E-commerce Fundamentals and Business Models
Models and money flow
E-commerce questions test whether you can separate a business model from a revenue model. Business models describe who transacts with whom and who carries risk: B2C, B2B, C2C, and D2C; reseller (you buy inventory and own margin and markdown risk) versus marketplace (you earn commission, and GMV is not your revenue) versus dropship (low inventory risk, thin margin, supplier-controlled fulfillment). Revenue models describe how money arrives: transactional, subscription, commission, advertising, and freemium.
Know the unit economics vocabulary cold. AOV = revenue / orders. Gross margin = (price − COGS) / price. Contribution margin subtracts variable costs - payment fees, pick-pack, shipping subsidy, ad spend - so it answers "does this order add money?" CAC = acquisition spend / new customers. LTV is a margin-based, churn-adjusted estimate, not a revenue number. Payback period (CAC / monthly contribution per customer) is the practical test for subscription models.
Traps: treating GMV as revenue on a marketplace; comparing CAC to revenue instead of margin; assuming dropshipping carries no working-capital issue; confusing markup with margin; quoting LTV without stating the churn assumption, which makes the figure unfalsifiable.
Rule of thumb: an LTV:CAC ratio is only meaningful when both are margin-based and measured over the same period. A "3:1" built from revenue LTV is inflated.
Worked example: price $80, COGS $32, payment plus fulfillment $8, ad spend $10 per order → contribution = 80 − 32 − 8 − 10 = $30. At 2 orders per year with 30% annual churn, expected margin LTV ≈ 30 × (1 / 0.30) = $100.