Taobao, JD.com and Pinduoduo, who can solve the problem of traffic costs for merchants?

In the competition among China's e-commerce giants, Taobao, JD.com and Pinduoduo have each adopted different strategies to attract and retain merchants. As traffic costs continue to rise, merchants are facing increasing operating pressure. This article will explore in depth the strategies and effects of these three platforms in solving the traffic cost problem for merchants.

Since the end of July, the hot topic about Taobao's imposition of "basic software service fees" has not yet cooled down, but Alibaba's new quarterly financial report is here.

As expected, Alibaba, which had already fallen by more than 4%, handed in a not-so-good financial report. During the period, revenue was 243.236 billion yuan, a year-on-year increase of 4%, but net profit fell sharply by 27%. Alibaba explained that this was mainly due to the decline in operating profit and the increase in investment impairment.

Specifically for Taotian Group, overall revenue decreased by 1%, of which customer management revenue in China's retail business increased by only 1% year-on-year, direct sales and others decreased by 9%, and China's wholesale business increased by 16% year-on-year.

Customer management revenue increased by 1% year-on-year. Alibaba's official explanation was that online GMV achieved high single-digit growth, which was partially offset by the decline in Take rate. The year-on-year decline in Take rate was mainly due to the increasing proportion of GMV generated by emerging models with low current monetization rates within Taotian Group.

In other words, the low-price strategy implemented by Taotian in the first half of this year contributed a large amount of white-label GMV, and these merchants did not have much advertising capacity. Therefore, in the conference call, the management confirmed that the 0.6% technology service fee would contribute to revenue in the last seven months of this fiscal year.

However, this measure has also been accused of increasing the operating costs of merchants. Some merchants also said that although 0.6% also pushed up costs, it was still a small matter compared to the cost of traffic promotion.

There is a widely circulated merchant revenue formula in the e-commerce circle: Merchant revenue = actual GMV - cost = (traffic * conversion rate * average order value * purchase frequency) - (production cost + marketing cost + logistics cost)

Considering the "buyer" attributes of most e-commerce merchants, production costs and logistics costs are not under their control. Therefore, in reality, many merchants want to make profits, often by generating the most sales with the smallest possible marketing costs, that is, by seeking the maximum GMV while maximizing the ROI of marketing investment.

However, one of the difficulties in operating the e-commerce industry at present is that with factors such as Taobao and other platforms raising the monetization rate and excessive supply from merchants, online traffic has been close to exhaustion, the ROI of merchants' marketing investment has dropped sharply, while costs have continued to rise.

This problem has a particularly serious impact on mid- and lower-tier merchants. The era when you could get large sales by just "opening a store, advertising, and doing a few promotions" is gone forever.

In the early days, mass consumer demand was strong, and the supply of goods was severely insufficient, so no matter how much brands invested, they made money; but in the later period, as more and more brands emerged and user demand weakened, consumers' limited attention was constantly diluted, and the end result was rising marketing costs.

Today, the problem facing most merchants is that without investing in traffic, there will be no growth in GMV, and investing in traffic will gradually become working for the platform.

01 Taotian: Are merchants “reducing their burdens” or “increasing their burdens”?

After Taobao was exposed on July 26 for intensively adjusting its merchant rules, someone summarized the three most important changes: major changes to store traffic rules, clearly using "experience points" as the core basis for traffic allocation; loosening the "refund only" policy for stores with high experience points; and Taobao will begin to charge a basic software service fee at a rate of 0.6% of the confirmed transaction amount for each order.

As soon as the news came out, some media pointed out that the series of changes announced by Alibaba this time can be divided into two categories. One is the changes in merchant charging rules, which affects the platform's monetization rate (which is also the cost of merchants), and the other is the changes in consumer experience and traffic distribution mechanism.

Regarding the first category, Dolphin Investment Research made an estimate in the article "Taobao's Big Change, Can Alibaba Have Some Hope?" The result is a comprehensive income and loss. After this rule change, Taobao's new income is about several billion to a little over 10 billion.

In the eyes of small and medium-sized businesses, the 0.6% basic software service fee is an additional cost out of thin air. But in fact, in the business operating costs counted later, although the platform service fees including commissions accounted for more than 20%, it was not the largest item.

"Many merchants said that their traffic promotion fees on the platform accounted for more than 50% of their cost structure, and some even reached 70%."

The high traffic cost is not a one-day achievement. In 2018, the average traffic cost of the e-commerce industry was already 10%-40%, which means that if a merchant sells a piece of clothing for 1,000 yuan, it is possible that 400 yuan is advertising fees for the platform. When Rongmei Co., Ltd. went public in 2021, its prospectus disclosed that its promotion expenses on Taobao had increased by 147.71% in two years.

