Category: Online retail

Are you thinking about how to start an online store without inventory? Do you want to understand how such a business works and how to be on top of your game? I wrote this guide to help new ecommerce entrepreneurs get started with an online store without inventory in 2021.

My name is Mike Dragan and for the past 17 years I’ve worked with some of the largest consumer brands in the world to build and improve on their ecommerce strategy. If you ever get stuck or have some questions, do shoot me line and I’ll try to answer.

In this guide you’ll get an understanding of what makes an ecommerce business work. You’ll notice that, just like a car, the things that make an online store are usually under the hood. How you present them is obviously very important and I’ll guide you through the best apps you can use to showcase and sell your products.

As you’re starting your journey into entrepreneurship and starting a new online store the first thing you might ask yourself is – how do I start an online store without an inventory? Given the fact that you are probably low on capital this is a very important question and I’ll help you understand how to navigate this issue through finding suppliers, developing a “supply chain” and making sure you are able to fulfill your orders in a timely manner.

Here are the 3 chapters I’ll guide you through. At the end of this guide you’ll be able to start selling like a pro:

10 steps to start an online store without inventory:

Basically there are ten main areas you need to focus on when starting an online store without inventory. These are:

1. Finding your niche and understanding your market. Building a go-to-market plan;
2. Finding the right business model (how will you make money?);
3. Registering your business;
4. Finding suppliers, developing a supply chain, pricing the products;
5. Developing a fulfilment operation (understanding how you or your staff will pick, pack, ship and handle product returns) and preparing for customer care;
6. Building a brand identity and building your web store;
7. Posting products and adding relevant content;
8. Adding sales channels to your business;
9. Marketing your store;
10. Testing and fine tuning;

That’s a whole lot of bullet points but don’t worry. An online store is still a business and businesses are built by entrepreneurs just like you.

But keep in mind…

Starting your online store without inventory is hard work but you can do it.

This guide will work as a framework for you have to do to maximize your chances for success. Depending on where you are and the type of products you will be selling you may need to adapt as you go but you can rely on this framework to guide you through building your store.

So let’s dive in:

1. How to find a niche market for my online store?

“I’ll sell everything” is not going to work. You will need to find the right market you are going to sell products in. Especially if you have no inventory, your online store needs to be optimized for a specific type of product and consumer. This is called “product-market fit”. Basically making sure that what you sell has a potential group of consumers that will buy it from you.

There are three very important things to take into account when starting your online store and discovering your market:

1. what value do you provide for other people?
2. what type of value do you provide that other companies don’t?
3. are there enough people interested in the products you are going to sell?

The first thing you have to understand is that your business has to provide value for other people.  Just as people do, businesses strive for purpose. Without providing value in a clear and straightforward way, you cannot expect your business to be successful.

Find out what people need or want. A combination of both is great but if you have to choose, go for need – it is way better in the long run. Find out how you can supply these products or services. This is the value.

The second thing you have to take into account is that other online stores may provide the same kind of product. Do your research. Google the type of products you want to sell. Check Google Trends to see how the terms for your products have evolved throughout the years. Compare the number of product searches with the number of companies providing the same type of value you’re planning on offering.

There is a dynamic between demand and supply that you cannot ignore. You are looking for a market that is booming but there are not many competitors. And that’s were the third point comes in: your online store has to provide value for lots of people.

You may like hoodies for cats very much. Hence the question – how to start an online store without inventory for my passion. Is hoodies for cats such a good idea? You are addressing people in your country (don’t think you’re going international just yet), who own cats, who think that dressing up cats is a good idea and who like hoodies. A pretty small market, don’t you think?

The lower the market size, the lower your chances for success.

To start an online store without inventory you need a large market you can make a dent in. The higher the market size, the higher are your chances at building a great business.

See the graph below on where you’d want to place your business in:

So there are two great combinations that you can choose. Both need as many customers as possible. You should strive for a market where there are plenty of people ready to buy your product.

The best place to start an online store without inventory  is the one in the lower right corner – few competitors, many potential customers. That’s where few companies will compete with you and there are plenty of customers willing to buy your products.

To position your online shop there, you need to identify a need before the competition and quickly get as much market share as possible.

