How Alibaba makes money and Alibaba’s business model

Understanding Alibaba's Business Model
Chinese ecommerce giant Alibaba’s business model has 2 main components – ECommerce and ad technology. Alibaba makes money through purchases happening on its ecommerce arm which is world’s largest and advertisement revenue using an ad technology which is among the best in world due to its sophisticated advertising technology and the future marketing potential.  Alibaba as an eCommerce giant has been discussed in detail in my previous blog post Alibaba as eCommerce Giant. Alibaba’s foray into advertising is mainly aimed at increasing product sales for sellers at its market places and ecommerce sites, but its ad business has been also extended to advertisers wishing to push their products. 
In advertisement value chain, role played by participants varies greatly depending on their position in the value chain. For example, Advertisers aim to get their products sold and focus on creating content that resonates well with their target audiences. I have discussed Advertising Value chain in detail my previous blog Digital Advertisement Value Chain. Well targeted content keeps audience engaged and leads to repeat visits and repeat purchase. Publishers like media companies and content creators sell their inventory to the advertisers and aim to fetch maximum money for their inventory. Data Management Platforms helps in providing insights about users and segment these users into audiences based on user’s online behaviour. These segmented audiences can then be sold to appropriate advertisers leading to higher CPMs for publishers and targeted sales for the advertisers. 


Alibaba has large amount of users visiting to its various e-commerce platforms, market places and partner websites, leading to Alibaba getting access to vast trove of consumer and transactional data. Alibaba applies proprietary algorithms on these transactional data to evaluate quality of advertising inventory and based on these data predicts CTRs and conversion rates of marketing messages. This helps Alibaba segment advertising inventories leading better user targeting, increased marketing effectiveness, improved consumer targeting efficiency and enhanced ROI for advertisers.
For example Alibaba knows well in advance a user’s buying history and thus his taste, preferences and recent purchases. Based on this information and its targeting algorithms, Alibaba as a publisher is able to show perfectly targeted product advertisement to users.  This in turn helps Alibaba increase product sales for merchants listed on its e commerce platform. It also helps Alibaba enter and mark its presence in the ever important advertisement business. 
Key features of Alibaba’s online ad business are the following:

1. Data Management Platform

DMP helps in creating audience segments by using consumer’s online user behaviour (products people browse and buy) on Alibaba’s e-commerce platforms. Alibaba’s DMP data is further combined with advertiser’s audience data to deliver targeted advertisement to potential customers with similar attributes. This provides better targeting ability for advertisers on its ad exchange and its market place. 

2. Taobao Ad Network and Exchange (TANX)

TANX is one of the earliest and one of the largest real time online advertising exchanges in China. TANX handles and automates third party buying and selling of billions of advertising impressions on a daily basis by on Alibaba market places and non-Alibaba sites through real-time bidding auctions. TANX is powered by its DMP wherein DMP helps participants on TANX leverage its transactional data to evaluate and select online advertising inventory using both behavioural data of users as provided by DMP and browsing behaviour and shopping history as provided by advertisers. Unlike Alimama, TANX allows for transparent pricing of advertising inventory leading to increased ROI for marketers. TANX is not limited to merchants only and any brand advertiser can buy ads on TANX. Participants on TANX include publishers, merchants, Demand Side Platforms and third-party data and technology companies
U.S. rivals: Google’s AdX, Yahoo Exchange (formerly Right Media), Facebook Exchange, Twitter’s Mopub 

3. Taobao Affiliate Network

Taobao Affiliate Network is Alibaba’s network of third party sites like Weibo (China’s Twitter equivalent) wherein Taobao sellers run ads bought through Alimama. Sellers put marketing displays on our affiliates’ websites and mobile apps. Further, sellers pay a performance-based marketing fee primarily based on CPC or CPS basis with a significant portion of marketing fees getting shared with the participating affiliates. 
Taobao marketplace is one of the most prominent Alibaba’s e commerce property with 100 million visitors a day.
Rivals – Google Display Network, Facebook Audience Network, AOL’s

