Alibaba.com is an e-commerce site that connects Chinese suppliers with buyers at home and abroad. Today, Alibaba Group is involved in a variety of Web businesses. Its most important elements are its online retail sites: Taobao Marketplace, a large commerce site; Tmall, an online marketplace for name-brand retailers like Apple; and Juhuasuan, a daily deals site similar to Groupon. The company is also affiliated to mobile payments service called AliPay, and it has investments in online video, mobile messaging and cloud computing, among other businesses. The company that started in 1999 by Jack Ma, a former teacher from his apartment in his hometown of Hangzhou, now employs 24,000 workers at its headquarters in Hangzhou and elsewhere, with 25 separate business units.
Alibaba Products:
Alibaba has built a massive e-commerce business without selling even a single pair of jeans, washing machine, or book. What it sells instead are consumers, and it sells them in groups to retailers who pay for clicks, keywords, ad views, and sales.
Unlike Amazon, Alibaba itself does not sell and ship items to customers. Instead, it acts as a kind of online bazaar where merchants as small as local vendors and as large as Nike can sell their wares. Alibaba makes money mainly by convincing these sellers to place search ads on its website to reach more potential customers through keywords (like Google) or by charging a commission on some transactions (like eBay). The company also makes money by selling premium memberships, cloud computing services and access to analytics data.
How does Alibaba make money?
Alibaba has already been called so many things–the Amazon of China, the biggest IPO of all time, the harbinger of a new Internet era—that it can be hard to pin down exactly what Alibaba does and how it makes money.
A recent Forrester Research report called Alibaba ―the world’s biggest digital ecosystem.‖ That description provides a pretty good indication of its sprawling operation. About 84% of the company’s revenue comes from its China commerce businesses, such as Taobao and Tmall sites. International commerce accounts for 12% of the top line, while cloud-computing and Internet infrastructure represents 1.9%.
On the consumer side, Alibaba operates Taobao, which works much like eBay, and Tmall, which brands like Apple and Uniqlo use to reach out to an estimated 302 million online shoppers in China. Taobao, which does not charge transaction fees, makes money mainly through advertising purchased by traders who use the site. Many traders spend money on advertising to make their products more visible, because there are more than 800 million pieces on Taobao. While almost anyone can become a seller on Taobao with little cost in advance, Tmall is the most exclusive site. Trademarks and authorized distributors pay the deposit to open storefronts after going through a stringent verification process.
It runs AliExpress, a site to connect consumers outside China with exporters, and a group shopping site, Jujuasuan. Its flagship site, Alibaba.com, handles wholesale business-to-business commerce, a huge market that neither Amazon nor eBay yet dominates online. It has a small business-to-small business marketplace, 1688.com. And it offers cloud computing in the style of Amazon Web Services. Alibaba is also tied to online payments giant Alipay and is used for buying products across Alibaba’s sites.
Success Mantra:
Chinese are tight-fisted. So Alibaba made all the basic services it offers free to both buyers and sellers. It earns money through online advertisements and extra services it offers clients, such as website design. The second is that many Chinese are reluctant to trust strangers. So Alibaba has provided tools to build trust. One is an independent verification service through which third parties vet the claims made by sellers; the sellers pay for the process. Another is the Alipay payments system, which takes money up front and puts it in an escrow account. Vendors can be sure that payments made through it will be honoured.
Number Games:
But don’t just believe the rhetoric. Believe the numbers. The Wall Street Journal has reported that the combined transaction volume of Taobao e-commerce marketplace and Tmall reached $240 billion last year. That’s triple the size of eBay Inc., and more than double the size of Amazon.com Inc.
Sales across Alibaba’s consumer marketplaces were $296 billion over the past year. By comparison, eBay in 2013 sold $76.5 billion in merchandise, only about $5 billion more than Alibaba sold on mobile devices alone. Total payment volume on Alipay in 2013 was $519 billion, more than double PayPal’s total of $180 billion in the same year.
Data Driven:
The sheer volume of commerce moving across Alibaba’s many platforms means the company likely has the most comprehensive and most detailed picture of consumer behaviour in the largest consumer market on the planet—a market whose spending power continues to grow. With great depth and breadth of visibility into consumer behaviour, Alibaba will be able to assemble a highly detailed profile of its consumers — which allows it to become much smarter and sell far more.
Global Perspective:
Alibaba does a huge amount of business—and compared to Amazon, it does business much more efficiently. Unlike Amazon, Alibaba doesn’t own its own inventory. Its marketplaces handle the selling, not the stuff itself. Even Alibaba’s logistics operation exists to coordinate deliveries, not to make them. Through its cooperation with 14 strategic delivery partners, Alibaba uses more than 950,000 delivery personnel. It also has more than 980,000 cloud computing customers. The company also has more than 342,000 small businesses taking out loans from the company.
Alibaba has so far managed to achieve profit margins. In its most recent fiscal year, Alibaba’s net profit margin—net profits divided by revenue—was greater than 44 percent, a figure that has climbed steadily over the past few years. Amazon’s net profit margin in 2013, by comparison, was less than 1 percent. Net margins at Google and Apple last year hovered at just above 20 percent.
Conclusion:
Jack ma’s vision of making Alibaba reach its pinnacle of success can be estimated when he states that ―There were three reasons why we survived. We had no money, we had no technology, and we had no plan. Every dollar, we used very carefully.‖ The company’s breakneck growth in China shows no signs of abating, and Alibaba also has plans to compete on U.S. shores. In September, 2014, Alibaba launched its IPO. The company raised $21.8 billion when it priced its IPO at $68 per share, making it the largest offering in U.S. history. That opening price puts Alibaba’s overall valuation at almost $230 billion, more than Amazon and eBay’s valuations combined.
Many questions still dog Alibaba, like concerns about corporate governance, China’s uncertain regulatory environment, and competition from other Chinese internet behemoths. But what works in Alibaba’s favour is the depth and breadth of data that puts it in the same league as the biggest U.S.-based tech platforms.
