What Is E-Commerce?: A Comprehensive Introduction

The simple answer is that e-commerce is buying and selling online. E-commerce is a short form of the phrase electronic commerce. There’s more to it, though. From Amazon to your favorite local soap maker on Facebook to wholesale industrial parts manufacturers, e-commerce takes a lot of forms.

E-commerce takes place through brand websites, apps, email ordering, social media and marketplaces. Just like traditional on-site businesses where no one building type fits every business, no single e-commerce style works for all. The goal is to match your e-commerce outlet to the needs of your customers and company.

Unlike traditional on-site businesses, e-commerce removes many barriers to entry for small to medium businesses (SMBs), and even kitchen table entrepreneurs can reach global markets.

There’s no magical formula for selling. Traditional site-based sales, catalog sales and e-commerce all have good and bad points. That said, with the International Trade Administration projecting e-commerce to reach $5.5 trillion by 2027, e-commerce isn’t a sales avenue that can be ignored regardless of potential downsides.

When I’m asked by an existing business if e-commerce is worth it, I always point out that they are already competing with online sales whether they offer e-commerce or not. Every seller, even physical storefronts without an online presence, now has to compete with global online retailers. Customers will often visit physical stores to see products in person and then search for options online with better prices, home delivery or even just a different color.

E-Commerce Pros

• Lower cost of entry
• E-commerce stores can be opened more quickly than on-site stores
• Depending on location, fewer permits are needed for e-commerce
• Lower overhead than traditional on-site commerce since no physical storefront is required, although you may still need an office and inventory storage
• Scalability
• Wider audience reach—location, location, location is traded for SERPs, SERPs, SERPs
• Lower advertising costs and more DIY advertising options, thanks to social media ads, influencer marketing, email marketing, Google Ads and electronic self-serve billboards
• Open 24/7 without additional staffing
• Enhanced data and analytics gathering
• Personalized shopping suggestions for each customer
• It’s easier for new and small businesses to become established and trustworthy on a budget

E-Commerce Cons

• Limited connection to customers
• Customer service personnel are needed to help bridge the communications gap for online sales
• Cybersecurity threats
• Regulatory compliance can be difficult with data privacy, consumer protection and cybersecurity rules such as PCI-DSS payment security on top of business regulations
• Sales tax is more complex, as you must track tax rates and rules for multiple locations
• Inventory tracking and management to prevent overselling can be complex when selling through multiple channels
• Extra tools that integrate inventory management with your online store become necessary (and with those tools come compatibility concerns and additional costs)
• Shipping or delivery adds another layer of complexity to sales
• Shipping, and other unexpected costs, are a top reason shoppers don’t complete purchases
• Return management increases costs, especially since returns are more frequent when customers can’t physically examine products before purchasing and, when it comes to clothing or shoes, buy multiple sizes at a time

It’s also important to note that returns are especially problematic for clothing sellers due to size bracketing. That is, ordering three or more sizes with the intention of returning all but the one that fits the best. I find that since customers usually don’t have to interact with anyone when making e-commerce returns, they are less nervous about size bracketing instead of checking size charts before ordering.

E-commerce uses the internet to connect buyers and sellers, but that’s where the similarities between online stores end.

Just like there are different types of brick-and-mortar stores, such as drive-throughs, wholesale distributors, large department stores and showrooms for custom-made products, there are different types of e-commerce stores.

Likewise, companies may sell to end users, wholesale to other companies or even to governments. There are also different product categories, so classifying e-commerce often winds up being a bit like ordering in a build-a-meal-style restaurant where you pick one from column A, column B and column C.

E-commerce businesses need to choose a sales channel, who to sell to, a product type and how to get orders to customers.

E-commerce channels are the actual methods used to connect the buyer and seller. These channels are where customers view the products available for sale and place orders.

Most businesses eventually wind up with a combination of channels, although I always advise starting with only one or two channels and slowly adding more channels later due to inventory complexity.

The most common e-commerce channels include marketplaces, e-commerce websites and apps, to name a few.

Marketplaces

Marketplaces are group selling portals where individuals and small businesses can list items for sale individually or set up small storefronts. Examples include Airbnb, eBay and third-party seller listings on Amazon and Walmart.

E-Commerce Websites

For most businesses, even if they sell through multiple channels, a stand-alone e-commerce website is the primary online store. Rather than programming stores from scratch, most businesses choose a ready-made e-commerce platform that already has built-in features including shopping carts, secure checkout, integrations with payment processors and templates for product catalogs.

