Editor’s note: All quotes come from a University of Michigan Ross press statement. Puneet Manchanda’s working paper can be viewed here.
As Chinese e-commerce firm Alibaba prepares for what could be the biggest IPO in history, University of Michigan Ross School of Business professor Puneet Manchanda has dug into its Taobao Web site to help solve a lingering chicken-and-egg question.
Taobao.com is the world’s largest customer-to-customer shopping site, with nearly 500 million users and more transaction value than Amazon and eBay combined. The company gave Manchanda access to its data to help answer a question: Who drives the growth that results in higher transactions – buyers or sellers?
It was long assumed buyers were the primary drivers of traffic, but Manchanda’s research showed otherwise. His working paper with Junhong Chu of NUS Business School in Singapore reveals that sellers are the ones who get the ball rolling. The finding has implications for how companies like Taobao that set policies for buyers and sellers.
“There’s very little information on these platform markets, and it’s not clear that companies know which side is more important when they’re doing the matchmaking,” says Manchanda, Isadore and Leon Winkelman Professor of Marketing. “It’s difficult to get information right from the site’s beginning to study this cross-network effect – how buyers affect sellers and vice versa – but Taobao gave us the data because they wanted to know.”
The prevailing wisdom that buyers were more important for driving traffic comes from the belief that it’s buyers who have the money to spend. But the research showed those buyers won’t come if a Web site doesn’t have enough to sell.
Manchanda’s and Chu’s analysis revealed that the cross-network effect of a seller – the probability that it induces a buyer to join – is 3.5 times that of a buyer inducing a seller.
The finding can affect how companies set policy and promotions. For example, some policies will become more “seller-friendly” after seeing the results, Manchanda says.
His analysis also revealed product variety is critically important for buyers. That can help companies induce more buyers by fast-tracking sellers who bring something new to the table, he says. For sellers, it turns out that the quality of the buyer base – the number of transactions per 100 buyers – is critical. Based on these results, Taobao started running programs to incentivize dormant buyers to “wake up” and start buying again.
“Taobao is huge and has a virtual monopoly in China,” Manchanda says. “These types of platforms are growing, so being able to study and contribute to this new way of doing business was a big motivation for us.”