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

How Alibaba works and rise of Alibaba as the largest eCommerce company in China

With Alibaba IPO in 2014, Alibaba became the largest ecommerce company in China and one of the most valued company in the world. Alibaba raised $21.8 Billion making Alibaba IPO one of the biggest US listed IPO in history (Second only to VISA IPO in 2008). With massive internet adoption in China, ecommerce in China is led by Alibaba dominating all three B2B, B2C and C2C online space in China. This blog discusses business how Alibaba works, structure of Alibaba,its numerous market places and how Alibaba makes money.

Business Structure

Alibaba Group Holding Ltd was established in 1999 by Jack ma, and operates Taobao Marketplace, China’s largest online shopping destination in terms of GMV and provides platform for C2C retail to small businesses and entrepreneurs, Tmall, China’s largest third-party B2C platform in terms of GMV and launched by TaoBao for brands and retailers and Juhuasuan, a group shopping website launched by TaoBao which is also
China’s most popular group buying marketplace by its MAUs.

These 3 market place comprises Alibaba group’s Retail Market Place and generated a combined GMV of RMB1, 542 billion (US$248 billion in the twelve months ended December 31, 2013) from 231 million active buyers and 8 million active sellers in the twelve months ended December 31, 2013 and accounted for 82.7% of Alibaba’s revenue in 9 months ending December 2013.

Apart from these 3 market places, the group also operates, Alibaba.com, China’s largest global online wholesale marketplace in 2013 by revenue, 1688.com, wholesale marketplace for the group, and AliExpress, group’s global consumer marketplace and a cloud computing service provider. The group provides payment and escrow services for buyers and sellers through Alipay. The group has a platform approach to shipping and delivery and works with third service provider through China Smarts Logistics (48% affiliate) as central information service provider.

Apart from these 3 market places, the group also operates, Alibaba.com, China’s largest global online wholesale marketplace in 2013 by revenue, 1688.com, wholesale marketplace for the group, and AliExpress, group’s global consumer marketplace and a cloud computing service provider. Aliexpress is focussed on B2C and C2C retail and consists mostly of small Chinese businesses offering products to international online buyers. Alibaba provides payment and escrow services for buyers and sellers through Alipay. The group delivers merchandise using third service providers through China Smarts Logistics (48% affiliate) as central information service provider. Alimama is group’s proprietary online marketing platform, which provides online marketing services to the group.

The UCWeb acquisition by Alibaba Group will leverage UCWeb’s expertise in mobile web browser to offerings beyond e-commerce such as mobile search, location based service, app store, mobile gaming, mobile reader operations etc. Alibaba ecosystem

Buyers and sellers are at the heart of Alibaba ecosystem. Buyers and sellers discover, select and transact with each other on Alibaba platform. The Alibaba ecosystem can be summarized as following:

Network Effect in Alibaba’s Market Place

The interactions between buyers and sellers create network effects such that more merchants attract more consumers, and more consumers attract more merchants. In addition, marketplaces are interconnected making buyers and sellers on one marketplace also participate in activities on Alibaba’s other marketplaces, thereby creating a second-order network effect that further strengthens Alibaba’s ecosystem.
The below chart depicts network effect dynamic in Alibaba’s ecosystem:

 

The buyers, retail sellers and whole sellers are placed in Alibaba’s ecosystem as follow:

Buyers

  • Chinese consumers buy on Taobao Marketplace, Tmall and Juhuasuan
  • While browsing or searching on Taobao Marketplace, consumers see product listings from both Taobao Marketplace and Tmall
  • Global consumers buy on AliExpress
  • Global wholesalers buy on Alibaba.com

Retail Sellers

  • Small sellers in China sell on Taobao Marketplace and AliExpress
  • Chinese brands sell on Taobao Marketplace, Tmall, Juhuasuan and AliExpress and global brands sell on Tmall Global
  • Sellers source products on 1688.com

Wholesale sellers

  • Chinese wholesalers and manufacturers supply retail merchants in China on 1688.com and global wholesale buyers on Alibaba.com
  • Chinese wholesalers and manufacturers supply directly to global consumers on AliExpress
  • Global wholesalers and manufacturers supply global wholesale buyers on Alibaba.com

Revenue Stream

Alibaba group’s revenue is primarily generated from merchants through online marketing services (via Alimama, our proprietary online marketing platform), commissions on transactions and fees for online services. Group also generates revenues through fees from memberships, value-added services and cloud computing services. In the nine months ended December 31, 2013, the group generated revenue of RMB40.5 billion (US$6.5 billion) and net income of RMB17.7 billion (US$2.9 billion).