Sharing by David Wei, who served as CEO of between 2006 and 2011, leading Alibaba’s B2B business. In addition to this piece, we have also published another one from Wei, on how to build successful B2B companies. Wei is currently the Chairman & Founding Partner of Vision Knight Capital.

How to drive up both demand and supply on a platform?

The key to growing a platform is to provide the customer with a wide range of choices. The supply side is not your answer to profitability. As such, you should not be too obsessed with monetization on the supply side. Instead, use it as a tool to fuel the next round of growth. But to do it well, you need to do it at scale. If there was merely twice as many options on Taobao compared to eBay, the customers would not notice. But at ten times, the customer will start noticing and make the shift. Many failed to understand why TaoBao is free. The monetization of the supply side wasn’t the point. The point was to boost the number to choices, to the point it becomes a low-cost marketing tool for the demand side. To put it into perspective, people prefer to go to hyper-marts compared to cheap stores with limited selection.

How do you monetize advertising as a platform?

The first way is to be able to purchase advertising at a low cost, and then resell the advertising space at a higher price. The margin made is your profit. This approach of trading advertisement space has its risks and is dependent on data and market intelligence.

The second way is to be tech-driven and to have a lower cost structure than your competitors or your customers. If they need $1 to create a certain impact, and you can do the same with $0.50, then advertising through you is an attractive option if you pass on some of the cost savings. If you have a wide enough margin between the market rate and your cost, you could potentially lower the price until it is loss-making for your competitor.

What do B2B players need to be wary of?

The core of doing B2B is to have density. Instead of pursuing multi-region or international coverage, one should focus on a particular region/city, until it becomes the dominant player. When Alibaba went public, 80% of their business came from 2 provinces, Zhejiang and Guangdong.

What does it take to form the right team?

When it comes to hiring, it can be subdivided into 3 different approaches.

The first approach applies to the core management team. People in this category should be people who grew together with the company. It represents the core. For example, if you are in the education business, then the teacher should be someone who was cultivated and groomed in the company over time.

The second strategy applies to people with professional backgrounds. For example, accountants or legal officers. Trying to get a fresh graduate to grow and be the company’s legal counsel within a short period of time is not practical. Such positions should be handed to experienced professionals.

The third approach applies to positions with skillsets you hope to grow within your company. When Alibaba first went into the cloud, hardly anyone from Alibaba knew about the cloud. So they hired people from Microsoft, introduced them in stages, place the right people from Alibaba to work with them. After a few years, “talent” transfer occurred. You must have such a “talent” transfer plan in place. Once you get good at your trade, others will attempt to hire people from your team.

The final advice is to avoid hiring people with a high salary or to use the money to attract talent. You need to find people that believe in making a career at your place and the company’s future development. For positions like that of CFO, you need to over hire. Someone who has done something bigger before, to be able to take your company to the next stage. But that does not mean paying a high salary for a CFO role. At the end of the day, you need to carefully plan, what job roles fall into each of the categories, and then hire accordingly.

What advice do you have for software firms?

A piece of advice from David for such companies to not touch the supply chain because they generally do not have this gene.

In the software industry, there are generally two areas to look at. Sales efficiency and engineering efficiency. Sales efficiency is hard to optimize as it depends on uncontrollable factors like customer density. Engineering efficiency, on the other hand, can be optimized. Modularisation is the key to that, and a prerequisite to be able to go to the cloud.

What would you consider a good business to be?

To be considered good business, there are two criteria to look at. The first is to create value for customers. The four value propositions can be choice, speed, quality or price. If you can do anyone and do it well you can survive, do two and you will succeed, do three and it gets dangerous, do four and you will go out of business. More isn’t better in this case, as each of the value proposition has trade-offs and contradicts with one another. So you need to pick carefully. The other factor is to ensure that you do it efficiently, to ensure that you are sustainable.

Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected].