Alibaba Business Model, Understanding How Alibaba Makes Money and How does Alibaba Work

Alibaba Business Model, Understanding How Alibaba Makes Money and How does Alibaba Work and Alibaba Business Strategy, Alibaba Marketing Strategy, Books By Jack Ma

Hey Everyone, Hope you all had a wonderful year closing with 40% of your business trickling down in the last quarter and majority of incentives as well ūüôā !¬† I know, 80-20 principle works everywhere.¬† Again, Apologies for not writing regularly, it’s just that, there is nothing interesting to write.¬† I was looking for books by Jack Ma or on Alibaba and zeroed in on and just finished reading Alibaba: The House that Jack Ma Built¬†and I am truly impressed, with what Jack Ma has achieved in just 15 years.¬† I would recommend to go and get yourself a copy of the same.¬† This book has got me interested in How Alibaba works, and here you go on the same.¬† Grab a coffee to read this.

That’s Kim Kardashian btw, dressed as Jasmine from Arabian Nights Cartoon (Yeah I’m a huge Cartoon Verse Fan & Alibaba was the central cartoon character in the same) from where the Name Alibaba has been taken up.¬† That’s why, well the below image :-).

Alibaba Business Model
Alibaba Business Model

About Alibaba, Founders, Funders and More

About Alibaba Group:

Alibaba Group Holding Limited is a Chinese multinational e-commerce, retail, Internet, AI and technology conglomerate founded in 1999 that provides consumer-to-consumer, business-to-consumer and business-to-business sales services via web portals, as well as electronic payment services, shopping search engines and cloud computing services.

As of January 2018, Alibaba’s market cap stood at US$527 billion. It is one of the top 10 most valuable and biggest companies in the world. Alibaba is the world’s largest and most valuable retailer since April 2016, with operations in over 200 countries, as well as one of the largest Internet companies. Its online sales and profits surpassed all US retailers (including Walmart, Amazon and eBay) combined since 2015.

Alibaba Founder:¬†¬†In December 1999, Jack Ma and 17 other founders released their first online marketplace, named “Alibaba Online”.

Alibaba Funders: Alibaba Group raised a total of US$25 Million from SoftBank, Goldman Sachs, Fidelity and some other institutions.¬† I’m sure you now know, where did the major money of SoftBank come from (and well, where did it go, down the drain as well).

How does Alibaba Work

How does Alibaba Work
How does Alibaba Work

How does Alibaba Work?  This is the question that I get the most from people who either are analyzing Alibaba or just want to buy something from overseas suppliers.  In either case, they need to understand how does Alibaba Work and What is Alibaba after all.

What is Alibaba

Well,¬†If you’ve decided and are determined to source your supplier from overseas, there’s a good chance you will be buying from Alibaba. By the numbers, Alibaba is the largest e-commerce company in the world (bigger than Amazon and eBay combined) and it’s also the most exhaustive directory of almost everything that you would want to buy and that it connects suppliers (mostly from China) with buyers from all over the world. Alibaba literally has millions of products from hundreds of thousands of suppliers so there’s not much you won’t find in the directory.¬† Now that you know What is Alibaba¬†now let’s look at How does Alibaba work.

How does Alibaba Work

Alibaba works in a different way and is not like it’s other e-commerce counterparts.¬† They primarily operate a B2C (Business to Consumer) company or a marketplace which enables small to large businesses to directly ship to the consumer evading the supply chain in the middle.

Alibaba enables small to large suppliers to supply to other businesses (it’s sort of a B2B platform) who in turn can use that to make a different final product or re-sell the items procured at a profit.¬† The entire supply chain is managed by the seller here and not Alibaba (in some cases yes, but not mostly) like Amazon.

How does Alibaba Work as a Group

Alibaba is the holding company of a multitude of group companies which include the likes of TaoBao, AliExpress, Alipay, AliTrip, AliCloud, Ali Pictures, AliMama etc.  All these companies work similar to Amazon, eBay, MakeMyTrip, ClearTrip, Google, Tencent etc.

This makes Alibaba unique in its true sense, no conglomerate in the world today has such a diverse set of businesses in its corporate umbrella to boast off.¬† Let’s see these business and how they make money in detail in Alibaba business Model.

Alibaba Business Model

Alibaba Business Model
Alibaba Business Model

Alibaba Business Model (Alibaba.com’s to be precise) is simple, commission on goods sold on Alibaba.com.¬† This constitutes the major revenue of Alibaba, however, this is not the only source of income.

While many people know that Alibaba is an online retailer, the business model of Alibaba is less understood and staggeringly different from the e-commerce leader in the United States, Amazon.com.¬† Three major web portals make up the core of Alibaba’s business Modelňź Alibaba, Taobao, and Tmall. All three of these e-commerce websites connect buyers and sellers, wherein Alibaba Group acts as a middleman.¬† The only difference in the three will be their target consumers.

Merchants can list their products for free on Alibaba.com but also have the option to pay for a range of benefits such as greater exposure on the site and unlimited product listings.  Alibaba has 2 subscription bases packages for Sellers on its site:

  • Free (where the listing is free but seller pays commission on sales generated through the portal)
  • Premium / Gold Seller: Where the Seller pays certain fees to be listed and rank higher up in the searches of related products + gets free services of Export Documentation, VAT Refunds, Imagery, Returns etc. + lower commissions on sales volumes

Alibaba Business Model via Product Sales

Alibaba’s Business Model is complex when it comes to the products that it has on all it’s platforms combined.¬† ¬†Thus only commissions on sales would not work well for the revenue generation of the company and that is where the entire ecosystem works together to cater all types of customers, Alibaba, TaoBao, Aliexpress, TMall etc. are all working together to cater to large and small businesses and individual customers like you and me.

Alibaba Business Model via Services and Non Product Sales

Alibaba just cannot work on the basis of Products being sold over its ecosystem portals, because the lower the prices the sellers sell the goods on the lower will be the commissions.  In the absence of high margin services to counterbalance the spends on marketing and acquiring customers and sellers, this company would just fail.

That is where the service side of the ecosystem of Ali, comes to the rescue.  There are numerous companies that Jack (personally) or via Ant Financials (BFSI, VC, PE arm of Alibaba and Personal Family office of Jack) hold controlling or majority stake in.  These companies to name a few would be AliPay (Equivalent to PayPal), AliTrip (ClearTrip, Expedia etc.), AliCloud (Equivalent to Google Cloud, AWS), Ali Pictures (via China Media holdings, Equivalent to Disney) and many such more.

These companies are a high investment, high margin and decent return businesses, that also contribute to huge sums of money to Alibaba Business Model.¬† Now that you guys are aware of Alibaba Business Model let’s move to How Alibaba Makes Money.

How Alibaba Makes Money

How Alibaba Makes Money
How Alibaba Makes Money

Now that you’ve understood the Business Model of Alibaba, Understanding how Alibaba makes Money should be piece of cake.

I will split the section into two broader categories of Products, Services (and Non-Products).¬† Products would include all physical product sales through any of Ali’s platform and Non-Products well I guess is now self-explanatory.

How Alibaba Makes Money from TaoBao

How Alibaba makes Money from TaoBao should be easy to understand now that you know Alibaba Business Model.  Alibaba.com is a B2B platform for business to sell and buy goods.

In Chinese, Taobao means ‚Äúsearch for treasure.‚ÄĚ Taobao.com has grown to become China’s largest shopping website and is ranked the ninth most popular website in the world by Alexa.com. Launched in 2003, Taobao lists hundreds of millions of products from millions of sellers. Taobao doesn’t charge transaction fees and the site is free to join for merchants, a policy which helped the site gain its enormous user base in China.

