how-does-taobao-make-money

How Does Taobao Make Money? The Taobao Business Model In A Nutshell

Taobao is a Chinese eCommerce website, and it is among the most visited websites in the world. Within it also comprises its payment arm, Alipay. Taobao is part of the Alibaba Group, founded by Chinese tech entrepreneur Jack Ma. The company makes money via its Tmalls (e-commerce platform), and through Alipay, mostly via its Escrow service fees.

Origin Story

Taobao is a Chinese eCommerce website and it is among the most visited websites in the world.

The platform was founded by Alibaba Group in 2003 as a marketplace to facilitate consumer-to-consumer (C2C) transactions for small businesses and entrepreneurs.

history-of-alibaba
Alibaba is a Chinese multinational company with a focus on eCommerce, retail, Internet, and technology services across C2C, B2C, and B2B contexts. It was founded in 1999 by Chinese business magnate, investor, and philanthropist Jack Ma.

Initially, Taobao offered free listings to sellers and increased buyer-seller trust by incorporating Alipay – an escrow-based payment facilitation service. This saw the platform gain significant market share from eBay which was seen as a major competitor at the time.

In 2008, Taobao introduced the B2C platform Taobao Mall (Tmall) to complement its existing C2C offering. Two years later, the online shopping search engine eTao was introduced.

Taobao reacheda a billion product listings by 2016 and on the platform, most products are new and sold at a fixed price, but it does offer eBay-style auctions for some listings.

Taobao revenue generation

Considering how many transactions Taobao handles on an annual basis, the platform does not charge sellers or buyers a transaction fee.

Instead, it makes money by offering SEO-like advertising to sellers in much the same way that Google does. With more than 1 billion product listings spread across 8 million sellers, there is high competition between merchants to get the attention of buyers.

Merchants can choose between pay-for-performance or display marketing ads.

Tmall

As noted earlier, Tmall is the B2C arm of Taobao. With over 500 million active users, the platform allows Chinese and international businesses to sell brand-name goods to Chinese citizens.

Taobao makes money here by charging businesses to open a store on the Tmall platform. They must pass a stringent verification process and then pay a commission to Taobao for every subsequent sale. Typically this fee is around 5%.

As a real-world example, sunglasses retailer Lemon Optics paid a fee of around $25,000 to become verified and establish a shopfront on Tmall.

Alipay

how-does-alipay-make-money
Alipay is a Chinese mobile and online payment platform created in 2004 by entrepreneur Jack Ma as the payment arm of Taobao, a major Chinese eCommerce site. Alipay, therefore, is the B2C component of Alibaba Group. Alipay makes money via escrows transaction fees, a range of value-added ancillary services, and through its Credit Pay Instalment fees.

Escrow provider Alipay also charges for its services on Taobao. Merchants are charged a 0.55% fee for every successful sale. The system is free to use for withdrawals under RMB 20,000 – or approximately 3,000 USD. Above this threshold, users are charged a 0.1% fee.

Compared to rates offered by traditional credit card companies and payment facilitators, Alipay is an extremely attractive option for merchants. At least theoretically, this increases ad revenue for Taobao as sellers compete for that buyer visibility.

Key takeaways:

  • Taobao is a Chinese eCommerce site founded by the Alibaba Group in 2003. It was initially created to counter the dominance of eBay in the Chinese market and increase trust between the buyer and the seller.
  • Taobao sells advertising placements to more than 8 million sellers on its platform. With high competition for visibility, advertising represents a lucrative source of income.
  • Taobao also charges Chinese and international businesses to open on B2C arm Tmall. After the initial setup fee, Taobao also charges a commission for every sale. Usually, this commission is around 5%. Escrow provider Alipay also charges users for its service. Here, low service fees are in part compensated by the huge volume of transactions on the Taobao platform.

Read Next: Alibaba Business Model ,What Does Tencent OwnWeChat Business Model.

Connected Business Frameworks

Alibaba Business Model

alibaba-business-model
Alibaba is an e-commerce platform that generated over $134 billion in revenues in 2022 and over $7.4 billion in net income. Alibaba has six main segments: core commerce (revenues generated in China), international commerce, local consumer services, cloud services, Cainiao (logistics), digital media, and other innovation initiatives.

Amazon Business Model

amazon-business-model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services,  Amazon AWS, Subscription Services, Advertising revenues, and Physical Stores.

Amazon Mission Statement

amazon-vision-statement-mission-statement (1)
Amazon’s mission statement is to “serve consumers through online and physical stores and focus on selection, price, and convenience.” Amazon’s vision statement is “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.” 

Customer Obsession

customer-obsession
In the Amazon Shareholders’ Letter for 2018, Jeff Bezos analyzed the Amazon business model, and it also focused on a few key lessons that Amazon as a company has learned over the years. These lessons are fundamental for any entrepreneur, of small or large organization to understand the pitfalls to avoid to run a successful company!

Amazon Revenues

amazon-revenue-model
Amazon has a business model with many moving parts. With the e-commerce platform which generated over $222 billion in 2021, followed by third-party stores services which generated over $103 billion, Amazon AWS, which generated over $62 billion, Amazon advertising which generated over $31 billion and Amazon Prime which also generated over $31 billion, and physical stores which generated over $17 billion.

Amazon Cash Conversion

cash-conversion-cycle-amazon

Working Backwards

working-backwards
The Amazon Working Backwards Method is a product development methodology that advocates building a product based on customer needs. The Amazon Working Backwards Method gained traction after notable Amazon employee Ian McAllister shared the company’s product development approach on Quora. McAllister noted that the method seeks “to work backwards from the customer, rather than starting with an idea for a product and trying to bolt customers onto it.”

Amazon Flywheel

amazon-flywheel
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.

Jeff Bezos Day One

jeff-bezos-day-1
In the letter to shareholders in 2016, Jeff Bezos addressed a topic he had been thinking quite profoundly in the last decades as he led Amazon: Day 1. As Jeff Bezos put it “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”

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