alibabaAlibaba’s success is no secret. From its humble beginnings in Jack Ma’s Hangzhou apartment, the company has evolved and grown into an e-commerce empire known internationally. What exactly is it about Alibaba that has enabled it to flourish? It’s all found in these 3 core factors and 4 subsidiary factors.

Here are seven fundamental reasons for its ground-breaking success:

Core Factor #1: Unique Business Model

Alibaba provides services mainly to small enterprises and individuals. This defines a unique business opportunity which emancipates the productive forces of small enterprises and offers more diversified consumption choices for consumers.

Be it 1688 (a B2B eCommerce platform), Taobao, or YiDaTong (the largest Chinese professional import and export agent), all of Alibaba’s three core businesses focus on providing services to small enterprises, accumulatively creating value that would not have been possible individually. Together, they represent a complete eCommerce ecosystem.
By focusing on small enterprises, a large variety of goods is made available to a large variety of target consumer groups. In 2014, the Alibaba platform handled a total transaction volume worth CNY 2.3bn.

alibabaFrameworkAlibaba’s development and framework

Core Factor #2: Unconventional Profit Model

Alibaba charges for services in marketing and technical support, instead of for admission. This contributes to a large and robust market share made up of loyal customers.

Alibaba’s profits mainly come from advertisements and keyword bidding, which represents 57% of total profits. The second most important source of profits (representing 25%) comes from technical services based on big data of consumer behaviors.

By removing intermediate fees and allowing sellers to register for free, Alibaba was able to cultivate the online transaction habit among Chinese customers. eBay China, on the other hand, charges a fee for its platform transactions. By gathering a large number of sellers, Taobao succeeded in attracting even more customers.

Presently, the Alibaba platform represents more than 0.5bn registered users, including more than 0.23bn active buyers and more than 8m active sellers, and annual orders have exceeded 11bn. Alibaba is able to leverage on the large number of customers on the platform, and also make use of advertisement, keyword bidding, and customer’s data for profit.

Core Factor #3: Reliable Credit Model

Alibaba’s accurate credit model helps to develop a trustworthy reputation among customers. All sellers on the eCommerce platform are requested to pass an online certification test to verify their identity information. This reduces illegal transactions as sellers are supervised on the platform at all times. Apart from that, all transactions are recorded and can be traced back by both sellers and customers. This protects the legitimacy of each transaction and helps customers choose more reliable sellers.

As an additional layer of protection, payments are first transferred to Alipay and only released to sellers when buyers indicate that they have received their products in good condition. In 2013, the number of users in Alipay approached 0.3bn while the number of transactions reached CNY 900bn. Active users of the mobile terminal reached 0.1bn, which exceeded the number of users on PayPal.

In addition, the system is built such that online feedback is highly encouraged. Customers are rewarded for the reviews they contribute with discount coupons – more reviews, more discount coupons. These buyer reviews help other customers in their overall purchasing experience and decision making process, which reduces post-purchase regrets.

Subsidiary Factor #1: Support Services for Customer Satisfaction

Alibaba’s service offerings provide a comfortable purchasing environment and positive online customer experience, leading to high user engagements. Alibaba offers a suite of support services to ensure optimal customer satisfaction by helping sellers to maintain positive interaction with buyers. Some of these support services include the offering of online business training for sellers, introduction of a special coding system to manage the large number of stores on the platform, development of its own instant communication tool for better seller-buyer communication exchange, and the reimbursement of any product with refunds completed within seven days. These support services help to generate more transactions.

Subsidiary Factor #2: Sensitivity to Business Opportunity

Alibaba excels at identifying and seizing unique business opportunities, thereby positioning itself as a leader in developing customer loyalty. The ‘Double 11’ festival falls on November 11th, between Chinese National Day and Christmas. Most customers typically avoid shopping during that period but Taobao has successfully turned that day into an actual shopping festival.

In 2014, ‘Double 11’ generated over CNY 1bn in total trading volume for Tmall within the first three opening minutes. In a single day, Taobao generated a revenue of CNY 1.5bn and a net profit of more than CNY 0.5bn. During the event, Tmall sellers’ needs for advertisement and software services increased largely. Alibaba thus gains enormous profits from Double 11.