While Alibaba.com is business-to-business, Taobao is business-to-consumer or consumer-to-consumer focused, enabling small businesses and individuals to open online stores (similar to Amazon / Ebay / ETSY etc.).¬† TaoBao became so huge in China that it caused Ebay to shut down it’s China Operations.¬† I think China’s strict rules related to who can do what in China has definitely helped Chinese Entrepreneurs to thrive and succeed.¬† Same happened to Uber as well, who had to merge with Didi to culminate a war of losing money.

Merchants have the option to buy advertising and other services to help them stand out on the website and boost sales. Advertisers can choose between pay-for-performance and display marketing. These ads are the primary means through which Alibaba makes money from Taobao.¬† Consider this as similar to Google’s Adwords (PPC, PPM and PPV) type of ads.

You need to understand one thing here:  If I just google for a product that I want to buy and google gives me the related web page link, will I ever search for that same product in the E-comm site?  The answer is a Big No.  Then how does TaoBao achieve this?

Well to understand this, you need to understand, Alibaba’s relationship with Baidu (China’s Google Search Engine).¬† Baidu’s Crawlers (something that builds the search index) can and will NEVER crawl any of the Alibaba groups product portals, this way they ensure whatever searches happen, only happen within the portal thus they make advertising money.

How Alibaba Makes Money from TMall and AliExpress

How Alibaba Makes Money from Tmall.com, Well TMall offers branded products from across the world to woo China’s growing middle class. While Taobao caters more to small merchants and individuals as sellers, Tmall is focused on larger companies, including multinational brands.

Tmall charges merchants a deposit (on which Alibaba earns Bond Market Float), an annual fee, and a commission fee on transactions.

AliExpress, on the other hand, is a B2C version of Alibaba (where Business are selling single or multiple quantities to customers).  And 1688.com is somewhat similar to TaoBao but only for Wholesale buyers and sellers.

How does Alibaba Make Money

How does Alibaba Make Money
How does Alibaba Make Money

Now that we’ve seen How Alibaba makes Money from Alibaba Business Model (Product Sales), Let’s now see where other interests of Alibaba group lay.

Ant Financials is the PE, VC arm of Alibaba group and has stakes in many companies around the world (large and startups alike).¬† I’m sure you remember AliBaba’s investment in PayTm¬†which was followed by Tencent’s investment in FlipKart.¬† I’ve listed down some known companies in which they own Majority Stake and are making decent monies for the group.

How does Alibaba Make Money – Tech Services

If you’re still struggling to understand How does Alibaba make Money, Read this simple list to understand it’s core tech services offered to business in China.

Alipay: Alipay is an online third party payment platform, launched in 2004 by Alibaba Group. It provides payments and escrow services for transactions on Alibaba Group platforms. Often compared to PayPal in the United States, Alipay is the leader in China’s online payment market with 300 million users.¬† It’s similar to any other payment gateway in terms of making money from its operations.¬† Read Payment Gateway Business Model to understand how does Alibaba make money from Alipay.

Alimama: Launched in November 2007, Alimama is an online marketing platform that provides sellers on Alibaba Group’s marketplaces a range of marketing and advertising services.¬† ¬†Similar to Google Adwords for Digital Marketers.

AliCloud: This is the tech infra (server side) management company of Alibaba.  Now that they were managing operations at this scale, it became easy for them to open their infra to the public for a fee.  Thus became the Cloud Computing Arm of Alibaba.  This is similar to any web hosting company who uses Cloud Computing technology to offer hosting services.  Similar to Google Cloud and Amazon AWS.

AliNavi: Earlier AutoNavi, Mapping Services similar to Goole Maps.

AliMusic: Music Streaming apps.

Aliwangwang: Its own instant messaging software service Aliwangwang for interactions between customer and online sellers. By 2014 Aliwangwang user has reached 50 million, making it the second largest instant messaging tool in China.

Laiwang: Its own messaging application and service, Laiwang.

UCWeb: UCWeb is a Chinese leading provider of mobile internet software technology and services. Its international product portfolio includes a mobile browsing service (UC Browser), app and game distribution platforms (9Apps and 9Game), a mobile traffic platform (UC Union) and UC News that primarily caters to all types of news in the India market (as an aggregator) among others.