4. Alimama

Online marketing service is primary source of revenue as said by Alibaba in its US SEC filing. Advertiser can choose content-based PPC advertising plan (like adsense) or purchase banner or text link based on CPI or cost per time. Alimama is an online marketing technology platform that provides online marketing services to sellers. These online marketing services include services such as:
  1. P4P marketing service: Sellers bid for keywords that appear in search or browser results on a CPC basis based on prices as determined by Alimama’s online auction system. This facilitates market based price discovery based on online bidding system. This is similar to bidding of key words on Google ad words.
  2. Display marketing: Seller bids for display positions on areas like landing pages, channel pages and delivery confirmation pages of Taobao Marketplace and Tmall or Alibaba’s third-party marketing affiliates at fixed prices or prices established by a real-time bidding system on a CPM basis. Alimama provides one stop solution to promote product brands Display Marketing helps to promote product brands on Alibaba Market Place (Taobao) and Alibaba’s network of third party sites namely Taobao Affiliate Network. 
US Rivals – Amazon Advertising Platform, eBay Advertising, Google Shopping

Google declining CPC: Is mobile to be blamed for this?

Google posted its first quarter earning for 2015 on April 23, 2015 reporting $17.3 Billion revenue and EPS of $6.57.  Google missed market’s earning expectation of $17.5 Billion by a whisper and market gave Google thumps up for 12% YoY increase in revenue and the reported decrease in its Capital expenditure.
Pricing pressure on online ads led to 7% YoY decrease in Cost Per Click, however Google reported 13% YoY increase in aggregate paid clicks. The increase in aggregate paid clicks could offset the decline in cost per click and based on increased paid clicks Google could increase its YoY advertising revenue despite making less money per ad.  Finally Google ended up with $65.43 Billion cash and cash equivalents in Q1, 2015.
Some of the major highlights of Google’s Q1 earning can be seen as follow:
  • Revenue – Google’s Q1, 2015 revenue increased to $17.3 Billion, which is 12% up from $15.4 Billion revenue in first quarter of 2014.
  • Paid Clicks – increased by 13% YoY but decreased by 1% with respect to the previous quarter. This includes 12% YoY decline paid clicks from Networks and 25% increase in paid clicks due to Google sites
  • Cost Per Clicks – has seen decline for last 11 quarters and this has come up as big area of concern for Google. CPC saw 7% YoY decline.
  • Traffic Acquisition Cost – Traffic acquisition cost as a percentage of advertising revenue got down to 21.6% in Q1, 2015 to 23.1% in Q1, 2014.


Google’s Historical Revenue Data
Google gets most of its revenue through Advertising with 2 main components, namely advertising revenue from paid clicks on Google websites and advertising revenue on paid clicks on Google Network Members’ websites, contributing 89.5% of its total revenue in 2014.
Paid Click vers Cost Per Click mismatch in Google
Google has been grappling with Pricing vers Supply trend mismatch since 2011 wherein volume of paid search has been rising and cost for each click has been decreasing. This can also be seen in the figure as below:
Declining Cost Per Click
The falling CPC has led to  being interpreted as Google beginning to lag in advertising economy and thus started being left behind by players like Facebook and Twitter. But, can it always be said that falling CPC is the true measure of advertising effectiveness of a firm? We will discuss in detail about the trends in Google’s CPC and its advertising revenue in following section:
1. Shift to mobile
Google has around 90% market share in mobile search and thus dominates the mobile search engine market due to exceptional adoption of  Android OS by smartphone users. Android has 80% OS wise market share in smartphone landscape and google is expected to continue its leadership position in this area. Continuing decline in CPC has been attributed to massive shift to mobile and difficulties in monetising search on mobiles. Further, ads on mobile websites brings in smaller revenue than similar ads on desktop. But this trend may reverse due to innovations like Enhanced campaign.

2. Growth of advertising on you tube

As per Google CFO Pichette, rapid growth of advertising on youtube rather than difficulty in monetisation mobile search is the main reason for decline in CPC. Further youtube ad monetisation is influenced by following factors:
a. Rapid growth of youtube viewership – Youtube has over 1 Billion MAU and youtube has grown very rapid in world more especially in less developed countries. Further, ad rates are less in less developed countries than ad rates in developed countries and this has led to overall decline in CPC.
b.  Growth of True View ads on Youtube – Number of advertisers on youtube has grown substantially by 45% YoY and all the top 100 largest advertising brand on Youtube run True View ads.  True View ads charge advertisers only when an ad is watched for 30 seconds or more by a user and this leads to lower monetisation from True View ads than monetisation from This has also led to decline in CPC for Google.


