Alibaba is one of the largest e-commerce companies in the world. It started very differently than most e-commerce players and the report discusses these strategies in detail. With focus on multi-sided platforms, the report analyses the different impacts of the two sides of the platform in providing a competitive edge to Alibaba.

1. A MULTI-SIDED PLATFORM - ALIBABA
10-05-2018
(Image Source: moneycontrol.com)
Akash Behl
Inna Ilyantseva
Nidhi Pednekar

2. The two different sides of the market at Alibaba are the buyers and the sellers. The sellers are
the firms or individuals that sell their goods and the buyers may be individuals or wholesale
buyers who purchase those goods.
Alibaba is one of the largest e-commerce companies in the world. It provides a mobile
marketplace for retail and wholesale trade, including other services that provide a platform for
the sellers, buyers and other members to transact with one another. There are two marketplaces
- the international marketplace and the domestic marketplace. While the former focuses on the
worldwide network for buyers and suppliers for raw materials, components, and completed
goods, the latter focuses on suppliers and buyers mainly in China (Li & Yazdanifard, 2014).
Alibaba provides quite a few platforms for the buyers and sellers to communicate with each
other. It provides effective and quick management tools for exporters to provide vital data free
of cost, into the database to interact with buyers directly from overseas. It also provides
versatile organizational tools such as description of products available in other e-marketplaces,
and help buyers look for products though the search function of an exhaustive database that
includes numerous products (Li & Yazdanifard, 2014). In addition to providing a free of cost
online e-commerce platform to both clients and consumers, Alibaba also offers suppliers
payper-click (PPC) advertisements to build their business. Alibaba also provides convenient
twoway forums and communication tools such as Alitalk, Taobao Wangwang, and Yahoo
Message to help clients get information of supply and demand immediately (Li & Yazdanifard,
2014). Introduction of Alipay, a payment tool for the users, and TrustPass, a credit certification,
has provided security to customers, whose information is kept anonymous, and sellers to
conduct their business by decreasing the risks of fraudulent transactions (Li & Yazdanifard,
2014).
The phenomenon where increased number of participants improve the value of a good or
service is called a network effect (Investopedia, 2018). The two types of networks effects, direct
and indirect, are relevant in this context for Alibaba. When behavior of consumers aligns with
that of the producers when conducting business in markets that enable transactions between the
two symbiotic groups, it creates a direct network effect. Alibaba provides a platform for small
business to compete with already established giants by providing a supply chain that decreases
costs and production via economies of scale (Cornell University, 2014). This creates a positive
effect wherein one entity’s decision to use a service, results in the increase of the value of that
service to other suppliers or consumers (Cornell University, 2014). Indirect network effect
occurs when the growth in usage of one product results in the increase in the value of a
complementary product on the other side of the network, which then increases the value of the
first product (IGI Global, 2018). The launch of distinct key IT initiatives such as Alisoft,
Aliloan, and Alimama, helped Alibaba to upgrade its platform to include diverse entities such
as applications developers, banks, and advertisers and enhance the relationships between
platform members by creating dependencies among the members. Additionally, these
initiatives provide the platform members with a way to boost their processes and overall
performance (Tan, Lu, Pan, & Huang, 2015). This results in the positive loop effect, wherein
users using the complementary products, indirectly create a positive externality that affects the
growth of Alibaba.

