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Even though Amazon seems to captivate the world with its seemingly unending e-commerce success, there is another player to keep an eye on: Alibaba.
With 726 million active buyers and a host of diverse Alibaba manufacturers and wholesalers, it's changing the face of how products are bought and sold.
One of the big reasons Alibaba has seen such remarkable popularity is because of its reputation for offering cheap goods. Alibaba products, which are typically sold in bulk quantities, can be far less expensive for buyers because they can work directly with the suppliers via the Alibaba online marketplace.
But how are these products so cheap?
To better understand the nature of Alibaba's success and lower prices, let's begin by taking a look at how they got to where they're at and how they make their money…
What Is Alibaba?
The history of Alibaba goes back to 1999, when founder Jack Ma, along with 17 others, launched Alibaba in his apartment. Now known as Alibaba Group Holding Ltd. (NYSE: BABA), it's grown to be the Chinese equivalent to Amazon. The company offers a business-to-business (B2B) platform for Alibaba wholesalers and manufacturers to connect with international buyers. And the growth it's experienced over the years is nothing to scoff at, especially the significant Alibaba stock growth.
Thrust into the spotlight as one of the world's foremost e-commerce businesses, Alibaba continues to transform the way people buy and sell. By giving merchants, brands, and other businesses access to e-commerce technology, these wholesalers can operate more efficiently, engage with their customers, and compete with other brands in their industry.
Alibaba and its subsidiaries focus on various sectors including cloud computing, digital media, and entertainment. Unlike Amazon, which operates under one large umbrella, Alibaba is split into three distinct businesses: Alibaba, Tmall, and Taobao Marketplace.
How Does Alibaba Work?
Essentially, Alibaba acts as a middleman between manufacturers and buyers from around the world. Sellers can post their Alibaba products for free on the Alibaba marketplace, with options to invest in other benefits that give more exposure and the ability to list more products.
The focus was on creating a space for manufacturers to sell their products in bulk to other small businesses. Then, those businesses can resell those Alibaba products elsewhere in the world.
Alibaba's business model has created an interesting dynamic that's akin to B2B trading (Alibaba manufacturers can negotiate with Alibaba buyers), with an e-commerce twist. But with the advent of Tmall and Taobao, Alibaba opened the door for exponential e-commerce growth in the business-to-consumer (B2C) and consumer-to-consumer (C2C) spaces…
Taobao Focuses on Consumer-to-Consumer
Taobao was launched in 2003 as a way for small businesses, or independent consumers, to trade directly with other consumers. Similar to eBay, it has become the largest subsidiary of Alibaba, forcing eBay to close its business in China in 2006.
As one of the most popular websites in China, Taobao has certainly made waves when it comes to Alibaba stock news. Its growth has catapulted Alibaba to be one the largest e-commerce sites in the world, with revenue in early 2020 reaching approximately $72 billion.
Tmall Focuses on Business-to-Consumer
Whereas Alibaba manufacturers focus on B2B, and Taobao is C2C, Tmall highlights China's B2C market. Launched in 2008, Tmall offers sellers direct access to a wide variety of products from larger retailers. Their primary audience is middle class Chinese people who want to purchase high-quality items from established brands.
Tmall is wildly successful, reigning as China's No. 1 B2C e-commerce site, bolstering Alibaba's name and control over the e-commerce space beyond just B2C.
Now that you know more about the basic structure of Alibaba and its subsidiaries, let's look at how they all make money…
How Does Alibaba Make Money?
Outside of their core commerce offerings that include cloud computing, digital media, and entertainment, the Alibaba platforms generate revenue in a few primary ways:
- Paid advertising/online marketing opportunities.
- Commission on transactions paid by sellers.
- Membership fees.
- Storefront fees for sellers that operate a storefront.
In addition to generating revenue from these value-added services, Alibaba reduces operating costs by not stocking inventory or providing warehouses. Alibaba manufacturers and wholesalers are able to manage operations using Alibaba's software that aids in the exchange of goods and services.
This is a key differentiating factor in the Alibaba vs. Amazon conversation. Alibaba does generate less revenue than Amazon, but it also maintains lower operating and logistics costs. This allows Alibaba to be more agile and scalable as it continues to expand its offerings.
So, with that in mind, we can now get a closer look at why Alibaba products are offered at lower prices…
4 Reasons Why Alibaba Products Are So Cheap
Alibaba's incredible popularity and success is due in part to its reputation for offering cheap products. There are a number of reasons products are so affordable, including:
No. 1: Bulk Purchasing
Buyers can purchase large quantities of products at wholesale prices, setting them up for a higher profit margin upon resale. This lowers the cost per unit, which is beneficial for buyers who need large quantities of an item. It also means less time and money spent on shipping and ordering products.
Alibaba wholesalers so benefit from selling in bulk, which can help with packaging and shipping costs. Since many wholesalers are also the manufacturers for Alibaba products, they are able to offer much cheaper prices directly to the consumers.
No. 2: Lower Manufacturing Costs
Many Alibaba manufacturers produce goods in China or other nations where labor is often much cheaper than other places in the world. With nearly 1.4 billion people, China has the highest population in the world and an abundance of willing laborers.
But there are other factors that make manufacturing in China attractive, including less regulatory compliance (environmental, safety, fair wages), lower taxes, and a more efficient supply chain.
Of course, there are concerns that accompany some manufacturing practices, such as child labor, unfair wages, and questionable working environments. While the Chinese government has made efforts toward reform, the implementation of such reforms has been slow and will likely take time to be fully realized.
No. 3: Price Negotiation
Alibaba allows buyers and sellers to negotiate prices, which may warrant an even cheaper price. This takes some understanding of the industry, products, Alibaba manufacturer, competitors, and careful negotiation practices, but with proper handling, it can be a huge benefit for buyers.
Using the "Contact Supplier" option, buyers can quickly and easily communicate directly with the Alibaba wholesaler to discuss not only the overall cost or price per unit, but deposit costs and payment options.
While some suppliers may be reluctant to budge on their price, if a buyer is committed to regularly purchasing larger quantities of Alibaba products, the supplier may be more willing to negotiate.
No. 4: Purchase Directly from Manufacturers
When purchasing bulk products via Alibaba's marketplace, buyers are able to work directly with Alibaba manufacturers, not the company that is selling the manufactured goods. This allows manufacturers to avoid some of the overhead costs associated with additional marketing, advertising, and customer service.
Alibaba wholesalers often do choose to engage in marketing through Alibaba's different paid options, but that still equates to less than trying to market to a large swath of buyers from numerous sources.
What's Next for Alibaba?
Alibaba products continue to be popular. The outlook for Alibaba seems to look quite good. The historical price performance for Alibaba stocks (BABA) continues to show positive signs, even during a pandemic. So, is it worth investing in Alibaba? Or is there something else to take a look at?
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