The other option to start an online store without inventory is the market where there are a lot of competitors and a lot customers. This means this is an established market and you’re more likely to succeed if you prove yourself better than the competition.

If you make small changes in the way you sell products you will be able to compete with established leaders. Later on in this guide you’ll see how to create innovative business models for your ecommerce store.

How to create a plan for my online store?

Once you have discovered the kind of product(s) you will be selling it’s time to start planning on how you’ll start your online store with no inventory. You will notice that I’m using the term “plan” – not business plan. That is because this is your plan. It has to come as a natural idea and set of targets you want to accomplish in the future with the business you’re building.

There are nine important questions you need to answer when planning your future online store. Try to be as clear as possible when answering these questions. It helps a lot when thinking about how to start an online store without inventory.

9 things to think about when building an online store without inventory:

1. What products will I be selling on my online store?

2. Who are my competitors?

3. Who is my customer?

4. How do I convince the customer to buy my products?

5. I don’t want to hold inventory. Who will be supplying my products and how?

6. How much will my products cost and what profit am I making?

7. What are the costs I expect to have when running my online store?

8. How am I going to cover the costs?

9. How much revenue am I expecting in the first 3-5 years?

Answering these questions will get you thinking and preparing for the future. You will notice that these are actually the questions you need to figure out the answers to when building a business plan as well.

However, take your time to think through these questions. Find information to support your expectations. Question your own assumptions because the market will surely do so. If you’ve taken into account all these questions you basically know how to start an online store without inventory. Planning is an important part of building your online store.

2. How to find the right business model and make money with my online store?

You’re probably thinking the ecommerce business model is pretty straight forward. You post some goods online, someone orders them, you ship them and collect the big bucks.

Well, that is why you need to know that even if the logistics and operations may look the same in all ecommerce business, the differences can have a huge impact on how you’re building yours.

I’ll walk you through the 5 ways on ways you can make money with an online store without holding an inventory. Afterwards we’ll look through different implementations of the B2C model (business to consumer), the one you’re probably aiming for.

How to start an online store without inventory – the 5 business models I should consider

B2C online store

B2C Ecommerce is the most popular form of commerce online. The B2C stands for Business to Consumer and that’s exactly what it means.

Online stores (aka “The Business”) will deliver goods (either from their own inventory or from a supplier), post them online and sell directly to the customer (“The Consumer“). The Consumer browses an online store and hopefully buys the items posted online. When this happens, the online store team is notified. They wither contact the supplier to receive goods or they will pick the merchandise from the warehouse shelf, pack it and ship it to the consumer.

Most of the online stores you are familiar with are focused on this type of ecommerce business model. Some examples you might be familiar with are Walmart.com, Target.com or HomeDepot.com. The big difference between them and your future store you are asking the question – how to start an online store without inventory. They hold inventory and you will probably not.

But B2C is not just for the big players. Many ecommerce startups employ this type of business model. For example Bonobos.com and WarbyParker.com are doing just great selling directly to the consumer.

Bonobos is a fashion ecommerce retailer for men. The company manufactures and sells its own line of men wear and its main selling point is it makes shopping easier. How it does that? You’ll find out later in this guide.

WarbyParker.com sells stylish eyeglasses and sunglasses directly to the consumer. It is a great example of finding the right type of product at the right time and packaging it with the right type of social activism twist. When you buy a pair of glasses from them, a social mechanism makes sure that part of the money you’ve paid go to those in need of eyewear in the developing world.

But wait, isn’t Amazon a B2C ecommerce site, you might ask? Glad that came up. See, Amazon has started as a B2C online shop but since then it evolved past a single model. Most of its sales are still directed at the end consumer but Amazon also ships items to businesses (B2B ecommerce) through its Amazon Supply outlet. It also brings other sellers (businesses and consumers) in contact with its own customer database. This means Amazon is indeed the largest online retailer in the world, but it’s not just a B2C ecommerce website.

B2B online store

Another business model that works great is the B2B Ecommerce model. In this model Businesses sell merchandise to other Businesses through an online shop.

You might wonder why even mention this model. I mean, couldn’t those listed above just allow businesses to buy from their shops? Of course they could and most do. But here, I’m talking about a different type of companies, different type of products and most of all – different number of items purchased and different pricing.

