E-commerce Defined: Types, History, and Examples

What Is Electronic Commerce (E-commerce)?

Electronic commerce, or e-commerce, is the buying and selling of goods and services over the internet. E-commerce can be conducted on computers, tablets, smartphones, and other smart devices. Nearly every imaginable product and service is now available through e-commerce, and it has upended how many companies and entire industries do business.

Understanding E-commerce

As noted above, e-commerce is the process of buying and selling products and services online. But it involves more than simply a buyer and a seller, relying on a vast, often invisible, infrastructure to keep it running.

E-commerce has helped companies (especially those with a narrow reach, like small, local businesses) gain access to a wider market by providing cheaper and more efficient sales and distribution channels for their products or services.

While some businesses exist entirely online, others straddle the real and virtual worlds. Target (TGT), for example, is one of many giant retailers that has supplemented its brick-and-mortar presence with an online store that allows customers to purchase everything from clothes and coffeemakers to toothpaste and action figures without leaving their homes.

At the other end of the scale spectrum, individual sellers increasingly engage in e-commerce transactions via their own personal websites. And digital marketplaces like eBay and Etsy serve as exchanges where multitudes of buyers and sellers can come together and do business.

History of E-commerce

Most of us have shopped online for something at some point, which means we’ve taken part in e-commerce. So it goes without saying that e-commerce is everywhere. But very few people may know that e-commerce has a history that predates the internet.

E-commerce actually goes back to the 1960s, when companies used an electronic system called the Electronic Data Interchange to facilitate the transfer of documents. It wasn’t until 1994 that the very first transaction took place. This involved the sale of a CD between friends through an online retail website called NetMarket.

The industry has evolved rapidly since then, with companies like Alibaba and Amazon becoming household names around the world. The introduction of free shipping, which, at least on the surface, reduces costs for consumers, has also helped increase the popularity of the e-commerce industry.

Advantages and Disadvantages of E-commerce

Advantages

E-commerce offers buyers and sellers a number of advantages:

• Convenience: E-commerce can happen 24 hours a day, seven days a week. Consumers can buy at their convenience, and business owners can make sales while they sleep.
• Increased selection: Many stores offer a wider array of products online than they could ever carry in their brick-and-mortar counterparts. And many stores that solely exist online offer consumers exclusive inventory that is unavailable elsewhere.
• Potentially lower start-up costs: E-commerce companies may require a warehouse or manufacturing site, but they usually don’t need a physical storefront. The cost to operate digitally is often less expensive than needing to pay rent, insurance, building maintenance, and property taxes.
• International sales: As long as an e-commerce store can find a way to ship its products to its customers, it can sell to anyone in the world and isn’t limited by physical geography.
• Opportunity to collect valuable data: Willingly or unknowingly, consumers share a lot of information on their interests and shopping habits when they buy or even just browse online. Site owners can monetize this data in a number of ways, using it themselves and selling it to others.

Disadvantages

There are also some drawbacks that come with e-commerce. Those can include:

• Limited customer service: If you shop online for a computer, you cannot simply ask an employee to demonstrate a particular model’s features in person. And although some websites let you chat online with a staff member, that is not a typical practice. A disadvantage for shoppers, this can also be a money-saver for retailers.
• Lack of instant gratification: When you buy an item online, you must wait for it to be shipped to your home or office. However, e-tailers like Amazon now make the waiting game a little bit less painful by offering same-day delivery as a premium option for select products.
• Inability to touch products: Online images do not necessarily convey the whole story about an item, and e-commerce purchases can be disappointing when the items don’t live up to the buyer’s expectations. Case in point: an item of clothing may be made from shoddier fabric than its online image indicates.
• Dependence on technology: If a website crashes or must be temporarily taken down for any reason, the business is effectively closed until things return to normal.
• Greater competition: Although the low cost of starting an e-commerce business can be an advantage, it also means means competitors can just as easily enter the market.

Types of E-commerce

E-commerce companies can operate using several different business models.

