May 27, 2019

ecommerce business models malaysia

E-commerce is gaining popularity in Malaysia as well as most of Southeast Asia. Each week, I receive emails from Malaysians who want to start their own e-commerce business but don't know how.

They have questions like:

"What's the best path to get started with? Should I drop ship, sell on marketplaces like Lazada and Shopee or set up my own Shopify store?"

Essentially, they are asking which e-commerce business model will make them the most money right now.

Unfortunately, there isn't a single most profitable e-commerce business model that fits everyone. The best e-commerce business model for you would depend on your budget, experience and current circumstance.

For example, if you are college student with a capital of RM500, you won't be able to use the business model as someone with a RM10,000 budget would. 

Similarly, if you have zero experience selling things online, it might not be a good idea to replicate the business model of someone with ten years of digital marketing experience.

So, which e-commerce business model should you go for right now?

The best way to decide is by first understanding the various e-commerce business models Malaysians are already using to make money online.

By knowing exactly how each model works, you'll start to see if a specific business model is one you can afford, or have the right skills to execute.

Let's get started:

Common E-commerce Business Models Explained

While there are many types of e-commerce business models out there, they are mainly classified by their distribution and fulfilment methods.

The combination of a specific type of distribution method and a specific type of fulfilment method usually forms one type of e-commerce model.

For example:

Drop shipping to Marketplaces like Lazada and Shopee is one type of e-commerce business model.

Of course, classifying e-commerce business models simply by their distribution and fulfilment doesn't cover all business models available.

However, for beginners in e-commerce, understanding e-commerce business models from these two aspects will give you a good understanding of how most e-commerce businesses work and help you to discover which one might fit you best before diving into more specifics later.

Let's now take a look at some of the most popular e-commerce distribution and fulfilment models in Malaysia:

E-commerce Distribution Models

Distribution models determine how the products are sold to customers. Here are two of the most common e-commerce distribution models in Malaysia:

1. Direct to Consumer (DTC)

Direct to consumer marketing is defined as promotion of product directly from manufacturer to consumers without involving the intermediaries in the process. 

In a DTC model, a brand sells their products directly to their customers without the use of any kind of middle man.

A DTC model is quite the opposite of a traditional distribution model where brands get distributors and retailers to sell their products on their behalf.

To give you an idea of how DTC works and how a traditional distribution model works, consider two online stores:

TESCO and Apple.

While TESCO carries a lot of brands under it, Apple's website sells its own products exclusively.

Now you know the difference, you might be wondering: why would a brand choose to use a DTC distribution model compared with a more traditional distribution model.

Let's take a look:

Why Choose a DTC business model?

You can control your customer experience. Having full control over how your customers buy from you is one of the biggest benefits of a DTC model. You get to design every step of your customer's experience on your store without sticking to your distributor's rules.

You don't need to please gatekeepers. In a traditional distributor model, you'll need to convince retail gatekeepers or meet their list of criteria before they'll put your brands on their physical or digital shelves. With a DTC model, you can start selling immediately.

It's easier to build a strong brand. In a DTC model, your customers will have direct contact with your brand only. Compared to a traditional distributor model, they won't become distracted by your competitor products.

You can spend more money on marketing, rather than markups. Since you don't need to pay your retailers and distributors, you can use the money to give your customers better pricing on your products or invest on marketing.

Disadvantages of DTC business model

High startup costs. Since you won't be taking advantage of distributors, you'll need to build your own retail chain. If this is your first brand, it can be an expensive process involving building brand awareness and creating marketing campaigns to heighten the awareness to your brand.

Example of Malaysian DTC E-commerce Brands

Here are some brands in Malaysia who are already taking advantage of the DTC model:

Signature Market

Signature Market is a DTC brand that supplies healthy snacks for Malaysians directly from manufacturers. By getting rid of middle men, they are able to pass on 20 - 50% savings off other brands to their customers.

signature market homepage

How to Get Started with a DTC Model

If you have a product you want to sell using a DTC model, the most important thing you'll need is your own branded e-commerce website.

This will be your main touch point with your customers so you'll need to invest time and money into creating a great customer experience for them.