This year, some e-commerce platform investors have publicly stated that during this year's 618 promotion, all platforms will adopt low prices and forced payment strategies. The traffic costs of each platform are also tending to be more expensive. The traffic costs of some white-label merchants (the proportion of traffic costs in GMV) are as high as 100%.

Even some brands that rely on online channels find it more difficult to escape. For example, the profit warning announcement for the first half of 2024 released by Blue Moon shows that the company's sales in the reporting period increased by more than 38% year-on-year, but the loss is expected to reach about 620 million yuan, an increase of nearly 300% year-on-year.

There are only two ways out for merchants when marketing costs are too high: either persevere or refuse to lose money. Xiao Yang, a merchant in the personal care products category, told us that on Taobao they only paid for Pinxiaobao, and the traffic investment cost was zero. "We pay more attention to word of mouth and repeat purchases, and would rather invest money in product research and development and experience."

In Xiao Yang's opinion, if the platform's operating costs exceed the safety line, the basic output will not cover the investment, and it will definitely be a loss. But from the platform's perspective, the platform's revenue can only increase if merchants maintain a certain level of promotion expenses.

Huatai Securities pointed out in a research report that Taotian sacrificed profits for direct subsidies in the first and second quarters of 2024. On the surface, it was to stimulate traffic growth and mental return, but the deeper motivation was to promote the return of merchants.

Therefore, Taobao's series of actions in the first half of the year are to let merchants know two things:

1) The platform traffic growth trend is improving, implying expanded incremental sales opportunities;

2) The investment-to-production ratio of the platform’s commercial advertising tools has improved.

The essence of promoting merchant return is to use a series of marketing tools and adjust traffic distribution rules to encourage merchants to invest more in promotion expenses, thereby bringing in corresponding incremental revenue and incremental profits.

02 JD.com: The intriguing “Mao Bao”

Although JD.com and Taobao are both e-commerce platforms, their models are very different. Simply put, Taobao is a platform model that makes money through advertising and services, while JD.com is a typical model that makes money from the price difference. Of course, JD.com also earns transaction commissions and advertising from third-party products (3P), but the volume is very small.

The vast majority of JD.com's revenue comes from self-operated sales. In 2023, JD.com's self-operated revenue reached 873.1 billion yuan, while third-party revenue was only 213.5 billion yuan.

Because the overall scale is relatively small and self-operated businesses that contribute more than 80% of revenue are often in an advantageous position, there is an obvious ceiling for third-party merchants' marketing and promotion on JD.com. If we only look at the proportion, according to a survey by Photon Planet, if JD Logistics' integrated solution (warehousing) is not adopted, the marketing expenses on JD.com are generally around 10%, and the comprehensive costs including third-party logistics are about 25%.

JD.com’s focus is still on self-operation.

In essence, self-operation of brands on JD.com is equivalent to platform underwriting, without having to pay platform fees, and only earning brand gross profit. However, in order to ensure its own interests, JD.com usually sets a gross profit protection clause in the underwriting agreement, commonly known as "gross profit protection".

Dayang, who has 8 years of experience in JD.com operations, told us that JD.com's gross insurance is divided into two types: product gross insurance and comprehensive gross insurance.

Product gross margin refers to the book gross margin set in the agreement signed between the brand and JD.com, which is usually between 10% and 25%. If it is lower than the book gross margin, JD.com will deduct it from the payment of the current or next month. The specific amount calculation formula is as follows:

Book compensation amount = JD.com’s actual sales amount in the current period × book gross profit margin agreed in the agreement - actual book gross profit

However, this gross margin protection is not 100% triggered. Generally speaking, it will only take effect when the self-operated gross margin is damaged. For example, if JD.com forces an event (similar to a price war) and lowers the price of goods, causing JD.com's profit to be damaged, then the gross margin protection agreement will take effect. JD.com will deduct this loss + JD.com's contract profit from the brand's payment.

In addition, JD.com also has a comprehensive gross insurance, which means that the promotion fees of brand merchants can be deducted from a certain gross insurance. JD.com will set a ratio between the promotion fee and the overall sales for brand merchants, for example, 20% of the merchant's promotion fee can be deducted from the gross insurance.

For merchants, gross margin is like a "marketing fee" paid to JD.com in exchange for certainty of underwriting. Under normal circumstances, JD.com's gross margin is a win-win for all three parties. Suppliers and JD.com both get higher gross profits, and consumers also get a series of certain services from JD.com, such as logistics and after-sales. But in the price war, gross margin has become a compulsory means for JD.com to protect itself, and it is a lose-lose situation for both the brand and the platform.

