3. Alibaba in China: The reason why Alibaba is so successful because it swiftly adapts the business model to Chinese reality, which includes the following: 3
a. The fragmented retail landscape of China: Chinese retail market is highly diversified and fragmented. Chinese economy is so unbalanced among regions that a staff in Beijing may earn as much as his American counterparts while in a rural area, a family may live on less than $1,000 per year. There is also no national retail chain in China. The leading 100 retailers in China only accounted for 8.7% of total retail sales of consumer goods in 2013 As a result of the highly-fragmented market, Chinese brick and mortar retailers lacked the scale and skills to encounter the challenge of online retailers as well as their American counterparts did, and yielded the whole battlefield to Alibaba alike. b. Free is a powerful strategy in China Totally free service gave Taobao the largest advantage over its major rival at that time, eBay. Initially, EachNet provided all services for free. But in order to tackle rising operating costs, it began to charge fees to sellers, resulting dramatic drop in the number of deals. After being acquired by eBay, the fee structure was raised even further to match the global standard. and because Taobao was launched as a fee free business. As a result, buyers and sellers had no good reason to accept the fee structure of EachNet. They rushed into the new platform in hordes. Although by the end of 2005, EachNet had eliminated fees, it already had been reduced to a trivial player. Till today, Taobao is still free to all parties. As it already built a big cohort of users and it makes revenue through advertising and displaying sponsored products on notable locations on the pages. c. Connect small business with consumers As the factory of the world, China has millions of small manufacturing companies. Before the dawn of e-commerce, they had no way to reach domestic customers, and focused on exporting their product for a skimpy margin. First EachNet and then Taobao linked these small businesses with numerous buyers around the country. Buyers can ensure they get the products at a fixed price while the sellers can ensure fixed revenue. d. Facilitate communication and safety in the transactions 4
Fraud is a serious issue in online retail, especially in the infant and thus chaotic period of Chinese market. Buyers were not so comfortable to hand out money before they received the goods, and if they did so, they would be vulnerable to deception. Therefore it was not a surprise that both EachNet and Taobao developed some form of escrow services. The website would hold the buyers’ money until the delivery was confirmed by the buyers. Alibaba again gained the upper hand with the launch of AliPay, an integrated payment system. At the beginning of 2000, credit cards were not so prevalent, and debit cards were also troublesome considering the IT reality at the time. AliPay provided the buyers and sellers a unified platform and easier way to handle the money.
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- Spring '15
- Management, Alibaba, Alibaba Group