Recently, I was discussing with a friend about Alibaba’s B2B market. While its new logistic platform is just a “joke” (see my earlier posting: Alibaba’s US$4.5 billion investment in logistic – just a plan only! ), its decision to raise membership fee can be a real driver to boost its bottom line.
It is just a simple matter of price elasticity of demand (PED or Ed), a term used regularly in economics. “Many Chinese businessmen think the lower the price, the more you can sell. But that is not always,” said my friend.
Alibaba lowered its cheapest membership package from US$5,000 to about US$2,900 (or RMB 20,000) , when its key competitor, Global Source cut its price by half, during the financial crisis in 2008. But, last September, it raised its price by 50%. The cheapest membership is now about US$4500 (or RMB 30,000)
“Alibaba lowered its price in response to Global Source’s price cut. But in fact, Alibaba need not to. It is much bigger than Global Source,” he said. Alibaba’s revenue and profit in 2009 are US$550 million and US$140 million respectively, and Global Sources have only US$174 million in revenue and US$16 million in profit.
Also, to many of the small traders replying on Alibaba to get overseas buyers, they will not cease to use it just because the membership fee increase from Rmb 20,000 to Rmb 30,000. (Profit from one or two customers can be more than that.)
And if the small traders found Alibaba’s B2B market ineffective, i.e. they are not successful in getting more business after they sign up for Alibaba’s paid membership, they will not continue their subscription, even if the price decrease. (And there are many of such cases. It could be Alibaba’s fault – not enough active buyers. Or it could be the traders’, as they don’t know how to use the internet platform effectively – many small traders are not used to computers and emails.)
The 50% price difference will not cause a 50% increase or decrease of number of subscribers – the demand is rather inelastic. If that is the case, of course, Alibaba should raise the price. And, it is rather stupid for it to lower its price in late 2008. The effect: revenue only increase 30% and profit dropped by 10% last year.
With the price hike, Alibaba’s profit should increase again this year. In fact, one of my friend who knows Alibaba well said it is going to introduce more expensive packages in the future. “Something like, if you spend over Rmb 100,000 in total on Alibaba you will be a gold member. Silver and bronze for the ones spending less,” he added.
For companies with pricing power, the sure way of better profit is just raising prices.