Luckily, it's not that challenging to set up an e-commerce website these days. You can explore some of the most popular e-commerce platforms or website builders below:

Shopify Malaysia or EasyStore Malaysia: Which E-commerce Website Builder Should You Use? (Updated 2018)

Shopify Malaysia Review: Pricing, Plans, Pros, Cons and How to Get Started Selling in 2019

[2019] EasyStore Review: Is it Worth Setting Up Your E-commerce Store with EasyStore?

2. General or Niche E-commerce Website

Similar to a DTC model, you will be selling directly using your own website, but the biggest difference is that you won't be carrying your own branded products but a variety of different products.

Why Choose General or Niche E-commerce Website Model?

Can test a large variety of products. When you don't have to be brand exclusive, you can sell almost any product you want. This allows you the ability to test and find winners.

No need to rely on sales of just one brand. If you are selling just one brand, your business may be a risky one. But with a large variety of products, you will eventually be able to hit some home runs.

Disadvantages of using this model

Cost of website setup. An e-commerce website can cost you anything from RM50 - RM500 per month. You'll also need to set up a payment gateway to capture payments on your e-commerce website.

High marketing costs. You need a large budget for marketing. These include Facebook marketing, influencer marketing and SEO, to name a few.

Example of General E-commerce Stores in Malaysia

Storming Gravity

Storming Gravity is an e-commerce website selling high-quality gadgets and accessories in Malaysia. It is a niche store that appeals to gadget savvy millennials in Malaysia.

storming gravity homepage

Who Should Go for General or Niche E-commerce Store Model?

You should consider starting an general e-commerce store if:

  • You want to test a lot of different types of products
  • You want to carry many kinds of products
  • You have the budget to run marketing campaigns

How to get started?

Like DTC model, you need to set up your own e-commerce website. Here are some guides about e-commerce platforms you can consider:

Shopify Malaysia or EasyStore Malaysia: Which E-commerce Website Builder Should You Use? (Updated 2018)

Shopify Malaysia Review: Pricing, Plans, Pros, Cons and How to Get Started Selling in 2019

[2019] EasyStore Review: Is it Worth Setting Up Your E-commerce Store with EasyStore?

3. E-commerce Marketplace

Other than DTC model, selling on e-commerce marketplaces like Lazada and Shopee is one of the most common distribution models in Malaysia.

In a marketplace distribution model, you register yourself as a merchant on these marketplaces, list your products and start making sales. You won't need to set up your own branded website if you don't want to.

The marketplace platform owner may charge you money for things like sales commissions, payment gateway fees, and sponsored ads.

Most of the time, a brand may choose to add marketplace distribution as another sales channel on top of their existing ones.

Why Sell on Marketplaces?

Low setup costs. Unlike DTC model, you won't need to set up your own website, or payment gateway. You can get started fairly quickly without spending too much money.

Large, ready traffic. Marketplace platforms run their own marketing campaigns that draw in large traffic to your store. As a brand, this means your Customer Acquisition Costs (CAC) will be much lowered.

Disadvantages of Selling on Marketplace

Lack of control of customer experience. This is one of the most important drawbacks of selling on marketplaces. Unlike your own website, you are pretty much at mercy of what the marketplace owner decides to do. Even if the changes are not in your business' favour, you won't have much of a say.

Price wars. In a marketplace environment, you'll find your products listed next to your competitors. This makes it easy for your customers to do comparison shopping, often checking out the cheaper option.

Hard to build a brand. Especially for a less well-known brand, it will be quite difficult to build a brand. When people buy from a website like Lazada or Shopee, they may think they are buying directly from these brands, rather than your brand.

How to Get Started Selling on Marketplaces

To sell on marketplaces, you'll need to set up your seller accounts on e-commerce marketplaces in Malaysia.

Here are my guides to help you get started:

Why You Should Sell on Lazada Malaysia and How to Get Started in 2018

Why You Should Sell on Shopee Malaysia and How to Get Started in 2018

E-commerce Fulfilment Models

Now that you have a better idea of the common distribution models, let's take a look at the other part of an e-commerce business model: the fulfilment.

Fulfilment is basically when your customer orders are processed and sent.

This usually includes warehousing the inventory, packaging and then shipping it out to your customer's given address.

There are a few common ways orders are fulfilled. Which one you choose will depend on your budget and current business nature.

1. Drop ship Supplier to Customer

How it works

You do the marketing while your suppliers keep inventory, pack and ship your customer orders directly to them with your brand or no brand.

