Managing Startups: Best Blog Posts

Chapter 7. MBA Mondays: Revenue Models—Commerce

Fred Wilson

Commerce has to be the oldest business model. Sell something to someone. Or maybe it was barter back then. In any case, ecommerce revenues topped $200b in the US in 2011 and are growing at close to 10% annually. Global ecommerce revenues are at least double that—maybe as much as $500b, depending on who you ask. So selling something to someone online is a big business and getting bigger.

Retailing is by far the largest component of the online commerce market. Retailing is buying a product at wholesale and selling it to the customer at a markup. Retailing involves inventory. You stock up on inventory so you can provide the goods quickly to the customer.

Amazon is the world’s largest online retailer. Amazon’s revenues in the past four quarters were approximately $55b. Clearly some of that revenue is non-retailing, but let’s assume their retailing revenues are about $50b annually. They are roughly 10% of the global ecommerce market.

Retailing is a tough business. The difference between what you buy the product for at wholesale and sell it for at retail is called your gross margin. Amazon’s gross margin ranges between 20% and 25%, depending on what time of year it is. The holiday quarter brings the lowest gross margins because retail makes up a larger percent of revenues. At Amazon’s size, a 25% gross margin turns into a lot of money. But a smaller online retailer can really struggle at these margins. Let’s imagine a retailer of ...