Say you’re a company manufacturing hoodies for cats. Supposedly your market is not as popular as the smartphone market and your factory can ship 1000 beautiful cat hoodies every year. You could, of course, open an online store and ship these hoodies directly to the consumer. But you’ll find out that it implies development costs, marketing costs, customer service costs and you just want to be in the factory all day, trying to finally manufacture the perfect cat hoodie.

Along come Business A and Business B. These companies are probably retailers and have an established commerce operation, with a huge database of customers and they think they can sell 500 hoodies this year. And they want everything you manufacture.

How to start a B2B online store and decrease marketing costs?

Before these companies came along you’ve done the math and thought: “My cost for each manufactured hoodie is 10$. I’ll sell these hoodies for 20$ and make a nice profit.” But then you went on and started selling on your own and saw that including marketing, shipping and other expenses your cost rose up to 18$ and you’re actually making only 2$. Not that much, is it?

But now both Business A and Business B decide they can offer you 15$ for each hoodie and they are going to buy everything you manufacture. On one hand they are offering you less than your asking price but in the end your earning 5$ instead of 2$ so you decide you’re better off selling directly to Businesses.

This simplified scenario is the basis of the B2B ecommerce business model. It means that businesses (either manufacturers or wholesalers) sell directly to businesses and offer incentives to those that buy in bulk. The usual incentives are lower prices, extended payment conditions, free shipping or custom manufacturing.

Some of the most popular B2B ecommerce sites are Quill.com, AmazonSupply.com and of course AliBaba.com, the largest B2B marketplace, connecting businesses in China to buyers all over the world.

By the way – if you are asking yourself how to start an online store without inventory – the sites above will become your go-to source to find suppliers that will send products to consumers when you receive orders. This is called a dropshipping model for ecommerce.

B2B2C online store

This is a rather new type of ecommerce business model. It stands for Business To Business To Consumer.

How does B2B2C ecommerce work?

Say you have your own stocks and you’re selling your cat hoodies through your very own ecommerce website and it works pretty well. But you’re thinking – why not sell more?

So you think of new sales channels, the type of opportunities where your cat hoodies can sell even better if exposed to a larger number of customers. Kinda like Amazon or eBay.

Larger retailers, such as Amazon, offer you the possibility of selling on their own website. You supply the goods and post them on the Amazon Marketplace, for example, and next thing you know -bam! – your cat hoodies can be purchased by Amazon’s customers. Same thing happens with an Etsy shop. Depending on your decision you can either fulfill orders on your own (receive orders from Amazon, pick, pack and ship yourself) or just let them handle the logistics, through their Fulfillment by Amazon program.

C2C online store

So we’ve covered businesses selling to customers and other businesses. Shouldn’t consumers sell to other consumers too? But they do and this area is actually booming.

Consumers usually meet other consumers through online marketplaces. By far, the most popular is eBay.com, the place where anyone can sell and buy anything. Even though eBay hosts businesses also, we will focus on the individuals selling their items through these type of systems.

The online marketplaces enabling C2C ecommerce help sellers post their goods online and buyers to find them.

There are many mechanisms in place to handle these transactions, things such as product showcasing, selling, payment and feedback. But if we were to look at what makes C2C marketplaces work this has to be the network effect and peer review. The network effect means that the more people engage in trading goods in a marketplace, the more people will come and more successful the marketplace will be. This effect also ensures seller and buyer lock-in: the more people are buying or selling, the harder it is for someone to leave the marketplace. The reason – where else will this person find so many customers or merchants?

The second big feature that defines C2C marketplaces is peer review. When you’re buying or selling through this type of systems, you really don’t know who’s on the other end. And because relying on luck and having faith in the good character of people is not the most efficient solution, marketplaces introduced peer review.

When someone buys from a merchant and they get what they asked for, they offer a positive review. When they don’t, and things take a turn for the worse, they slap the merchant with a negative review so others know the merchant is not to be trusted.

The same goes for the merchant. If the customer doesn’t pay up or somehow tricks the merchant – there’s always a bad review at hand to get things leveled.