3. Alibaba was launched in 1999 by Yun (Jack) Ma with the primary purpose to connect buyers
around the world to sellers that were primarily based in China. Since then the company has
grown exponentially and is constantly battling Amazon for the title of the “largest MSP” in the
world. While Amazon started out as a retailer and worked on attracting buyers before it became
a marketplace, Alibaba focused on building a strong network of sellers from the very beginning
before it started to attract customers (Evans & Schmalensee, 2016).
The main purpose of the Alibaba platform was to provide an easy way of communication
between Chinese sellers and buyers, and help businesses gain exposure in the global
marketplace. Businesses were given tools to create and customize their own pages on the web
site, so they can present their offering in their preferred manner, since nobody knew their
business better than they did (Evans & Schmalensee, 2016). Alibaba in turn provided
enhancements such as searchability, appropriate categorization, and overall user experience to
ensure that businesses were easy to find. Alibaba’s focus on growing the supplier side was the
driving factor behind their achievement of critical mass because in less than a year there were
40,000 businesses registered on the platform and in 2000 there were close to 22,000 buy offers
and 52,000 sell offers posted (Evans & Schmalensee, 2016). The friction that was created
resulted in customers around the world flocking to Alibaba’s extensive database of suppliers
and the variety of products available. The platform became a widely known B2B marketplace
reaching over 36 million users in over 240 countries, 3 million supplier storefronts and almost
6,000 product categories (Evans & Schmalensee, 2016).
In the early 2000s, the United States experienced a major crash in their information technology
market, resulting in many dot-com companies and electronic marketplaces going out of
business. Founded in 1995, eBay is one of Alibaba’s main competitors that survived the
dotcom bubble. eBay became extremely successful, reaching one million users by the end of
1998, worth over 7 billion dollars at the time and offering an immense range of products on
their platform (Gianoulis, 2013). While eBay was successful in virtually every country they
expanded into, they did not manage to replicate this success in the Chinese market (Valero,
2016). According to Rodriguez Valero (2016), eBay did not do a thorough study of China’s
market and the behaviors of Chinese consumers, and therefore did not adjust their business
model accordingly. As a result, eBay was not able to achieve critical mass in China with their
American business model.
Since its inception, Alibaba’s main objective was to offer an effective platform for interaction
between buyers and sellers. Over time, the communication tools on Alibaba’s website evolved
to include chats, two-way reviews, and requests for quotations (See Appendix, Figures 1 and
2). Evans and Schmalensee (2016) identified trust as an issue Alibaba faced early on because
the idea of interacting with an unknown distant business over internet became a point of
hesitation for a lot of potential customers. To mitigate trust concerns, Alibaba launched
TrustPass - an initiative to help businesses with authentication and required documentation and
objectively identify them as “trustworthy” (Evans & Schmalensee, 2016). In addition to secure
payment options and credit rating systems, the platform’s “Trade Assurance” protects buyers,
if a supplier is unable to fulfil their obligations by guaranteeing money back to the buyer,
providing them with a peace of mind (See Appendix, Figure 3).
Over the past few years, Alibaba’s web development and design teams have had a strong focus
on improving the various channels for communication, transaction, and feedback. In an
interview, Paul Fu, Director of User Experience at Alibaba, disclosed that the core component
of Alibaba’s user experience strategy is “utility” (Practical eCommerce, 2013). Utility is the
ability to fulfil the users’ core needs, and is strongly supported by layers of usability,

4. desirability, and brand experience. Paul Fu’s team regularly gathers user feedback and applies
the learnings to their work in keeping the design relevant and ensuring the platform's reputation
remains high (Practical eCommerce, 2013).
As compared to the other dominant ecommerce platforms in the market, Alibaba has a
significant pricing strategy differentiation, focusing on B2B trade. Since profit maximization
from both sides simultaneously could lead to a potential blow-out for any platform, Alibaba
derives profits from the supplier side while keeping the consumer side of the platform
competitively subsidized. Utilizing three major web portals: Alibaba.com, Taobao, and Tmall,
Alibaba makes profits via bundling the following services, from the supplier side (Lambrecht.
2014, p.338):
• Online marketing services (creating advertisements, and communication material)
• Commission on transactions (as a percentage of the price of the goods sold, from the
producers)
• Storefront fees (setup costs, profile building, and adding products to the profile)
• Membership fees and value-added services (Premium Gold supplier membership where
suppliers pay fees to become a verified gold suppliers)
With its focus on strengthening the supplier side of the market, Alibaba started with a unique
value proposition of achieving the critical mass from the supplier’s side, rather than doing the
same from the buyer’s side, as other e-commerce giants such as Amazon did. Globally, buyers
have invariably displayed weaker retention rates for a platform than the suppliers. With distinct
user acquisition rates, the producer and buyer sides of the platform need to be targeted
differently by the platform owner and thus, the pricing strategy adopted by Alibaba clearly
materializes on retaining the supplier side by targeted pricing strategies and expanding the
buyers side by subsidizing product prices and implementing extensive marketing activities.
Alibaba’s two major business verticals: Apparels and Consumer Electronics, face direct
competition from Zara and Prada, and Lenovo and Huawei respectively. The four companies
have a pipeline business, which follows a linear series of activities, with the classic value-chain
model: A series of inputs are transformed by a set of operations to generate a finished product,
the output. The companies coexist with Alibaba, sometimes even providing exclusive rights to
the platform during product launches. While Zara, Lenovo, and Huawei have provided rights
to Alibaba for a majority of their respective product lines, Prada has shown a limited interest in
adding its products to the platform.

