The business concept of Taobao is to provide a B2C (business to consumer) and C2C (consumer to consumer) website where small businesses and individuals can carry out transactions securely.
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The business model of Taobao is to initially provide its services for free to encourage user participation, and then to gradually monetize the service by charging premium clients a fee for listing their merchandise at the top of keyword search lists, and by providing pay-for-performance contracts to its premium clients, where sellers would pay a fee for successful transactions.
Taobao does not specialize in products, as it is the client sellers who determine what they sell. Popular products traded on the site include clothes, mobile handsets, cosmetics and clothes (Oberholzer Gee, and Wulf 14).
Taobao is a service oriented business, and its main service is providing a platform for buyers and sellers to trade. Taobao also allows users to access the Alipay payment service for free, and to communicate online through Taobao’s messaging service, Wangwang.
Taobao’s marketplace is exclusively mainland China, as the site is constructed to cater to the needs of Chinese customers. Taobao currently makes money from the auction of keywords and from the pay-per-performance contracts on its premium service, Zhao Cai Jin Bao.
The cost structure of Taobao was insubstantial, as the company had focused on building critical mass, with the intention of monetizing its services once it had acquired the dominant market share in China (Oberholzer Gee, and Wulf 14). However, judging from their gross merchandising volume (RMB 43 billion in 2007), Taobao has the ability to convert its market presence into a formidable revenue stream.
So far Taobao is successful in terms of market share but its success has not been matched in revenue terms. Its success in market domination was achieved by its tactics in the face of competition, in the international online auction site, eBay. Taobao managed to overcome its rival in China by catering to the social and commercial needs of its customers. eBay’s business model was designed for customers in markets such as the US.
However Taobao, a local Chinese business, knew that Chinese customers preferred a site which would enable them to do business in the Chinese way, through a combination of commerce and social networking.
Despite these innovations, Taobao does not have significant revenues because it does not charge for its services, in a bid to attract customers from its competition. Nevertheless, the future looks bright, depending on the way in which Taobao monetizes its services.
Taobao’s expansive network of customers in China gives it good reasons to expect that it can reap maximum profits from its current client base. As stated earlier, Taobao has only started charging its premium service clients for use of the service, while other customers still use it for free.
One aspect of Taobao which could hold it in good stead in the future is the use of social networking to increase trust between buyers and sellers on the site.
The use of Wangwang to enable buyers and sellers to communicate with each other and the site in real time increased the popularity of the site. Such an innovation will create awareness about the site among the general public, encouraging people who do not usually trade online to begin doing so.
All of this can be achieved at the current stage, without charging the majority of Taobao’s customers. Since Taobao has a virtual monopoly on e-commerce in the C2C segment in China, they can leverage this market presence into revenue.
The demand for e-commerce is already well established in China, and Taobao can successfully charge for it, as there is no comparable service by competitors. In this way, Taobao will reap the rewards of its efforts to capture the market.
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Oberholzer Gee, Felix, and Julie Wulf. Alibaba’s Taobao. Boston: Harvard. Business School Publishing, 2009. 1-15. Print.