The Alibaba Business Model: An Overview

It's tempting to describe Alibaba (BABA) as a Chinese alternative to American online retail giants like Amazon (AMZN) and eBay (EBAY). But Alibaba's business model is in some ways surprisingly different from the leading e-commerce businesses in the U.S. Alibaba is comprised of three core businesses:

  • Alibaba
  • Taobao
  • Tmall

All three are brand names for e-commerce websites that connect various types of buyers and sellers, allowing Alibaba to act as a middleman to China's emerging e-commerce industry.

Key Takeaways

  • Alibaba Group operates three big companies, serving the business-to-business market, the mass consumer market, and the upscale consumer market.
  • In all of these businesses, Alibaba is the middleman, hosting buyers and sellers but not handling merchandise.
  • Its three big sites, Alibaba, Taobao, and Tmall, are all on the top 10 list for global reach.

The Alibaba Business Model In Depth

Alibaba (BABA) boasts a variety of eye-popping statistics. The company accounted for a reported 53.3% of all online retail sales in China in 2020, according to emarketer.

As of 2020, all three of its core businesses take up slots on the list of the top 10 most popular sites globally, according to Alexa, a data analytics company owned by Amazon.

As of June 2020, the company had 758 million active users, up from 742 million a quarter earlier. That's more than twice the entire population of the United States.

Alibaba recorded $74.1 billion worth of orders on Nov. 11, 2020, the date of the annual Chinese equivalent of Black Friday called Singles Day. That was nearly double its previous record sales day of $38.4 billion on the previous Singles Day in 2019. Those numbers defy the country's ongoing trade war with the U.S. and the global impact of the coronavirus pandemic.

758 million

The number of active users Alibaba has reported, as of June 2020.

Alibaba B2B

Alibaba.com was launched in 1999 in Hangzhou by Jack Ma, a former English teacher, along with a group of 17 friends. It is a business-to-business trading platform, connecting manufacturers and wholesalers with buyers from around the world.

Merchants pay annual sellers' fees and sales commissions to Alibaba. They can list a limited number of products for free but have the option to pay for a range of benefits such as greater exposure on the site and unlimited product listings.

Taobao B2C

In Chinese, Taobao means “search for treasure.” Taobao.com has grown to become China's largest shopping website. Launched in 2003, Taobao lists hundreds of millions of products and services from millions of sellers.

Taobao doesn't charge transaction fees and the site is free for merchants to join, a policy that helped the site gain its enormous user base in China. Its main revenue source is advertising fees paid by merchants who want to stand out from the literally millions of competitors on the site.

While Alibaba.com is business-to-business, Taobao is business-to-consumer or consumer-to-consumer focused, enabling small businesses and individuals to open online stores.

To help shoppers choose among the vast number of merchants, the site has a rating system that reflects how many transactions each seller has successfully completed. Buyers can directly ask merchants questions through Alibaba Group's messenger software.

Merchants have the option to buy advertising and other services to help them stand out on the website and boost sales. Advertisers can choose between pay-for-performance and display marketing. These ads are the primary means through which Alibaba makes money from Taobao.

Tmall Multinational Brands

Tmall.com, which launched in 2008, offers branded products oriented towards China's growing middle class. While Taobao caters more to small merchants and individuals sellers, Tmall is focused on larger companies, including multinational brands such as Nike (NKE) and Apple (AAPL). 

It was Tmall that pioneered Singles Day in 2009 as an annual promotional event.

Tmall charges merchants a deposit, an annual fee, and a commission fee on transactions. Sellers on Tmall have access to analytic tools showing the number of visitors, page views, and customer ratings, which help guide their business decisions.

Tmall is the part of Alibaba that most resembles eBay and Amazon, which also collect transaction fees from third-party merchants.

Alibaba's American Ventures

So far, Alibaba has had limited success in breaking into the U.S. consumer market.

In 2015, it sold its U.S.-based retail site 11Main.com to OpenSky, along with the logistics and fulfillment companies that supported it. Alibaba wound up owning 37% of OpenSky with the deal.

The company has invested in other U.S. ventures, including Zulilly, SnapChat, and Lyft.

Alibaba operated 11Main for only a year, giving rise to some speculation among investors that its primary interest was in raising its American profile before the launch of its initial public offering in September 2014.

Software vs. Warehouses

Unlike Amazon, Alibaba Group holds no inventory and owns no warehouses. Rather, Alibaba has created software platforms that facilitate the exchange of goods and services. While Alibaba's revenues are lower than Amazon's, it has higher operating margins and profit margins.

In that regard, Alibaba is more like eBay, which brings together buyers and sellers without ever touching the merchandise.

Amazon, by contrast, built and maintains a worldwide network of warehouses where orders are packed up and then delivered to individual consumers in 15 countries and counting. Software is easier to manage.

Alibaba and Baidu

One interesting element of Alibaba's business strategy lies in its relationship with Baidu, which operates China's leading search engine. Alibaba blocks Baidu's spider from indexing both Taobao and Tmall, meaning that pages from these websites do not appear in Baidu's search results. As a result, shoppers must go directly to Taobao and Tmall to search. This, in turn, increases the value of search on Taobao and Tmall.

When a customer does a search on Taobao and Tmall, ads from merchants appear alongside search results. This aspect of Alibaba's business model is similar to Google (GOOGL), which makes a significant amount of its revenue through online advertising.

Alibaba's core business is centered on e-commerce. Its business model combines elements of many leading U.S. technology companies rather than mirroring any one.

Alibaba Group's Ecosystem

In addition to its leading e-commerce portals, Alibaba Group has created an ecosystem of companies to complement them:

Alipay

Alipay is an online third-party payment platform, launched in 2004 by Alibaba Group. It provides payments and escrow services for transactions on Alibaba Group platforms. Alibaba Group spun off Alipay in 2010.

Alimama

Launched in November 2007, Alimama is an online marketing platform that provides marketing and advertising services to sellers on Alibaba Group's marketplaces. 

China Smart Logistics 

China Smart Logistics is a proprietary platform that provides real-time access to information to buyers and sellers to improve the efficiency of e-commerce package deliveries. 

Aliyun

Aliyun develops platforms for cloud computing and data management, ensuring that Alibaba's e-commerce portals can handle its massive traffic and transaction volumes.

Alibaba Group describes its overall mission as “to make it easy to do business anywhere.”

Investments in Other Businesses

Alibaba Group has made major investments in Sina Weibo, a Chinese microblogging website similar to Twitter Inc. (TWTR), and Youku Tudou, China's answer to YouTube.

Alibaba has also invested in a number of US startups, including video messaging application Snapchat and the ride-sharing service Lyft. In 2014

It even bought a 50% share of the Guangzhou Evergrande Football Club for $192 million.