5. Assets that provide advantages for the platform in the competition with pipeline firms:
Parameters Alibaba (platform) Zara, Prada, Lenovo, Huawei
(pipeline)
Resource
Management
With the community and resources
that the users contribute as the chief
assets, Alibaba’s platform model is
hard to copy.
Without any network, the threshold
for market entry is relatively lower
for firms with similar product
offerings.
Interaction
coefficient
With emphasis on ecosystem
governance, the platform facilitates
value-driven interactions between the
producers and consumers, thus
increasing the opportunity for
organic growth of the user base.
With focus on resource
optimization, pipeline firms
merely dictate processes, which
provides limited interaction
amongst the users, leading to more
restriction and less organic growth.
Lifetime
Value
With an ecosystem value
maximization approach in place, the
platform, via a feedback-driven
iterative methodology increases the
value of the entire ecosystem,
involving all players. This approach
leads to higher retention rates for all
users.
With a customer focus, pipeline
firms seek to maximize the
customer lifetime value in a linear
fashion, resulting in a lesser
emphasis on other players in the
platform. This approach invariably
has a lower user retention rate.

6. REFERENCES
Cornell University. (2014, November 17). Alibaba: Taking Advantage of Network Effects.
Retrieved from Cornell University Blog:
https://blogs.cornell.edu/info2040/2014/11/17/alibaba-taking-advantage-of-
networkeffects/
Evans, D. S., & Schmalensee, R. (2016). Matchmakers: The New Economics of Multisided
Platforms. Harvard Business Review Press.
Gianoulis, T. (2013). eBay. Gale Virtual Reference Library. Retrieved October 4, 2018, from
http://go.galegroup.com/ps/i.do?p=GVRL&u=ubcolumbia&id=GALE%7CCX273580
0827&v=2.1&it=r&sid=summon
IGI Global. (2018, October 05). What is Indirect Network Effects. Retrieved from IGI Global
Web Site: https://www.igi-global.com/dictionary/what-makes-the-platform-
networkeffects-unsustainable/14130
Investopedia. (2018, October 05). Network Effect. Retrieved from Investopedia Web site:
https://www.investopedia.com/terms/n/network-effect.asp
Lambrecht, A., Goldfarb, A., Bonatti, A. et al. Mark Lett (2014) 25: 331.
https://doi.org/10.1007/s11002-014-9310-5
Li, M. T., & Yazdanifard, R. (2014, November 15). The Review Of Alibaba's Online
Business Marketing Strategies Which Navigate Them To Present Success. Journal of
Business-to-Business Marketing, 1-9. Retrieved from Researcg Gate Website:
https://www.researchgate.net/publication/268278720_THE_REVIEW_OF_ALIBAB
A'S_ONLINE_BUSINESS_MARKETING_STRATEGIES_WHICH_NAVIGATE_T
HEM_TO_PRESENT_SUCCESS
Practical eCommerce. (2013, September 27). Retrieved October 4, 2018, from Alibaba User
Experience Director on Design, Usability:
https://www.practicalecommerce.com/Alibaba-User-Experience-Director-on-
DesignUsability
Tan, B., Lu, X., Pan, S. L., & Huang, L. (2015). The Role of IS Capabilities in the Development
of Multi-Sided Platforms: The Digital Ecosystem Strategy of
Alibaba.com. Journal of the Association for Information Systems, 248-280.
Valero, L. R. (2016). How and why Ebay failed and Alibaba/TAOBAO had success in the
Chinese market. Norwegian School of Economics.

7. APPENDIX
Figure 1: Screenshot from the My Account page on Alibaba.com depicting the various message and notification tools.
Figure 2: One of the many ways to rate a supplier on Alibaba.
Figure 3: Overview of the success of Alibaba's Trade Assurance buyer protection program.