03 Pinduoduo: Merchants complain while selling goods

In a recent research report on Pinduoduo, Tianfeng Securities answered this question: Why can Pinduoduo stand out from the crowd?

Of course, there are many internal and external factors involved, but one of the most important ones is the operating cost of the merchant.

In the view of Tianfeng Securities, since small and medium-sized businesses have poor risk resistance and relatively limited funds in the initial stage of operation, low operating costs are the core factor for them to choose Pinduoduo.

According to data compiled by Tianfeng Securities, Pinduoduo does not charge commissions for all agricultural products and non-10 billion subsidy merchants, and charges a commission of 1%-3% for 10 billion subsidy merchants other than agricultural products (compared with Tmall's commission of 2%-5%); JD.com's commission is divided into 1P and 3P, mostly between 3% and 10%.

The basic technical service fee is the same as Taobao's 0.6%, but the technical service fee is refundable when Pinduoduo merchants participate in the on-site resource activities. Pinduoduo merchants can enjoy the right to refund the technical service fee for orders canceled or refunded by users during the event, as well as refunded orders after confirmation of receipt.

Moreover, the amount of basic deposit and special category deposit is also lower than the other two. Pinduoduo stipulates that merchants should deposit 1,000 yuan for basic store deposit, and 2,000-100,000 yuan for special category deposit; JD.com's deposit for each category ranges from 1,000 to 200,000 yuan; Tmall's store deposit is 50,000-150,000 yuan depending on the store type, and 10,000-300,000 yuan for special categories.

In addition, Pinduoduo's evaluation system design, which only displays valid reviews (excluding blocked fake reviews and false reviews such as violations) and cannot modify reviews, has also reduced the operating costs of some merchants to a certain extent.

In addition to the basic operating costs mentioned above, merchants will also calculate comprehensive operating costs.

Photon Planet mentioned a case where a seafood merchant earned 100 yuan on Pinduoduo, including after-sales, traffic and platform commission, the total cost was 5-7 yuan. Other channels cost between 12 and 27 yuan.

This is somewhat similar to the business logic of Haidilao and Starbucks. Compared with the 20-30% of rent for ordinary catering brands, Haidilao's rent cost accounts for only 4%, and Starbucks's is 10%. This alone allows them to save huge profits every year.

In essence, merchants make money on Pinduoduo because they pay less "rent" and can break even or even make a profit even if the same products are sold at a lower price.

However, this model must have a major premise, that is, the platform can continue to provide low-cost traffic. Only when the platform's cost is low can it pass on the profit to the merchants.

Looking back at Pinduoduo's growth history, there are two stages of traffic acquisition that can be used as evidence. One is the group buying activity launched on WeChat in the early stage, and the other is the 10 billion yuan subsidy that began in Q3 2020. But both of them are just icing on the cake. Fundamentally speaking, Pinduoduo's traffic comes from a certain low-price mentality.

It is no secret that Pinduoduo has a function to unify the prices of the same SKUs. The so-called unifying the prices of the same SKUs refers to providing merchants with a price baseline for the same SKUs on the platform.

The platform has also been defining SKUs more and more finely in recent years. Take agricultural products as an example. For apples, the price baselines of Red Fuji apples from Yantai and Huaniu apples from Tianshui are different.

For the same SKU, if the price is lower than this line, you can get free traffic. If it is higher, it is also OK, and the merchant can choose to pay for the traffic.

There is no merchant who does not want high premiums and high gross profits, but if they want to win in the current situation where there are so many competitors, merchants must develop and find more differentiated SKUs.

04 Ending

A cross-border e-commerce practitioner once gave an example: suppose there are 50 folding chairs that cost $6 and sell for $19.99. Amazon charges an additional $10 for delivery. The merchant also has to pay for the delivery from the warehouse to the Amazon warehouse. On average, the profit of each chair sold on Amazon is about $3.

On Temu, the price on the platform is $16. But the shipping cost of each chair is about $7. The merchant pays it to the overseas warehouse. The storage fee for these 50 chairs is $15 per month, which is not high. In the end, the profit of a chair on TEMU is still about $3.

Temu can be cheaper than Amazon, but the profit for merchants is the same. At the same time, TEMU ships much more than Amazon, which motivates a large number of sellers who were originally from Amazon to move to Temu at the same time.

The reason I give this example is that it can perfectly explain why some people make money while others lose money on the same product. The key lies in where the cost comes from.

So back to the original formula:

Merchant revenue = actual GMV - cost = (traffic * conversion rate * average order value * purchase frequency) - (production cost + marketing cost + logistics cost)

When production and logistics costs are constant, marketing costs become the key variable that influences sales.