Personal blog of Pedro Neira Ferrand, Serial Entrepreneur and Startup Manager. Endeavor Entrepreneur and BlackBox Connect Alumni .
My views on Internet, entrepreneurship, startups, fundraising and life !
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Last quarter of 2008 Alibaba, the largest B2B marketplace in the world made a shocking announcement: It would launch to market a new premium product; the “Starter Pack” priced around 60% below its current flagship service, the “Gold Supplier Membership”.
A lot of things have been said that this is a tactical move from Alibaba’s management to respond to the economic slowdown and decline in Chinese exports, but in my opinion it’s much more than that… It’s a complete change in their business model. They are going from: a model based on a small amount of clients paying very large fees (Gold Suppliers paying around USD 7.000 per year and the rest is Free Subscribers) to another scenario where they will have a much broader base of customer paying a lower initial fee (around USD 3.000) and increasing the sales of Value Added Services (VAS). This a fundamental change not a response to the crisis. The objective of this article is to try to show Why Alibaba is making these changes? What business results has led Alibaba’s management to make such an important change of strategy in the middle of an exponential growth in revenues and net income? The short answer is, in my analysis: 1) a decline in Alibaba’s conversion rates and 2) Stagnation in Alibaba’s penetration rates of it’s core market.
Let’s look at these two arguments in more depth and see what the numbers say...
1.- Decline in Alibaba’s conversion rates
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Numbers show very clearly that Alibaba has been having a hard time in recent years to maintain or increase their most important ratios: paying members / registered users. Let’s look at some of the numbers:
Gold Suppliers (GS) as % of total registered users in the International Marketplace has been stagnant at around 0,60% since 2005 and will probably drop to around 0,40%-0,50% in the year ended in 2008, according to my estimates.
China Trust Pass Members (TP-Chi) as % of total registered users in the International marketplace has declined from 1,35% in 2005 to 1,15% in 2007.
Gold supplier and Trust Pass conversion rates (new paying members divided by number of new registered users in the same period)have declined in the last 3 years.
These and the other ratios shown are saying that Alibaba might have reached its ceiling in terms of conversion rates of premium services at actual prices. It would probably be much more costly and margins would decrease if Alibaba wanted to maintain or increase these rates. If they want additional revenue it’s clear it has to come from somewhere else.
2.- Stagnation in Alibaba’s penetration rates
(Click on image to see larger/more quality image)
Another way to analyze the data is to try to find how many companies are paying the “Gold Supplier” subscription as a % of the total number of Chinese exporting companies. To find reliable data from Chinese companies is very difficult. Some of the sources are even contradictory, being in many cases official sources. Nevertheless, I’ve tried to come up with an estimate (details shown in the Excel file at the end of this post) and the result is that in the last three years, Alibaba’s penetration rate has been stagnant around 12%; meaning that around 12% of exporting Chinese companies pay the Gold Supplier rate. A very impressive penetration rate in my opinion, but stagnant for the last 3 years.
Conclusion
It’s not that Alibaba is just lowering prices as a response to the crisis; they are doing it because they’ve reached their own limits in terms of conversion rate and penetration rate in their target market. These findings, together with the fact that around 90% of the keywords available for sale at Alibaba (only paying subscribers are allowed to buy them) remain unsold, called for a change in strategy. Now it’s the right time to move on and monetize the next layer of its customer base.
We’ll have to wait 2009 and see if the company can deliver in making this difficult transition and manage effectively a much broader base of customers. The strategy makes sense… now let’s see next year if Alibaba’s management can live up to the challenge in terms of execution...
You might be interested other articles I’ve written about Online Marketplaces:
I’m very happy to communicate to all the readers and followers of MBA Internet Marketing Manager that it has been selected by GraduateDegree.org as one of the best 100 blogs for MBA Students.