Drop shipping is probably one of the first ways of fulfilment people think about when wanting to make money online. It's low cost and quick way of getting started for people with a low budget.

Pros

No capital down for inventory. The biggest advantage of drop ship model is that you don't need a lot of money to get started when it comes to inventory. Your supplier keeps the inventory for you and ships it out on your behalf when a customer confirms an order.

Cons

Low margins. As a drop shipper, you can expect a lower margin since you'll be buying stock one unit at a time. You won't be able to take advantage of bulk pricing.

Competition. With drop shipping, one of the biggest disadvantages is that you'll be selling products everyone has access to. This means you'll not be able to hang on to exclusive seller rights.

High marketing costs. While drop shipping helps you do away with inventory costs, you still have to prepare money for marketing.

2. Direct Manufacturer to Customer

How it works

You manufacture your own products and sell them directly to your customers. This is a fulfilment model that factory owners can use. 

Pros

Supply chain control. You'll know exactly how much stock you have. You'll less likely face fulfilment issues.

Costs control. Especially when combined with a DTC distribution model, you'll be able to reduce all the middleman costs and pass your cost savings as an attractive price to your customers.

Cons

Less product choice. As a manufacturer, there are a lot of additional costs needed to produce new products. Expanding your number of SKUs can be an expensive process.

3. Retailer to Customer

How it works

You buy from manufacturers or distributors and sell to your customers.

Pros

Lots of product choices. You don't need to be locked down to one product. You can get product supplies from many different manufacturers. This means you'll also be able to provide your customers with a larger product collection.

Cons

Can be expensive to keep stock. As a retailer, you'll usually need to meet the Minimum Order Quantity (MOQ) of a manufacturer before they will supply you the products. The more products you want to sell, the higher the upfront investment you need.

Price competition. Unless you have exclusive access to the manufacturers, they can sell to your competitors who might reduce from your base price.

4. Offline-to-Online (O2O)

How it works

This is one of the most common fulfilment models by Malaysians who have existing physical businesses. O2O basically involves listing online the products you already have in store.

Pros

Easy transition. If you already have retail shop with stock, it's one of the easiest to transition online. You simply have to list what you have. Even if it doesn't sell, you still have your retail store to sell them on.

Cons

Stock management. Need to streamline physical stock and the online stock. Not having the right system to sync may cause stock shortages on either end.

Which Should You Go For?

As we've seen earlier, your overall business model will depend on both your distribution model and your fulfilment method of choice.

1. By Budget

Below RM1,000 (Low budget)

My Recommendation: Marketplace + Drop shipping

If you have a really low budget of RM1,000 or below, my best recommendation is to go for marketplace + drop shipping model.

Why?

Selling on marketplace means you won't need to spend money setting up your own branded e-commerce store, and you don't need to spend much on marketing.

Most of your time can be spent on doing research and listing products.

Most importantly, drop shipping means there's no money down for inventory. This is the best way to get a foot into e-commerce.

More than RM5,000 (Medium budget)

My recommendation: General/Niche E-commerce store + Drop shipping/Cheap products inventory

You can go for a drop shipping model first if you want to take advantage of more product choices. Run product testing before investing in product inventory.

2. By current business type

Manufacturer/Brand Owner

If you are a manufacturer, you need to ask yourself this question:

Do you want to eventually build a brand? Or do you just want to sell products without building a brand?

If you want to build a brand, make sure to set up a branded e-commerce store. Consider also if you want to add marketplace as another sales channel.

Offline Retailer

O2O business model would be the best match for you. If you sell a large variety of products and want to start selling immediately, consider selling on marketplaces. If you really want to build a brand, make sure to set up your own e-commerce website and invest in marketing it.

Conclusion

There are many types of e-commerce business models to choose from. The best one for you will depend mainly on your budget, experience and your current business nature.

With the right combination of distribution and fulfilment methods, you can build a profitable business. 

Let's face it: there is no perfect business model. Each model comes with its own advantages and disadvantages. What matters most right now is choosing one that fits you, get started, and then tweak your business model as your business grows.

Let me know: which e-commerce business model have you tried? Which would you recommend?

About the author 

Lu Wee Tang

Lu Wee is the founder and writer of Entrepreneur Campfire. She started her journey in e-commerce and SEO after leaving her engineering career behind. Now, she consults small and medium businesses in Malaysia and Singapore on how to digitise and grow their business.

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