Most of the top e-commerce platforms, such as Shopify, are all-in-one services that include hosting and a storefront maker. For brick-and-mortar stores expanding into online selling, e-commerce platforms, such as Square, that offer physical point of sale (POS) and online selling in one package are generally optimal.

Apps

More than just optimized for mobile, e-commerce apps are purely designed for mobile and are almost always distributed through the Google Play store and Apple’s App Store. Although there are e-commerce app maker services available, their initial costs often start around $500 and are outside the budget of many small businesses.

Email Ordering

While most e-commerce is completed through ordering portals, there is still a segment that often uses email ordering. Large wholesale orders, especially for industrial and construction supplies, are sometimes compiled on spreadsheets and emailed to order due to how unwieldy a shopping cart would become.

Social Media

Social media facilitates e-commerce in several ways. There are social media marketplaces, such as Facebook Marketplace, and individual account shops driving traffic to stand-alone e-commerce sites (often with affiliate codes in the links).

Many small businesses start out with individual account shops because their only online presence is on social media and there is little to no upfront cost involved in setting up an integrated e-commerce store this way.

E-commerce business types are defined by who is selling to whom.

Classified by who is selling to whom, e-commerce types can easily start to look like alphabet soup. However, there is a method to the madness, and each type is shortened to a three-character acronym.

“Business To” Categories

“Business to” types are where the primary e-commerce seller is a business.

• B2B. Business-to-business e-commerce is where companies sell to other companies such as a building supply manufacturer selling roofing supplies to a distributor.
• B2C. Business-to-consumer e-commerce is what most people think of when they hear e-commerce. Online retail sales for anything from original art to groceries fall into this type.
• B2G. Business-to-government e-commerce is when private companies sell to government entities such as building contractors.

“Consumer To” Categories

While often facilitated by businesses, “consumer to” e-commerce categories are when an individual is the seller or otherwise providing something of value to another entity.

• C2B. Examples of consumer-to-business e-commerce include freelance web designers, consumers writing reviews, affiliate marketers and social media influencers promoting a product.
• C2C. Consumer-to-consumer e-commerce mostly consists of facilitated transactions. That is, a business such as Airbnb acts as an intermediary for consumers to sell or rent something to another individual. Other examples include eBay, Poshmark and Facebook Marketplace.
• C2G. Consumer-to-government (or citizen-to-government) e-commerce mostly involves citizens providing value to the government versus actually selling anything. Public input on upcoming policy changes or electronic voting could be considered C2G.

“Government To” Categories

“Government to” types are where the primary e-commerce seller is a local, state or federal government. While not a form your small business will take unless you’ve won the lottery and bought a sovereign island, this “government to” e-commerce is growing and it’s good to understand how it fits into the overall picture.

• G2B. Government-to-business e-commerce includes government websites that allow businesses to apply for business permits, pay taxes and access public records.
• G2C. Government-to-consumer (or government-to-citizen) e-commerce includes government portals where citizens can pay taxes and visitors can apply for visas.
• G2G. Government-to-government e-commerce includes commerce between government agencies or different levels of government, such as one agency purchasing equipment from another, but is more often simply electronic information exchanges.

The type of product sold can profoundly impact how e-commerce works. For example, while physical retail products simply need to be paid for and shipped, wholesale e-commerce products mean sellers must also deal with site access controls, custom pricing and tracking wholesale tax certificates.

When you are researching the best e-commerce business ideas, it’s important to keep the requirements of each product in mind.

Physical Products

Physical products make up the bulk of e-commerce. From cars to sublimated tumblers to landscape rock sold by the ton, there is a huge variety of items that fall into this product type, and they fall into one of two categories: retail and wholesale.

Retail covers items sold to anyone who wants to purchase, regardless of sales tax status. Wholesale products are generally sold B2B, where the buyer has a sales tax exemption and buys in larger quantities.

Private Labeling

Private-label products are usually physical products, but they are often broken out because they are a sort of hybrid between reselling something you bought and selling your own brand. Private-label products are made by another supplier but labeled with your branding.

Store-brand canned foods and Amazon Basics products are common examples of private labeling. The most common private-label e-commerce products from small businesses are coffee, cosmetics and clothing.

Digital Downloads

Digital downloads are products delivered in digital formats. Music and movie downloads, PDF sewing patterns, tutorials and e-books are digital download examples. Unlike physical products, digital downloads are susceptible to copying, sellers should invest in rights management or non-duplication security software.