Business-to-Consumer (B2C)

B2C e-commerce companies sell directly to the product’s end-user instead of distributing goods through an intermediary such as another retailer.

This type of business model may be used to sell products (like your local sporting goods store’s website) or services (such as a lawn care mobile app to reserve landscaping services). This is the most common business model and the concept most people likely think about when they hear the term e-commerce.

Business-to-Business (B2B)

Similar to B2C, an e-commerce business can sell goods to another company. B2B transactions often entail larger quantities, more detailed specifications, and longer lead times. The buyer can also arrange for recurring orders if the purchase is for ongoing manufacturing processes.

Business-to-Government (B2G)

Some e-commerce businesses serve as government contractors, providing goods or services to government agencies and other entities. Often these arrangements require bidding on projects though an established procurement process and can involve large quantities of a given item.

Consumer-to-Consumer (C2C)

Individuals can sell things to other individuals on their individual websites or through e-commerce platforms that facilitate the process. Examples of the latter include Craigslist, eBay, Etsy, and many others.

Consumer-to-Business (C2B)

Some platforms allow individuals to more easily engage with companies and offer their services, especially related to short-term contracts, gigs, or freelance opportunities. Upwork is one example.

Consumer-to-Government (C2G)

Although not an e-commerce relationship in the traditional sense, C2G is a way for individuals to interact with government. For example, uploading your federal tax return to the Internal Revenue Service (IRS) website can be considered an e-commerce transaction as it involves an exchange of information. Taxpayers can also pay what they owe or request a refund for the amount they may have overpaid.

Types of E-commerce Revenue Models

Due to the unique nature of e-commerce, businesses have a variety of revenue models to choose from, based on how their goods are manufactured, sold, and shipped. Common examples include:

Dropshipping

Often considered one of the easier forms of e-commerce, dropshipping allows a company to create a digital storefront, sell goods, and then rely on a supplier to take it from there. The e-commerce company collects payment from the buyer, after which it passes the order to the dropshipper. This supplier manages inventory, oversees the warehousing of goods, packages the orders, and delivers the product to the purchaser.

White Labeling

In white-label e-commerce, the seller doesn’t manufacture the product but buys an existing product from the manufacturer or another supplier and repackages it under its own brand for resale to the ultimate consumer.

Private Labeling

Similar to white labeling, private labeling involves selling a product made by another manufacturer. In private labeling however, the seller may have more control over the actual product, such as having it made to particular specifications. Store brands are an example of private labeling.

Wholesaling

Wholesalers serve the buyers of large numbers of a particular item or many smaller buyers of that item. A more capital-intensive approach to e-commerce, wholesaling can entail maintaining and warehousing significant quantities of inventory.

Subscription

E-commerce companies can also leverage repeat orders or loyal customers by implementing subscription services. The consumer places an order once and receives their goods at a fixed cadence, such as every month. Common subscription e-commerce products include meal prep services, pet food, fashion boxes, and health and grooming products.

Example of E-commerce

Amazon is a behemoth in the e-commerce space. In fact, it is the world’s largest online retailer and continues to grow. While its success has been unusually spectacular, its history is not unlike many other e-commerce businesses.

The company launched its business with an e-commerce-based model of online sales and product delivery. It was founded by Jeff Bezos in 1994 as an online bookstore and over the years has expanded to include everything from clothing to housewares, power tools to food and drinks, and electronics. Today it also makes a significant portion of its revenue from services to consumers, other businesses, and governments.

Company sales increased by 11.8% in 2023, totaling $574.79 billion, compared to $513.98 billion in 2022. Amazon’s operating income rose to $36.85 billion in 2023, up from $12.25 billion in 2022.

The Bottom Line

E-commerce companies like Amazon, Alibaba, and eBay have changed the way the retail industry works, forcing major, traditional retailers to change the way they do business. At the same time, e-commerce has created new opportunities for small, new companies to find a niche. If starting an e-commerce site is something you’re considering, make sure to do some market research and start with a small, narrow focus to give yourself room to pivot and grow.