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

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 Advertising.com

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

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.

Advantages:

  • 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.

Disadvantages:

  • 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.

Advantages:

  • 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.

Disadvantages:

  • 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.

Advantage:

  • 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

Disadvantage:

  • 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.

Thus,

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

where,

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