Subsidiary Factor #3: New Transaction Patterns

Alibaba actively challenges traditional transaction patterns and explores new ways to create more value for customers according to their needs.

Consumer-to-Business (C2B) transaction model: Alibaba deploys the C2B transaction model to reduce costs in the traditional supply chain and shorten the time required for product turnover, thereby increasing customer satisfaction. Alibaba gathers scattered customers with similar needs to form a powerful purchasing group that can buy single products at a wholesale price. Furthermore, Alibaba also takes advantage of its massive online customer behavior data to develop products suited to particular customer habits.

Online-to-Offline (O2O) strategy: In Alibaba’s system, customers can purchase a product by scanning a two-dimensional code and they can also indicate receipt of a product with another code. Customers can also take part in various brand-run initiatives by scanning the corresponding codes to receive targeted advertisements. To accelerate the growth of the O2O service, Alibaba is actively employing the use of mobile terminal domains through “Alipay Wallet” and partnering with banks to provide code scanning and cash transfer services for payment.

Subsidiary Factor #4: Integrated Ecosystem

Rather than position itself simply as an eCommerce company, Alibaba strives for excellent service quality by introducing easier ways of doing business for sellers, and by developing a positive purchasing experience for the buyers.

In order to achieve its goal in terms of positioning, Alibaba is expanding its core business to many different domains, such as advertising services, logistic network, financial services, and mobile terminal services.

  • Alimama
    Essentially an advertising platform on Alibaba’s B2B operations, users can list available advertisement positions on Alimama for advertisers to purchase.

  • Use of Big Data
    Alibaba integrates comprehensive data resources that cover almost every aspect of customers’ daily lives through the acquisition of software companies in other domains (e.g. map, weather, taxi, music, and travel). The data helps advertisers to select the most appropriate website advertising channels and to reach customers effectively.

  • Taobao Ke
    Made up of a group of people dedicated to assisting merchants in the promotion of their products, Taobao Ke follows the ‘cost per sale’ billing model - members receive a commission upon successfully identifying customers and convincing them to complete a purchase.

  • Video and Mobile Terminal Integration
    In April 2014, Taobao bought 16.5% shares of China’s largest video site, leveraging on the strength of videos on the desktop computer and mobile devices, to enable consumer interaction with advertisements. When consumers watch video advertisements, Taobao sends related information to their mobiles in various forms, including games and coupons to entice clicks from the audience.

  • Ali Micro Finance
    Ali Micro Finance provides micro deposits and loans to small structures that typically experience difficulty in obtaining a loan from traditional banks. It translates the online customer behavior data collected from the Ali platform into businesses and categorizes small enterprises’ individual credit ratings according to their eligibility to apply for small loans from Ali Micro Finance.

  • China Smart Network (CSN) Project
    CSN project was launched by Alibaba in collaboration with the four most influential logistics companies in China, with the goal of bringing products to buyers within 24 hours of the purchase. Logistic networks belonging to different logistic companies were integrated to form the single most effective network in terms of parcel turnover for customer delivery.

Based on data analysis, Alibaba selects the most suitable logistics company for different segments of the network. Customers can also choose from a list of delivery preferences (e.g. fastest, cheapest, safest or best service), and CSN will deploy the ‘right’ logistic company with the corresponding strengths accordingly.

By Prof. Xavier Pavie, Associate Academic Director for MSc in Management & Director of iMagination Center, ESSEC Business School & Yixuan Luo, Master student at ESSEC Business School

ESSEC Business School, Asia-Pacific offers academic and executive programs with Asian insights and global perspectives. Backed by a multicultural faculty based in Singapore, the school offers academic programs such as the ESSEC & Mannheim EMBA Asia-Pacific, the Master of Science in Management, the Global Bachelor in Business Administration, as well as a series of specialized masters in Finance, International Business, Management of Health Industries, etc.  In addition, the school delivers executive courses and in-company programs designed to suit the specific needs of organizations and individuals.