Operating Costs of China E-Commerce Giants

In recent times, the controversy surrounding the “refund only” policy on Chinese e-commerce platforms has sparked considerable debate. Some merchants have publicly voiced their frustrations, accusing the policy of being exploited by so-called “bargain hunters,” leading to what they describe as malicious refund practices.

However, a closer examination reveals that even for those merchants who have spoken out, the proportion of “refund only” orders remains in the single digits. What was originally intended as a policy to protect consumers and combat substandard merchants has now become a flashpoint for conflict, raising the question: why has this policy become the “final straw” for some merchants?

Beyond the emotional reactions, the complaints about the “refund only” policy highlight broader challenges faced by merchants. This leads to an essential question: Among Taotian (Alibaba), JD.com, and Pinduoduo, which operating cost component is the most significant burden for merchants?

Taotian’s New Rules: Will Traffic Costs Decrease?

On July 26, Taotian (part of Alibaba Group) made a series of adjustments to its merchant policies, focusing on two main areas that impact operating costs:

Software Service Fees: All merchants across Taobao, Tmall, and Xianyu platforms are now required to pay a 0.6% software service fee on order transaction amounts, replacing the previous annual fee model for Tmall merchants.

Notably, this fee applies to Taobao C2C stores, which were previously exempt. However, Taotian has introduced some relief measures, including full refunds of the service fee for small merchants earning less than 120,000 yuan annually and partial refunds for mid-sized merchants.

Traffic Promotion Costs: Taotian has also focused on improving the return on investment (ROI) for paid promotions, encouraging merchants to increase their spending on advertising, with the promise of more efficient traffic generation.

Merchants can use various promotional tools such as Taobao’s “Super Promotion” and AliMama’s “All-Station Push” to enhance visibility. Some reports suggest that these measures have already led to a 5%-10% reduction in advertising costs, with corresponding increases in GMV (gross merchandise value) and conversion rates.

For merchants on the Taotian platform, operating costs are mainly concentrated in four areas:

• Store Setup and Tool Fees: With the reduction of security deposits and the free access to operational tools like “Business Advisor,” these costs account for less than 1% of total expenses.

• Platform Service Fees: All merchants must pay the 0.6% software service fee, and Tmall merchants also incur a 2%-5% technical service fee, alongside other associated costs, amounting to 5%-7% of their revenue.

• Traffic Promotion Costs: This encompasses the bulk of merchants’ expenses, estimated to be over 50% of their operating costs. Despite efforts to reduce these costs through initiatives like the “All-Station Push,” the dependence on paid promotions remains significant.

• After-Sales and Logistics Costs: These include costs associated with shipping insurance, refunds, and warehousing, accounting for about 5% of total expenses.

The data indicates that traffic promotion is the most significant cost for merchants on Taotian platforms, far outweighing other costs like after-sales services.