Growing online buyers and sellers — lessons from Taobao

Consumer-to-consumer platforms such as eBay, Amazon and Taobao are major engines of growth in electronic commerce. China’s online retail market raked in approximately US$630 billion (S$852 billion) of sales in 2015, making it the world’s largest, nearly 80 per cent higher than the US.

Taobao’s phenomenal growth is evident: By December 2012, 10 years after its launch in 2003, it had amassed 435 million buyers and more than 7 million sellers. Each day, there are 728 million unique items on the “shelf” for sale and 75 million unique viewers, generating 13 million transactions and US$258 million in revenue.

Several factors enabled this growth, including novel revenue generating mechanisms such as charging sellers only for value-added services, and a laissez-faire attitude that allows buyers and sellers to make choices on what to offer.

In my research at the National University of Singapore (NUS) Business School, I investigated Taobao’s evolution and growth from the first day of its operations in May 2003 using daily observations on a variety of factors, including the number of buyers and sellers, the assortment of products offered, and the revenue generated.

Taobao’s catchphrase is “there is no treasure that cannot be hunted out”. And it lives up to it. Since its launch, the massive assortment of products available on Taobao contributes, on average, a significant 40 per cent to buyer growth.

People patronise Taobao because they can buy almost anything there. Shopping platforms with limited product variety may find it difficult to grow or compete with those that offer more variety. Unless a platform is of a specialised nature (such as sports equipment), variety is necessary for growth. This bears some semblance to shopping malls. Those that live up to their positioning as a one-stop shop attract mass buyers who varyingly want to shop, dine and be entertained under one roof. Shopping malls with a more specialised theme, such as Sim Lim Square for computer products, attract a smaller buyer base.

While it is not surprising to find that the more sellers and products a platform has, the more buyers it attracts (and vice versa), what is noteworthy is that throughout Taobao’s lifecycle, the effect of sellers in generating buyer growth is much stronger (3.5 times more) than the effect of buyers in generating seller growth. That is, its sellers can attract more buyers to its site than its buyers can in pulling in more sellers. Taobao’s phenomenal growth, as it turns out, is driven more by sellers.

However, this growth effect of sellers is not stable throughout Taobao’s lifecycle. During its first two years of operation, it was indeed the sheer number of sellers that drove its growth by attracting many buyers. But from mid-2005 to 2010, the drawing power of sellers on buyers waned, though it was still strong. Since 2010, the effect of sellers on its growth is stable.

While more buyers also generated more sellers, one must not forget that the quality of buyers is critical. We found that better-quality buyers attract more new sellers. More interestingly, the importance of buyer quality escalates with time. Hence, as Taobao matures, the sophistication of its buyers becomes more paramount for growth. Over time, it has to attract and cultivate an even better clientele of buyers to grow.

Does having a lot of sellers attract more new sellers? Conventional wisdom of the physical marketplace suggests that sellers (retailers) are drawn to a popular shopping mall where retailers fight intensely for limited rental space. This is not the case for Taobao. Its current base of sellers does not seem to attract nor discourage new sellers from registering. Competition among its sellers does not appear to lead to congestion. This is good news for its sellers, as there is healthy competition without compromising on profitability. In part, this is because as an online site, there is no physical congestion.

In terms of holiday sales, Taobao differs from countries such as the US, where holidays are golden shopping seasons. Holidays in China have a dampening effect on online sales. Seller registrations fall dramatically on all holidays but buyer registrations drop substantially only during long holidays such as Chinese Lunar Year but not during short holidays. Perhaps, for Chinese, holidays are meant to be spent with families rather than online shopping.

The “Double 11” promotion on Nov 11 is becoming very popular, not only in China but also worldwide. Thus, it comes as no surprise that from 2009 to 2012, buyer registrations increased by an average of 72.5 per cent on that day, to take advantage of Taobao’s biggest annual price promotions. However, promotions have to be well spaced, as Taobao’s “Double 12” promotion a month later sees no impact.

Some lessons can be garnered from these observations. First, sellers are more important than buyers in driving e-commerce site growth. This is somewhat similar to brick-and-mortar shopping malls where a mall developer’s primary focus, at least in its early years, is finding anchor tenants (sellers) rather than building consumer traffic. Perhaps online and offline stores are not too different after all. The principles from one channel can be adapted to the other.

In the case of Taobao, where sellers rather than buyers drive growth, these two parties should not be accorded similar treatment, especially when the platform has limited resources. Similar to brands that recognise and reward preferred customers, online platforms have to ascertain whether it is the sellers or buyers who contribute more to their growth, and reward them accordingly.

Importantly, having more buyers and sellers in the early periods of a platform’s operation has a significant and long-lasting impact on its growth. As such, platforms should encourage buyers and sellers to register in the introduction stage of its operation via marketing and economic incentives, such as cash and referral bonuses. Uber, GrabTaxi and Alipay have used this approach. Once the platform amasses enough users on both sides, it will grow organically.

E-commerce sites should also not limit product variety, as it will substantially discourage buyer and seller registration.

Unless the site is for a specialised product category where exclusivity connotes expertise, it makes sense for e-commerce sites to be as inclusive as malls.

Finally, the site should try to attract quality buyers, as this will encourage sellers and buyers to register. This can be done through buyer and seller ratings.

ABOUT THE AUTHOR

Chu Junhong is associate professor of Marketing at the National University of Singapore (NUS) Business School. This is part of an ongoing series by the school on business in China.