Once these reviews start pilling up, they start working as a certificate of good standing (or bad standing). If you are a honest merchant or customer, you won’t leave the marketplace that stores this certificate. That’s because reviews are a valuable asset that help members trade in better conditions.

Why mention all these? Because building a C2C marketplace is really, really hard and expensive. For example eBay lost $100 million trying to enter the Chinese market before giving up to AliBaba. It’s that kind of expensive so I would rather advise against building a general C2C marketplace if you’re a startup.

You could, however find a niche where individuals are willing to trade with one another and cater to that specific niche.

For example: Etsy.com is famous for building the biggest handcrafted C2C ecommerce community. Uber and Lyft bring individuals in need of transportation in contact with those able to provide these type of services. In fact, Andreessen Horowitz, one of the leading Venture Capital firms lists Online Marketplaces as one of the most promissing directions for startups.

C2B online store

Yes, C2B (Consumer to Business) eCommerce is a thing. It might look a little off but there are great ways to start an C2B ecommerce business. There are also some great established services that help connect individuals to the businesses in need of their products or service.

An example of Consumer to Business ecommerce model

Reverse auctions are a great way for individuals to post how much are they willing to pay for a certain product or service. A C2B Ecommerce site can collect these auctions and forward them to companies willing to fulfill them. For example – the basic model behind the likes of Groupon.com or LivingSocial.com is a combination between B2C and C2B. Companies post their offers but the consumers have to vote by purchasing these offers. If the minimal number of offers is not met, the offers are not activated.

Another great example of the C2B ecommerce model is Elance.com. The website is one of the first businesses that connected freelancers to potential contractors (usually businesses). Freelancers would go online, post their capabilities and those in need of their services would hire them for a limited time or project based.

Monster.com is another great C2B example. Yes, people posting their resumes and getting recruited is a type of commerce where The Individual is pitching The Business to buy his services (aka hiring).

If you’re an one-woman or man startup, this can be a great way to setup something quickly. In fact, most freelance developers or graphic designers practice this type of commerce. Either through large marketplaces such as Elance.com or just by posting their resume and portfolio online and getting orders through a simple contact page.

How to start an online store without inventory and sell to the government

The models above are the most popular ways to start an online store without inventory but they are not all. There is a separate class of ecommerce business models that has to do with the government. When the government wants to buy products or services from businesses it will post the tenders on a G2B (Government to Business) portal that handles auctions and offers.

If the businesses want to market their their offers to the government, they will employ a B2G business model. See that? G2B vs B2G – pretty simple stuff.

A final model is G2C – government to citizen. Using this model, government authorities can auction goods directly to the consumer. It also works as a way of connecting citizens directly to the authorities and decrease bureaucracy when issuing documents or collecting taxes.

Six innovative business to consumer ways to start an online store without inventory

Let’s say you’ve studied all these great ways of starting an ecommerce business and you finally decided on one of them. The vast majority of online shop startups are built on top of the B2C business model so the next part of this guide will focus on a few innovative ways of implementing an online shop.

The basics all stay the same. You are still an online shop owner trying to attract the right kind of consumers and provide them with products they will love. But how about some inspiration from the most innovative business models out there?

1. The right fit

Remember Bonobos.com we’ve talked about earlier? Well their whole selling point goes something like this: most men don’t really like shopping. They like to wear clothes that make them look good, without spending too much time choosing. We can make this happen.

That is especially hard when you’re an online store and your customer can’t see, touch or try on the product your selling. But it can be done. To make it happen, Bonobos mixed its great designs with few things to keep the customers happy and relaxed:

• Ninjas. What? Well, not real ninjas but some pretty great customer service representatives that are willing and happy to walk customers through buying the right piece of clothing.
• 365 days return. Not the right fit? Maybe the customer is too busy to return the merchandise within the standard 30 days. Why not extend that to  365 days?
• Free shipping and free returns. This means the customer has no reason to drive up to a brick and mortar store to try on the products. Shipping and returns are free so basically everyone can try on their new chinos at home. If they don’t like them, they send them back.
• Try on everything. Bonobos has a special kind of store – the one that lets customers schedule a “try on everything and if you are happy with what you find, you get your stuff shipped home” session. Also – preferences are saved so next time the customers wants to click-shop, he knows exactly what’s the right size.

