software, or even services – though this is less common.
Over time, however, many merchants may decide to expand by working with resellers, operating brick-and-mortar locations in addition to the online shop, or moving towards a different model of business.
How Does the Merchant Model Work?
In the merchant model, a merchant buys products from a wholesaler or manufacturer and then lists them on an online storefront. The merchant is responsible for product images, descriptions, specifications, as well as stocking inventory of all available products.
A customer shopping online would then be able to purchase a product directly through a payment gateway on the website. After the payment has been processed, the seller dispatches the product to the buyer.
For example, Best Buy works as a merchant model. It doesn’t manufacture its own products, but it sells, among many other things, both hardware such as computers and laptops and software such as Microsoft Windows. This benefits both the company and the customer, because the customer can purchase both a new laptop and an operating system for it from the same online store.
When you work according to the online merchant model, you can offer a wide range of stock that appeals to many consumers, without having to rely on physical location or developing your own products.
Merchant Model Examples
Huge online platforms such as Amazon, AliExpress, Zappos, and Wayfair source products from various brands and sell them online, directly to consumers. Amazon and AliExpress also function as online marketplaces, allowing other online sellers to make use of the merchant model without having to start a website of their own.
Another example of the merchant model is a click-and-mortar seller. These are brands that have brick-and-mortar stores (sometimes in many locations), but also operate online stores to reach a wider customer base. Examples of these include Best Buy, Foot Locker, and OfficeMax.
Similar to the ecommerce giants mentioned above, bit vendors offer products curated from a variety of sources. The difference is that bit vendors sell digital products. A prime example of this is the Apple iTunes store. This model is losing popularity, though, with the rise of subscription-based models for software and other digital products.
The Pros and Cons of the Merchant Model
- Limitless Offerings: One big benefit of operating an online merchant model business is that you can source a variety of goods that compliment each other to enhance the customer experience. For example, if your online store sells Nike shoes, it would be easy to add on Nike socks as accessories.
- Brand Recognition: Merchant-model businesses can use existing brand and product recognition to gain customers, instead of having to develop and market their own brand.
- Scalability: While merchant-model online shops are simple to set up, they also offer the ability to scale quickly and efficiently. By operating online only and starting small, you’ll be better prepared to know what sells well and what doesn’t, and how to scale your business accordingly.
- Competition: Because the merchant model is relatively simple, you’ll often have a lot of competition selling similar products (or sometimes even the exact same). Differentiating yourself in some way to gain and keep customers can be a challenge.
- Upkeep of Large Inventories: Running an online merchant-model business means you may have to keep a large inventory, so potential customers don’t have to see “out of stock” messages while browsing your product catalog. Unlike dropshipping, where the supplier stores and ships the goods for you, this can require a large investment.
- Credit Card Fraud and Privacy Concerns: As an online merchant, you’re responsible for ensuring the security of your customers’ personal information and financial details. Unfortunately, with the rise of cybercrime and hacking, no site is immune from security threats. Any privacy breach may result in loss of customer trust or issues with continued operations.
How Does the Merchant Model Compare to Other Major Pricing Models?
The Dropshipping Model
The dropshipping model is often compared to the merchant model. While similar in the idea that sellers rely on sourcing goods from manufacturers, dropshipping-based businesses don’t keep physical stock on hand. Instead, they act purely as the middleman, and rely on manufacturers to send directly to customers.
The Brokerage Model
A brokerage-model business also acts as the middleman, but unlike dropshipping or merchant model, does not source products at all. Instead, it provides an online marketplace where sellers can connect with buyers, and charges a commission for each transaction. Some examples are eBay, Amazon, and Etsy.
The Agent Model
The agent model is similar to the merchant model, but it’s more popular for services rather than goods. Agent-model businesses work similarly to brokerage-model businesses, taking a cut of the revenue instead of providing their own services. This model is common among online travel services like Booking.com, or freelancing marketplaces like Upwork.
The Subscription Model
In subscription-based models, the business provides recurring access to software, products, or services. Unlike the merchant model, the subscription model is best for items purchased regularly (HelloFresh, for example), or media platforms where content may constantly change (NYTimes or Hulu, for example).
The Bottom Line: Is the Merchant Model Right for You?
The merchant model may be a great choice for you if you’re looking to sell products from a well-known brand or run a large ecommerce site with many brands.
While you’ll need to invest the work into building an online shop, sourcing inventory, and marketing, there are some clear advantages. The merchant model is easily scalable, allowing you to start small and grow over time. If you sell products from established brands, you’ll be able to take advantage of brand recognition to appeal to your customers.
Whether your business is going to be using the merchant model or not, you’ll need a way to accept payments from your customers. With Pay.com, you can easily set up a secure payment system on your website, choose which payment methods to accept, and even customize your checkout page. Click here to start accepting payments on your website today.