3. Multi platform enhanced campaign – Google introduced multi platform Enhanced Campaigns so as to make cross device paid search campaigns easier for advertisers to manage.  Multi platform enhanced campaign tie mobile and desktop bids together and thus ads on tablet can not be separately bid by an advertiser. Further, it was also presumed that CPC price for tablets will be pulled up to desktop levels as there will be same bid for both desktop and tablets. Most AdWords campaigns were converted to Enhanced by the end of July last year.
4. Realignment of advertising revenue in favour of mobile devices
Since large number of web traffic (in range of 50%) has started coming from mobile devices, advertisers have started realigning their ad budgets in favour of mobile devices.  Further, advertisers with less spending on mobile advertisement started putting more money for mobile advertisement and this might have led to decrease in desktop revenue as some money have got diverted from desktop and have been shifted towards mobile. Lack of price discovery arising due to shift in spending pattern of advertisers might have skewed the overall CPC but in longer run CPC for mobile devices and desktop may align to their respective prices.
5. Role of emerging markets
Increased share of emerging market has also led to overall decrease in CPCs as increased number of clicks from emerging market brought overall CPC down.  Most of Google growth is coming outside USA and European market which is a low priced market. Thus although, Google is able to add search volume but this addition is coming at a cheaper rate bringing overall CPC rate down.

6. Increasing CPC but decreasing paid clicks on Google Network Member’s site – For the last 2 quarters, CPC on Google network member’s properties has been increasing YoY and paid clicks on these properties have been decreasing YoY. The increase in CPC might be due to the fact that network ads might have been historically sold at lower price than Google’s site and this increase might be due to catching up by network’s ad CPC.

7.Decreasing CPC but increased paid clicks on Google Site –  But, Google web sites sold more
ads at a decreasing price a scan be seen below:
But as a whole, it can be seen below that Google earns more money form its own sites than network sites as can be seen below:

8. Increased contribution of advertising in Google’s revenue:

Google earned 59 Billion USD revenue through advertising which constituted 89.5% of its revenue. This shows Google’s dependence of advertising for its revenue and any decreasing trend, either in price or volume can have large impact on Google’s competitiveness.


Revenues (in millions) by revenue source for the periods as presented:
Year ended December 31
Advertising Revenue
Google Websites
Google Network Member’s websites
Total Advertising Revenue
Other Revenue
Total Revenue
Percentage of revenues by source as a percentage of total revenues for periods presented:
Year ended December 31
Advertising Revenue
Google Websites
Google Network Member’s websites
Total Advertising Revenue
Other Revenue
Total Revenue

Thus, it is difficult to say if average CPC is cause of worry for Google if overall click volume and overall revenue is increases.  and overall revenue is increasing. If Google is able to leverage its presence in desktop, search, youtube, chrome, android etc in a better way and is able to deliver well targeted quality ads for advertiser then falling CPC in short run should not be cause of worry for advertisers as there might be many exogenous factors that may be leading to decrease in overall CPC.
Google’s revenues from Google Network Members’ websites include revenues generated primarily through advertising programs including AdSense for search, AdSense for content, AdExchange, AdMob, and DoubleClick Bid Manager.
Paid clicks on Google websites include clicks related to ads served on Google owned and operated properties across different geographies and devices, including search, YouTube engagement ads like TrueView, and other owned and operated properties including Maps and Finance. 

Online Advertising Revenue Models: CPC advertising, CPM advertising and CPA advertising

Online businesses make revenue through mix of online revenue models – online advertising revenue model, subscription revenue model, transaction fee revenue model, sales revenue model and affiliate revenue model. This blog discusses various types of online advertising revenue models, namely – CPC advertising, CPM advertising and CPA advertising and ad monetization under each of these advertising revenue model. Each player in Digital Advertisement Value Chain tries to increase its revenue or decrease its cost based on the position occupied by it in the value chain. Advertisers and Publishers use wide variety of ad monetization methodologies to monetise display ads. Among these methodologies, publishers primarily use following 3ad monetization methodologies to monetise their display inventories:

  1. Cost per Mile (CPM) or Cost per Thousand
  2. Cost Per Click (CPC) or Pay Per Click (PPC)
  3. Cost Per Action (CPA) or Pay per Action (PPA)

Cost per Thousand (CPM) Advertising

Under CPM advertising model, the advertiser agrees to pay the publisher a predetermined amount for every 1,000 ad impressions served. Thus, publisher is compensated for every ad served on its platform. CPM advertising is the most commonly used method used by publishers in direct sale and CPM ad networks. It is mostly used in branding campaigns where most important objective of the campaign is to increase brand awareness. It is generally used as a benchmark to calculate relative cost of an advertising campaign. In a CPM advertising model, advertisers bid for number of times the ad appears on publisher’s network and bid amount is the maximum amount that the advertiser is willing to pay for 1000 impressions.
CPM value for an ad can be given as:

Based on above, CPM for an ad campaign can be calculated as follow:

Total Cost of running campaign = Rs 9000000 = 900 * 1000
Total Estimated Audience = Rs 15000000 = 15 *1000 * 1000

CPM is generally used as a benchmark to calculate relative cost of an advertising campaign.


  • Publisher is able to make money for every ad he serves regardless of whether ad generates a click/an action or not
  • This is favoured method if advertisers want to put their name in front of more people and create a brand for themselves or for people who wants their ads to be viewed rather than to be clicked
  • CPM results are very predictable if publisher is able to predict traffic and thus CPM results provide relatively stable income stream for publishers
  • CPM adverting provides publisher ability to maintain control and visibility over the money he owes from his advertisers. Advertiser is able to exactly know the number of times his ad has been served, and thus advertiser can exactly know his revenue.


  • In case of good fit between ad message and the audience, CPM model may lead to less revenue than CPM advertising model and the publishers may loose some revenue in well targeted messages in CPM advertising model
  • Very weak correlation between actual action or sales and CPM and thus very weak performance matrix
  • In case of Google Adwords bidding, CPM bidding is currently available for “Google Display Network – All features” and “Google Display Network – Remarketing” campaign types only

Cost Per Click (CPC) Advertising

Under a CPC advertising model, also known as Pay per Click advertising model, advertisers pay publisher an amount known as Cost Per Click each time a user clicks on publisher’s ad. In other words, advertiser is paying for visitors sent to their site from the publisher’s site. CPC amount for any ad is determined by the advertiser; some advertisers may be willing to pay more per click than others, depending on what they’re advertising. CPC model is preferred by advertisers if they plan to run direct response campaigns.

But, in CPC advertising model of revenue, Publishers has less control over the ad revenue than the control it has in CPM advertising model and thus needs to properly track and record clicks in ad serving programs used by them.

Cost per Click (CPC) advertising is also a form of CPA campaign with the action being a click. PPC advertising model is often used by ad networks like AdSense for the paid search marketing done by advertisers in their platform. Similarly, CPC model is generally used for everything else like email marketing, display, contextual marketing etc.

PPC advertising campaigns are flat rate based and bid based PPC. Bid based PPC is an auction generally hosted by a publisher or an ad network wherein advertisers compete with one another in the auction. Google Adwords, Yahoo Search marketing and Microsoft adCentre are 3 main ad networks operating under bid based PPC model. In case of Google’s ad words highest bid amount along with other criteria like ad quality and ad relevance is used to calculate Quality Score to decide the bid winner.


  • Better revenue monetisation model than CPM advertising model if ad message has good fit with the audience being targeted. In this scenario of good targeted message, audiences are more likely to click on CPC based campaigns and thus leading to better monetisation
  • Advantageous to advertisers as they don’t pay for the ads served which don’t lead to a click
  • Low risk for advertisers as they pay only for those ads which led to click with large number of advertisers willing to go for CPC advertising campaign
  • Many advertisers prefer CPC advertising campaigns more than CPM advertising campaigns to the extent that some advertisers participate only in CPC advertising campaigns. This leads to increased number of potential advertisers available to the publishers
  • PPC/CPC advertising model has an advantage over CPM advertising model in that PPC/CPC advertising model tells us something about the effectiveness of an advertising. PPC is a better metric if we want to measure attention and interest of the target customers by measuring tracking clicks by the users.


