Alibaba's Taobao

1. What was Alibaba Group’s motivation for diversifying into the consumer business with the launch of Taobao? Does it make sense?
The motivation came from the fear of the rise of eBay in China. It invested US$30 million in EachNet in 2002, and at that time, EachNet commanded an 85% market share. Just in the following year, acquired the remaining 67% stake in EachNet, rebranding the site as eBay EachNet. EBay has very big ambition in Chinese market and it is another company that understood Chinese online marketplaces. eBay’s power sellers would grow their business to compete in the B2B space. In China, the line between individuals and small businesses is blurry. There are many people with entrepreneurial ambitions. Alibaba Group’s initial motivation is to stop eBay to protect Alibaba.
In addition, Alibaba Group’s saw potential in the market segment. China has large population and high growth in online purchasing power due to rapid economic growth of Chinese GDP. So Alibaba Group launched Taobao.
2. How did Taobao beat eBay?
Trust amongst buyers and sellers
Jack found that a critical difficulty is that many SMEs have no way to evaluate the trustworthiness of the trading partners. Taobao developed a number of mechanisms to help create trust between sellers and buyers, including the two-way feedback, string regulations on registration and TrustPass verification for premium subscribers.
Familiarity with Chinese aesthetics and preference
Ma had the experience in serving Chinese market for years. So he was more likely to know about the Chinese customers’ preference. Ma imbued Taobao with a strong local culture that reflected a deep understanding of Chinese consumers and an attitude of informality. For example, Taobao is more appealing name than eBay to Chinese customers. Chinese consumers like busy web designs with strong colors. Taobao’s design was much more usable for Chinese eyes compared to EBay.
Alipay service
Alipay was critical to Taobao’s development. The escrow service was designed to eliminate settlement risk among trading parties. It provided no risk payment transactions for both its buyers and sellers, by holding money in escrow before forwarding it to the receiving party.
No listing fees
An initial listing fee or any further transaction fees would have scared off the early adopters, unlike its U.S. competitor, Taobao did not charge listing or transactions fees. So Taobao is able to build a solid and wide customers base. The two-way Network Effect comes in as well, as more buyers are providing more stuff on Taobao that attract more buyers.
Better communication between buyers and sellers
Taobao invested significant resources to facilitate communication between buyers and seller. It embedded an instant-messaging service, Wangwang, in its website, allowing buyers to directly haggle with sellers. As a result, “communication problems” constituted only 8% of Taobao’s non-positive feedback. At eBay, this share stood at 20%.

3. Should Ma implement Zhao Cai Jin Bao? Why or why not?
Taobao Should not launch the value-added service called Zhao Cai Jin Bao . The service let sellers bid for keywords, ranking paid listings ahead of free listings and collecting a fee when a transaction relating to the paid listing was completed through Taobao. There are several reasons for it:
Many vendors are attracted by Taobao for its free service. Start charging the service can cause vendors to complain their guarantee of free service at the very beginning.
There is no guarantee that Zhao Cai Jin Bao will increase the company revenue. Zhao Cai Jin Bao will discourage many small vendors to do business on Taobao as they cannot invest a lot to compete with larger vendors. They may face difficulties in selling the products even they have price advantage or provide better quality product. Taobao highly relies on these small vendors, losing them will cause its customers base to shrink.
Chinese merchants are in reality very perceptive to charges and pricing policy. Zhao Cai Jin Bao will cause their resentment.
Taobao is in a very competitive market. There are many other e-commence websites that are providing free server and competing head-to-head with Taobao. Zhao Cai Jin Bao will cause sellers to switch to other platforms as the switching cost is not high in this case.
The entry barrier in e-commence websites is not high as well. More new entrants will come if Taobao make sellers unhappy.
Sellers may not want to use the Zhao Cai Jin Bao service as well as the majority of people are looking at the trustworthy of the sellers and the price of the products. Products listing on the top will pay the service fee to Zhao Cai Jin Bao and their price of their products will be higher. They will have no price advantage in the price-competitive market. So they may not want to use Zhao Cai Jin Bao.
4. What do you think is the most appropriate way to monetize Taobao?
Currently, Alipay is very good revenue source for Taobao. The transactions on Taobao are huge and Alipay can hold a very large amount of money and do investment to earn revenue.
Provide value-added service to premium subscribers will also be a good way. Taobao open Tmall website to serve the premium subscribers. Their products are listed top during searches. In addition, Taobao provide better customer service on behalf of the premium sellers.
Taobao can open more advertisement websites like Taobao Guangjie, Taobao Men and Taobao Women. These websites provide buyers with very good recommendations and can charge buyers if they would like to list their products on it. Now Taobao name these kinds of websites as Channels. Many people would like to subscribe to these Channels as they could provide recommendations based on purchasing history. Taobao can provide better-customized recommendations to enhance the Channels.
Taobao can also sell the purchasing statistics to those who are interested and doing market research.
Provide service in building stores on the websites. Some sellers have litter knowledge about how to open their stores on the website.
Charge high cash deposit for sellers. Sellers who can deposit more will be given higher trustworthy level. Taobao can use the money to invest.