Youku Tudou: In April 2014, Alibaba and Yunfeng Capital, a private equity company controlled by Alibaba’s founder, Jack Ma, agreed to acquire a combined 18.5 percent stake in Youku Tudou, which broadcasts a series of popular television programs and other videos over the Internet. China’s Version of NetFlix, Amazon Prime.

How does Alibaba Make Money – Other Services

Ant-Financials:¬†¬†Alibaba Group has made major investments in Sina Weibo, a Chinese micro-blogging website similar to Twitter and Youku Tudou, China’s answer to YouTube. Alibaba has also invested in a number of US startups, including video messaging application Snapchat and Lyft, a peer-to-peer ridesharing application. In 2014 it even bought a 50 percent share of Guangzhou Evergrande Football Club for $192 million.¬† The company¬†operates¬†Alipay, the world‚Äôs largest mobile and online payments platform, Yu‚Äôe Bao, the world‚Äôs largest money-market fund, Ant Fortune, Zhima Credit and MYbank.

Logistics, Cainiao Network:  Cainiao Network is a Logistics data platform operator dedicated to meeting the current and future logistics demands of China’s online and mobile commerce sector. The company has taken a collaborative approach to logistics and aims to realize delivery anywhere in China within 24 hours, and across the globe within 72 hours.  Similar to Amazon Transportation Services.

Alibaba Pictures: Alibaba acquired a controlling stake in ChinaVision Media Group for $804 million.

Fliggy Corporate: Fliggy (formerly Alitrip) is an online travel platform, which is designed as an online mall for brands such as airline companies and agencies.

Ali Health: It positions itself as a pharmaceutical e-commerce business and medical services. In April 2015, the group also reached an agreement to transfer its online B2C pharmacy, Tmall Medical (yao.Tmall.com), to Ali Health. The integration provides consumers a wide range of pharmaceutical and health products available in China. Similar to NetMeds etc.

Alisports: Alibaba’s sports division, Alisports, based in Shanghai, was established in 2015 after a consolidation of some of the parent company’s existing business units. The new company’s operations encompass television and digital sports rights, event operation, venue commercialization, copyright, media, business development, gaming, and ticketing.

Alibaba Business Strategy

Alibaba Business Strategy
Alibaba Business Strategy

Now that we’ve seen Alibaba Business Model and How Alibaba Makes Money, let’s look at what goes on at the backend of the business i.e.e Alibaba Business Strategy.

Alibaba Business Strategy – Product Side

One Important aspect of Alibaba’s Business Strategy is that unlike Amazon, Alibaba Group holds no inventory and owns no warehouses or products whatsoever in any of their E-Comm Platforms.

While Alibaba’s revenues are only a fraction of Amazon’s, it has higher operating margins and profit margins. The reason for this is that Amazon has to manage the expensive and complex logistics of developing and maintaining a network of warehouses to ship products directly to shoppers. Yes, TaoBao also doesn’t own anything but the seller has to ensure that shipping and returns are managed properly for which Ali group provides backend support in the form of tie-ups and technology to support this via Automation.

Alibaba Business Strategy – Technology Side

To understand How Alibaba Makes Money we need to first know that How does Alibaba work despite being a technology goliath, without the support of its internal core ecosystem partners it simply won’t work.¬† One such interesting elements (which I highlighted above and This is a huge contributor to¬†How does Alibaba Make Money) of Alibaba’s business strategy is that¬†Alibaba actually blocks Baidu’s spider from indexing both Taobao and Tmall, meaning that product catalog pages from these websites do not appear in Baidu’s search results.

Which in turn causes shoppers to go directly to Taobao and Tmall in order to see what they have to offer. This, in turn, increases the value and volumes of search on Taobao and Tmall. When a customer does a search on Taobao and Tmall, ads from merchants appear alongside search results (powered by none other than AliMama – from the house of Alibaba). This aspect of Alibaba’s business model is similar to Google, which makes the majority of its revenue through online advertising.¬† The search advertising bit similar to Google is a huge cushion of support, this in turn is a huge contributor to¬†How does Alibaba Make Money.