  • More volatile revenue stream for publishers in CPC advertising campaign than in CPM advertising campaigns
  • Weak correlation between actual action or sales and CPC
  • In case of CPC advertising campaigns, publishers loose for the ads that do not lead to clicks
  • Huge disadvantage to publishers if the message does not match with audience characteristics as they might hugely loose on their ad revenue and their ad impressions may go waste
  • Vulnerable to frauds where clicks are erroneous

Cost Per Action (CPA) Advertising

Cost Per Action (CPA) advertising model, also known as Pay Per Action (PPA) advertising model, is an advertising pricing model, wherein advertisers pay to the publishers only for those clicks that lead to visitors performing some set of specific actions. These action can include actions like purchase of a product, an impression, a click, submission like download of a document, sign-up for a newsletter / membership etc.

Affiliate market is an example of CPA advertising model, wherein publisher gets compensated for each sale generated by them for advertisers.


  • Lowest risk for advertisers as they pay only for clicks that lead to desired actions
  • Advertisers are willing to pay under CPA advertising revenue model and CPA advertising model of revenue generation can generate far more revenue than revenue generation under CPM or CPC advertising model.
  • This is a good revenue model when there is ad message has good fit with audience being targeted


  • Publisher loses transparency with respect to the revenue earned by the advertisers after the user enters into advertiser’s site and thus publishers lack some visibility into the revenue earned and need to rely on the advertisers word for the revenue earned
  • Increased volatility in earnings with some days with single conversion even if good amount of clicks might be happening

eCPM (Effective CPM) Advertising

While CPM is the price paid for every 1000 impressions when buying CPM ad impressions, eCPM is effective CPM calculated post campaign regardless of the buying method. In other words, eCPM tells what the publisher would have earned if they would have sold the ad inventory on a CPM basis instead of a CPA or CPC basis. Thus, eCPM is used to compare revenue across channels with varying traffic and varying method of ad purchase.

As per Search Engine Marketing Professionals Organisation (SEMPO) definition, eCPM is defined as – A hybrid Cost-per-Click (CPC) auction calculated by multiplying the CPC times the click-through rate (CTR), and multiplying that by one thousand.


eCPM = CPC x CTR x 1000

This monetisation model is used by Google to rank site-targeted CPM ads (in the Google content network) against keyword-targeted CPC ads (Google AdWords PPC) in their hybrid auction.

Thus, for a CPC campaign, the calculation for eCPM can be done as follow:

Total Impressions 1000000
CTR 0.25%
Total Clicks 2500
Cost Per Click (in $) 0.5
Total Cost (in $) 1250
eCPM (in $) 1.25

Thus, eCPM = 0.50 * 2500/1000000 *1000 = $1.25 eCPM

Similarly, In case of a CPI (Cost per Installation campaign), eCPM can be given as:

eCPM = CTR * CR * CPI * 1000


CTR = Number of Clicks/Number of Impressions
CR = Number of Installation/ Number of Clicks

Here, we can also define,
eeCR (end to end conversion rate) = CTR * CR = Number of Conversions/Number of Impressions

Thus, for a CPI campaign, eCPM can be calculated as follow:

Total Impressions 2000000
CTR 0.25%
Total Clicks 5000
Conversion Rate(Installation) 10%
Total Conversion 500
CPI (in $) 2
Total Cost 1000
eCPM 0.5

eCPA (Effective Cost Per Action) Advertising

Similar in line to eCPM, eCPA is used to measure effectiveness of advertising inventory purchased (by the advertiser) on a CPC, CPI, or CPM basis. Thus, eCPA is the amount that advertisers need to pay to the publisher if they would purchase any advertising inventory on a Cost Per Action basis instead of CPC, CPI or CPM basis.

eCPA represents total cost divided by total number of actions performed. There is a correlation between number of clicks and number of acquisitions but still it is not necessary that good eCPM will always lead to good eCPA.

eCPA on a CPM model can be calculated as follow:

Total Impressions 200000
CPM rate (in $) 1
Total Cost 200
Actions (Conversions) 50
eCPM (in $) 1
eCPA (in $)  4

Similarly, eCPA on CPC model can be calculated as follow:

Total Impressions 200000
CPC (in $) 1
Number of Clicks 1000
Total Cost 1000
Actions (Conversions) 500
eCPM (in $) 5
eCPA (in $)  2