However, even with that extra cost, digital downloads are often cost-effective, as there is no physical inventory to manage when selling digital products.

Streaming

Similar to digital downloads, streaming products are digital products consumed directly from the internet in real time instead of downloaded onto a personal device. Netflix and YouTube are two popular streaming service examples.

Services and Events

Selling services using e-commerce can sometimes become a hybrid between e-commerce and physical POS. Services such as home inspections, hair salon appointments and restaurant reservations are often set online, but payment is collected in person at the time of service.

This is a great entry into e-commerce for traditional companies, as it gives customers the convenience of seeing schedules and setting appointments without having to take time out of their day for a phone call.

Some services and events, such as photography sessions or workshops, may require payment or a deposit to be paid online. Still, other services such as online banking are conveniences that collect set fees automatically.

Rentals

Hotels, Airbnb and Vrbo are popular examples of rental e-commerce, but companies also rent cars, RVs, ice shacks and even puppies. Rental e-commerce is one of the more complex e-commerce products because of the sheer number of moving parts to set up the booking system.

Subscriptions

E-commerce subscriptions are automatically recurring purchases of any other category. For example, Hulu, Peloton or your weekly ready-to-make meal delivery. For small businesses, popular subscription products include themed boxes such as snack samplers, coffee, tea and craft-of-the-month tutorials.

After navigating all the setup and planning, I often see new e-commerce businesses caught unprepared for the work after the purchase. Unlike traditional commerce, where a customer has the product in hand at the time of purchase, e-commerce businesses have to figure out how to get the product to the customer’s location.

Self-Fulfillment

If you are shipping or delivering items yourself after receiving an order, you’re following the self-fulfillment model. In this type of order fulfillment, the seller carries inventory and packs and ships it once a customer places an order. You can store inventory in your own facility or rent storage space.

For digital products, there isn’t a physical product to ship, but sellers will still need to have a download delivery system in place. Some simply email the file to customers and others use download management software. I often recommend new sellers look at marketplaces such as Etsy that have built-in download management.

In-Store Fulfillment

A subtype of self-fulfillment, in-store fulfillment allows traditional on-site retailers that already have multiple locations to expand their distribution networks without the cost of additional stand-alone distribution centers. In-store fulfillment routes orders to the closest existing location that has a product in stock, and the store ships it to the customer.

Buy Online, Pick Up In Store (BOPIS)

For businesses with a physical location, BOPIS allows customers to place orders and then pick up the packaged orders at a later time at their convenience. Additional staffing needs are minimal, and many retailers use existing staff to pull and prepare orders for pickup.

“Buy online, pick up in store” is the e-commerce equivalent of someone calling and asking if you can hold an item until they get off of work and getting paid for the item upfront.

Dropshipping

In dropshipping, the seller never touches the product and holds no inventory. When a customer places an order, the online store owner places an order with their supplier and has it shipped directly to the end customer. Print-on-demand products such as shirts are common in this e-commerce fulfillment model.

Fulfillment by Marketplace

While selling through a marketplace channel such as Amazon or Walmart helps you quickly gain credibility with customers, it can create concerns about shipping speed. If there are any delays with your notifications of sales or if the order is from a location you don’t normally ship to, you may incur extra costs or the package might arrive late.

Fulfillment by marketplace takes advantage of programs such as Fulfillment by Amazon (FBA) from larger retailers that allow you to ship your products to a marketplace warehouse in bulk and then the marketplace ships items to customers as they are ordered.

Third-Party Logistics (3PL)

Rather than maintaining a warehouse facility or hiring staff to handle shipping, many e-commerce businesses opt to hire a third-party logistics company. These companies handle warehousing, shipping and receiving for you.

Third-Party Delivery

Third-party delivery is similar to 3PL, but those services don’t handle warehousing or any inventory management for you. Third-party delivery services allow brick-and-mortar businesses to sell online without handling the delivery part of the equation, or in some cases, the order picking and packing.

DoorDash, Shipt and Instacart are examples of third-party delivery. These services can work using direct order with the store or with a delivery app that acts as a go-between for the customer and the original business. These are most popular for food, grocery and convenience items from drugstores.

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E-commerce offers businesses and individuals a low-cost entry into a global market with the freedom to start small and scale easily as their resources and needs grow. Understanding what e-commerce is and the options available are the first step in creating a successful e-commerce strategy and starting your online store.