The key take away is if you’re building an online store, it has to solve a problem. Bonobos solves the “shopping for clothes is boring” men problem and promises the right fit without the headaches of chasing a pair of pants all day.

2. Flash Sales

There’s a whole post on Netonomy dedicated to Flash Sales. Basically, these type of online shops sell discounted merchandise to registered members.

Take for example Ruelala (pic above). Customers have to provide the shop with their email address to register as a member. This means that basically anyone who enters the website is also subscribing to an email newsletter.

In exchange customers get discounted, usually designer or brand name products. If you like to know more about this ecommerce model, please click here.

3. The subscription pack

Most online shops have thousands of products listed. This is a great advantage over brick and mortar stores which have to actually stock on all those products. Online shops can stock on the minimal amount and later on deal with orders through supplier dropshipping but more on that later.

A new trend emerged that deals with showing just the right amount of products customers need in a given period and ship those products in a subscription based model.

Take Manpacks.com for example:

What Manpacks does is list just the minimum amount of products men need in any given month. Customers setup their pack and receive it every month, based on a subscription.

There are many advantage in starting such an online shop:

• Predictability: because your revenue is subscription based, you can estimate your monthly, quarterly and annual revenue accurately. This way you can plan for the future and balance your company.
• Economy of scales: having few products on sale and lots of customers means you can negotiate with suppliers better prices for the products you’re selling. This means you can also profit more and sell your products cheaper.
• Marketing is easier: with few products in your offer you can simplify your marketing and communication and improve your customer acquisition (again – more on this later).

4. Community designed products

Are you familiar with the term crowd sourcing? It basically means asking lots of people to do something for you or your company. In this case, we’re talking about designing products.

What Threadless.com did was build a community around the concept of designing t-shirts. Designers would submit their designs and the community would choose what t-shirts were sold. In exchange, the website shared revenue with said designers.

Of course, going against Threadless now is probably not a great idea but you can always build a business by channeling people’s passion towards a commercial goal.

Key takeaways:

• Community: build and stand by your community. It is the key to creating a lasting brand.
• Share and save: hiring designers is a costly thing but if you can take independent designers’ ideas and turn them into products you can save a lot on fixed costs. But you have to be willing to share.

5. Customising for the masses

Mass customizations is an ecommerce segment that’s growing really fast. Customers want to express their creativity and they are ready to pay for this.

This type of online sales are technologically advanced and need three really important things to function:

• a store that can handle customisation input for the customers
• a system that transforms this input to a set of instructions to a production line
• a operational structure that can customize products in an automated manner so costs are kept in check

For example Nike launched Nike by you, a great way to customize their products. After a successful trial period, the program extended to many of the company’s products.

If you’d like to find out more about mass customization, you can get more info at “Is Mass Customization the Future of eCommerce?”

6. 3D printing

The final innovation I think you should take into account is 3D printing. Using specially designed machines you can build 3D objects and sell them to customers.

3D printing is a technology that is actually yet to take off but it sounds really promising. For certain products it can mean a reinvention of manufacturing and commerce. Imagine having your customers build the product in your store and having this product instantly printed and shipped. Imagination is the only thing that could limit what can be done with such technology.

Shapeways for example, started in 2007 as a marketplace for 3D Designers willing to design and sell their ideas. In 2012 it has passed the 1 million products sold threshold so there really is a market out there.

Because it is connecting designers to buyers, Shapeways is a C2C marketplace but probably the future will show 3D printing is not restricted to individual designers so B2C online shops might also leverage the trend.

This was the last of the six innovative ecommerce trends you could use to spark the right idea for your future shop. This ends part one of this guide. To wrap things up let’s walk through what you’ve learned here. First – the importance of finding the right niche and how you cult do that. Next, you’ve learned about the necessity of building your Plan when starting an online shop and the questions you need to answer when building said plan.

Last but certainly not least, you’ve discovered the main business models you can use to build your shop and six of the most innovative B2C ecommerce models. Pretty good for a day’s work.

See Part 2 of “How To Start an Online Store“: Registering your business, finding suppliers, integrating suppliers in your business and choosing the right product prices >>

Featured image source.