Alibaba's Competitive Advantage Threatens to Eclipse eBay & Amazon

The Economist reported that Alibaba.com handled $170 billion in e-commerce sales last year - that's more than Amazon and eBay combined. The company is poised to become the world’s leading e-commerce business and inevitably the most valuable company… ever.

As it prepares to go public, it could easily eclipse Facebook, which at the time of its own IPO was valued at $104 billion. Estimates for Alibaba’s value an IPO range from $55 billion to as high as $120 billion.

The e-commerce market has exploded over the past decades, offering limitless opportunity for current and aspiring entrepreneurs. Dominating even a section of the nation's online business market would deem any company a global juggernaut - as has been demonstrated by U.S.-based e-commerce powerhouses eBay.com & Amazon.com.

However, the beginning concepts and formation of online business didn't flow so seamlessly. The original e-commerce markets were flooded with shoppers who simply didn’t trust the process of buying online. Although advances in technology have allowed businesses to largely rise above those fears in developed nations such as the U.S., online trust is still a major hurdle in emerging markets. This is especially apparent in economies such as China, home to 1.35 billion people or nearly 20% of the world's population, where trust rules all personal and business relationships. So how did Alibaba Group, a China-based e-commerce platform, manage to win the trust battle?

Let's explore the steps Alibaba took to overcome one of the trickiest e-commerce hurdles.

Alibaba Group began as a B2B platform connecting small Chinese manufacturers with business buyers around the world through Alibaba.com. Alibaba joined the race in 1999 when safety and trust topped the buying criteria for online shoppers.

Leadership guru Steven Covey highlights the importance of trust in business when he cites research that proves high-trust organizations outperform low-trust organizations by as much as three times. In a 2012 interview with Forbes, Covey noted that his notion of smart trust is clearly shown in companies like Google, Southwest Airlines, IBM and Whole Foods.

As Alibaba.com expanded into direct-to-consumer selling through sites such as Tmall (B2C) and Taobao (C2C), it became apparent that Chinese consumers, already reluctant to trust strangers, certainly weren’t going to trust buying anything online from complete strangers. One of the company's first employees noted, in an article found in The Economist, that they spent a lot of time reassuring potential buyers that they could trust the Alibaba process.
Early on, Alibaba took two important steps to build trust with buyers:

1. Independent verification services: Alibaba ensures that claims of sellers are vetted through third parties, with the service paid for by the seller.

2. Fully protect both the buyers and sellers: In 2005, Alibaba launched AliPay. This allows consumers to pay for products up-front, have funds held in an escrow account until item(s) are received and verified to have met expectations, then have the funds released to the seller.

Fast forward a decade - while other factors have added weight in importance, such as cheaper products, faster shipping and ease of returns - trust still dominates... and Alibaba's legwork seems to have gained them a competitive advantage. I know I'm not the only buyer that's decided to pay a dollar more for a product listed by a 'top-rated eBay seller' versus one void of a ranking. Price is not always the tie breaker!

Consumers want to be able to trust their suppliers - Alibaba establishes that trust.
While China's internet penetration is only at 43% - compared to 70%+ in higher developed nations - Alibaba has lots of room for growth, as the number of online shoppers has doubled to 250 million in just three years. But it’s not going to stop there. Alibaba's methods for building trust should work just as well in low-trust, emerging online markets around the world - this means it has the opportunity to become the e-commerce leader in Africa, Latin America and throughout the rest of Asia. While the rest of the world was barely paying attention, Alibaba may have hit upon what I think is the key to its relevant selling success: Trust.

Reflections

• How do you build confidence and trust by removing risk for your customers?

• Do you know the level of trust you currently have with your marketplace? How might it be impacting your bottom line?  

Reasons Why Customers Won't Care About Amazon Sales Tax

I read an interesting article in the Wall St Journal,  Amazon Faces Taxing Time Ahead.

Amazon may be losing the online retailers battle that exempted them from collecting taxes where they did not have a physical presence.  This was one of Amazons competitive advantages;   Jeff Bezos originally located his company in Seattle since it offered a smaller population of customers who would need to be taxed.

Main street merchants rebelled because they became showrooms for the online retailers and they, of course, had to charge tax.  The article cites some analysts who suggest it won’t change Amazon’s competitive advantage because Amazon’s prices will nearly be as low as Wal-Mart and 7% below Target.  The price advantage would be somewhat diminished for Amazon products.  There is speculation at this point about the overall impact of this on Amazon. However, a Stanford study of eBay customers suggested that “the higher the sales tax in a buyers home state, the more likely he or she was to avoid paying it and using a seller in a different state.”  

I think this will be interesting to follow.  There is a substantial population who has become accustomed to the “convenience” and “choice” offered by Amazon.  The extremely price sensitive shoppers may move elsewhere for pennies in difference, but I believe what Amazon offers is worth the difference to the majority of online shoppers.

Wired Magazine in January 2012 agrees:  “Why pack into Target when Amazon can speed the essentials of life to your door? ….We declare the obsolescence of ‘bricks and mortar,’ but let’s be honest:  What we usually want to avoid is the flesh and blood, the unpleasant waits…”  Wired Magazine points out that technology, ala our computers, keeps us out of crowds.  Who and how many of us value that over price?

Well I, for one, am raising my hand!  I dislike crowds, hate waiting in line, and have no interest in putting up with all that just to save some sales tax.  The convenience is worth the very slight extra cost.

This is the point many businesses don’t grasp.  It’s not about price, not always, not as often as you think, and not to as many folks as you assume.  When customers highly value attributes like convenience, speed, and ease of ordering, they are willing to pay for it.   My guess is Amazon will confirm its customers value the online buying experience sufficiently in spite of added sales tax. (How far out of your way do you go for the cheapest gas?) 

What benefit do you offer that your customers value highly?  How do you know?  

Most companies “guess” what is important to their customers and prospects; our research on over 150 companies shows the company teams are wrong an amazing 90% of the time.  This is a dangerous gamble!  As a result they either don’t know which of their differentiators are relevant, or are very poor at articulating them (or both).  So they are relegated to using price as the tiebreaker.  Find out what is truly valued, and engage in Relevant Selling.