To know How does Alibaba work it is important to know that Alibaba Group’s Ecosystem is so huge that almost everything it needs to run smoothly is built in-house (or is acquired) to support the mammoth portal that Alibaba is.¬† For e.g. Payment is powered by AliPay, Hosting is managed by AliCloud, Advertising is powered by AliMama, Logistics is managed (unlike Amazon) by CaiNiao etc. etc.¬† This ecosystem caters to huge savings achieved which indirectly lead to¬†How Alibaba Makes Money.

Alibaba Marketing Strategy

Alibaba Marketing Strategy
Alibaba Marketing Strategy

I’m sure that after reading this descriptive prose on Alibaba Business Strategy and How Alibaba Makes Money, you’d want to know how Alibaba markets itself.¬† What’s the Marketing Strategy of Alibaba.¬† Well, you’ll be shocked to know that Alibaba does little to none online marketing of its brand, the major is the brand recall that Alibaba enjoys in its home country China.¬† Alibaba Marketing Strategy is very in very close loops similar to¬†How does Alibaba Make Money.

Now that you’ve understood everything about Alibaba’s Marketing Strategy¬†let’s look at some Books by Jack Ma himself.

Books by Jack Ma

Books by Jack Ma
Books by Jack Ma

Well, this may not be one of the books written by him, but this definitely is the most read book about Jack Ma.  Get a copy Now.  This book will teach you so much about Alibaba Business Model.

Books by Jack Ma

Another gem of a read from books by Jack Ma is Never Give Up: Jack Ma In His Own Words.  Do read these books and let me know your thoughts.

I hope that you’ve enjoyed reading and understood Alibaba Business Model, How Alibaba Makes Money from Products and How does Alibaba Make Money from Services, Alibaba Business and Marketing Strategy along with How does Alibaba work at the backend.¬† Please drop a comment if you’ve any queries.

 

Unicorn Economy
Unicorn Economy is your answer to all startup related queries with respect to business strategy, business model analysis and consulting. One stop stop for business plan and financial model development.

6 Comments

  1. Great work, very detailed analysis, covered all aspects of Alibaba group.

    However one question popped into my mind while reading, since Alibaba is mainly operated in China, the market there is different from, let’s say, US, considering local protection and internet restriction, would it be better to take the macro factors (policy, regulators, etc.) into consideration? Or in your opinion, is it highly relevant to the success of Alibaba’s business model?

    Thanks all the same.

    1. Policy restriction would apply when Alibaba owns inventory and is dumping the same in US (that would be import from US standpoint) – but here Alibaba is just a facilitator and would only facilitate the sale via the platform and everything else would be on the seller and buyer to obtain the relevant permission.

  2. Hi I recently read your detailed analysis really well done.

    I want to ask you something which really bothered me while understanding Alibaba and how it is trying to enter Indian ecommerce market.
    Alibaba website is promoting Chinese products worlwide. I am wondering what about products of other countries for instance India selling overseas. Flipkart or Snapdeal do not provide services like alibaba. I see a gap there.

    If someone can open a same portal or website to sell Indian products overseas at low cost like Alibaba does that have a chance? I know there is lot of competition already but Indian products can be made at a lower cost too.

    Thanks

    1. This portal has ZERO Chance. Because Alibaba not only sells Chinese Products overseas, it sells all products everywhere, There is Alibaba India Office in Mumbai, where youll see sellers queueing up to sell via Alibaba, FlipKart etc sell all products within India, any chinese seller can also start selling with just a GST no.

      1. Thank you for your reply.

        I was more thinking to open a website with limited category of retail items to sell Indian products only in Australia. It will just acting as a middleman between sellers and buyers. I items like shoes, shirts, wallets, wrist watch etc.

        I want to ask for your honest opinion?

        I know it will be hard to get sellers at first but I thought it was worth trying.

        Any suggestions welcome.

        Thanks

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