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Online Retail: Definition & Process

What is Online Retail?

Online retail is the selling of merchandise in small quantities to the general public over the internet. It is part of the Retail Trade sector and is classified by the North American Industry Classification System (NAICS) under nonstore retailers.

The NAICS code for online retail is 454110

Online Retail Vs. Ecommerce

Online retail is part of ecommerce, but not all ecommerce is online retailing.

The difference between online retail and ecommerce is that ecommerce involves other online transactions that are not classified as retailing. For example, ecommerce can include wholesale B2B transactions, or online services that are sold through the internet but do not involve selling merchandise.

Online Retail Examples

Amazon is the biggest and most popular online retail business, and it contributed 40.4% to total U.S online retail sales in 2021.

See Also: Retail Statistics

Here is a list of the top 10 online retailers in the U.S. and how much they contribute to total online retail sales.

Top 10 U.S. Online Retailers

Online RetailerContribution (%)
Best Buy2.2%
The Home Depot2.2%
Top U.S. Online Retailers & Their Market Share in 2021
Data Source: eMarketer

Most of the top 10 online retailers are originally brick & mortar retail businesses that moved online to capture the market share, and offer an omni-channel shopping experience. However; there are a lot of small online retail businesses that operate a pure play ecommerce operation, without any brick & mortar presence.

On the other hand, many businesses that started as online only businesses, later on decided to open physical stores to get closer to their customers and offer services such as BOPIS or click & collect and in-store returns.

The Process of Online Retailing

Online retailing has a different operational process from traditional brick & mortar retailing in many ways. From the display of merchandise, handling payments, ensuring successful delivery of bought items, to dealing with returns.

online retail process
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Publishing an Online Catalogue

In order to showcase the merchandise, the business needs to publish an online catalogue that shows:

  • Product pictures
  • product features and specifications
  • Size chart (if needed)
  • Price

This is usually done through a website with a shopping cart facility or a mobile application, or both.

Customers are driven to this website, through different online marketing methods (social media, SEO, paid ads,..etc), where they browse the catalogue and decide on the products they want to buy.

If they choose to buy an item, they add it to the shopping cart and proceed to checkout, where they enter their delivery information and pay for the items they want delivered.

Capturing Payments

Payments are processed through a separate payment processing service provider that integrates with the shopping cart on the website or app. This payment gateway captures the amount from the customer, and later on transfers this amount, after fees deduction, to the seller’s account.

Many payment gateways provide a lot of different payment methods for the customers to choose from, based on where they are based, and a lot of new services even allow customers to buy now and pay later (BNPL) in installments.

Processing Orders

After the order has been confirmed through payment, now the business will start processing this order.

This is done by :

  1. Locating the items in the bins (at the warehouse) or on the shelves (at the store)
  2. Packing them in a suitable shipping container (boxes or mailers)
  3. Labeling the container with the delivery information
  4. Sending a pickup request to the delivery service provider (e.g Fedex, UPS, ..etc)
  5. Sending a notification to the customer with a tracking number for their shipment, once it is out

The order is considered to be complete, once the customer receives the shipment.

Handling Returns

Every online retail business must have a return policy, and it should clarify the following:

  • Whether the business accepts returns
  • The time frame, within which is accepts the returns (e.g within 30 days)
  • The conditions, under which it accepts the returns (e.g. in original packaging)
  • Who pays for the return process
  • How much is the re-stocking or handling fee (if any)
  • Where to send the returns
  • Who to contact for return requests

Advantages & Disadvantages of Online Retail

Low initial setup costsHigh customer acquisition costs
Ability to reach a wider customer baseLow organic traffic, compared to street shops or malls
Ability to expand the breadth of the assortmentCostly return process
Store is open 24/7
Can be operated by a solo owner
Retail Management Courses

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