Taobao Mall, China’s leading business-to-consumer (b2c) shopping platform, experienced an unsettling week of merchant protest after the company announced a revised merchant system and fee structures that seemed to unfairly burden small and medium sized businesses (SMBs). The company, a business unit of Internet e-commerce giant Alibaba Group, claimed that the new policies were designed to improved product and quality service but many SMBs felt they were being driven out of the marketplace to make it a more friendly home to larger vendors.
The new plan consisted of the following:
- The current annual “technical service fee” of RMB6,000 (US$945.2) that had applied to all sellers would be split into two new packages — based on the vendor’s category of goods — with costs of RMB30,000 (US$4,726) and RMB 60,000 (US$9,452), a 400% and 900% increase respectively.
- Vendors would be eligible to receive a year-end refund of part or all of their technical service fee based on business criteria such as operational scale, service quality and other positive merchant indicators.
- Merchants must contribute a “liability deposit” which could be forfeited if they are found to have violated their contract in some way. This requirement arises out of an Alibaba scandal that had some premium merchants taking money for goods they never shipped to customers.
- The liability deposit set aside by merchants ranged from RMB 50,000 (US$7,876) to RMB100,000 (US$15,753) to as much as RMB150,000 (US$23,629).
- Depending on the extent of a violation , the merchant will incur a one-time deduction of at least RMB10,000 (US$1,575) that can then be used to compensate cheated customers.
From Taobao Mall’s perspective these policies were intended to provide additional protection against fraud for its consumers as part of its broader “zero tolerance” approach towards companies that sell fake and parallel imported goods as well as those that just provide sub-par customer service (eg – delayed shipments, wrong products, etc.)
“Why do people breach the contract willfully? It is because the cost of violation is too low. In fact, it is a form of unfairness to merchants who operate honestly.
Therefore, we will use financial measures to resolve this problem by increasing the cost of violation. Once the merchant violates the contract to a certain degree, we will deduct the breach of contract deposit. The increase in the deduction will be much higher than in the past so as to propel the business to raise their service standards.”
– Daniel Zhang, President, Taobao Mall
Despite assurances that this new fee structure would strengthen the marketplace, Taobao Mall withstood a Netflix-like rebellion by many of its most longstanding merchant customers. According to China Daily the company “experienced two successive waves of online rioting since it significantly increased fees on online vendors.”
The protests were seen as a reaction to smaller merchants feeling like they were being marginalized by Taobao Mall as it has sought to be the home for more large online retailers. Small merchants were the first to embrace the online shopping marketplace but as Taobao has expanded it has developed a growing reliance on bigger merchants such as Hanyidushe, Uniqlo, Osa, and Gap.
In addition to voicing their anger with the new policy in online chat forums, some groups have also taken credit for undermining the big sellers on Taobao Mall by placing (fake) orders, immediately canceling them, and then writing negative comments that can help lower their customer service ratings.
After about a week of protests Taobao Mall finally capitulated (somewhat) and announced some changes to its revised fee structure as well as the creation of an investment fund of RMB1.8 billion (US$282.2 million) focused on aiding the growth of SMBs.
The changes to the new fee plan include the following:
- Existing merchants that have maintained good ratings will be given an additional 9-month grace period before they must begin paying the new fees. New merchants will revised policy will have to pay the revised fees beginning on January 1, 2012.
- The cash “liability deposit” to be paid by vendors would be reduced by 50% to RMB 25,000 (US$3,938) to RMB50,000 (US$7,876) to as much as RMB75,000 (US$11,814).
- In order to make up the shortfall from the reduced merchant “liability deposits” and also to help SMBs thrive on their marketplace, Alibaba established a RMB1.8 billion (US$282.2 million) investment fund:
- RMB1 billion (US$157.5 million) will go directly into the fund that is set aside to compensate purchasers for fraudulent transactions. In effect Alibaba is making up the shortfall in the compensation fund resulting from the reduced merchant contributions.
- RMB500 million (US$78.8 million) will be put into a fund to help small online traders obtain loans from banks, and
- RMB300 milllion (US$47.3 million) will also be set aside to help SMBs with technical support and promotion.
While Taobao Mall and Alibaba view their concessions as a fair resolution to the controversy, many protesters still argue that the new fee structures “disproportionately hurt them”. The new revisions largely delay the implementation of the new fees but once they are put in place it will make it harder for SMBs to remain on the Taobao platform.
Many SMBs believe that the goal of the new fee structure is to move them from Taobao Mall, a business unit that enables businesses to sell directly to consumers (b2c) to Taobao Marketplace, a business unit that allows customers to sell/trade with each other (c2c). In other words protesters feel like Alibaba wants to downgrade them from the b2c marketplace to the c2c marketplace. It’s similar to a company only being able to sell on eBay but not Amazon.
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