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Taotian’s most important adjustment to merchant rules.

Text丨Guan Yiwen
Edited by Song Wei

We learned that Taobao has intensively adjusted its merchant rules today (July 26). There are three major changes: major changes to store traffic rules, which clearly use "experience points" as the core basis for traffic allocation; loosening the "refund only" policy for stores with high experience points; in addition, Taobao will begin to charge a basic software service fee at a rate of 0.6% of the confirmed transaction amount for each order.

It is a common practice in the e-commerce industry to charge basic software service fees to cover the cost of platform system construction. An Alibaba insider said that the 0.6% increase in the fee rate is mainly used to cover the software service costs of partners such as payment, ISV (independent software vendors), and cloud vendors.

Taotian is the last e-commerce platform to start charging basic software service fees.

Pinduoduo has been charging merchants a basic technical service fee of 0.6%-1% since 2020; JD.com and Douyin updated their rules in 2023 and both adopted a fee rate of 0.6%.

Taotian is also the most strict in charging this service fee. Pinduoduo and Douyin calculate this basic software service fee based on the actual amount paid by consumers plus the platform discount amount, while Taotian charges 0.6% for orders with a status of "transaction successful", that is, orders where consumers complete and confirm receipt of goods, which is calculated based on the actual amount of money received by the merchant - the biggest difference is that Taotian will not charge this 0.6% fee for returns and refunds before consumers click to confirm receipt of goods.

In addition, the updated merchant rules also announced that starting from September 1 this year, the annual fee (annual software service fee) for Tmall merchants will be officially cancelled. This fee has two levels of 30,000 yuan and 60,000 yuan. Specifically, new merchants entering Tmall from September will no longer need to pay annual fees; merchants who have already paid the 2024 annual fee will be refunded in batches.

Taobao will call some merchants to collect opinions for 7 days around the adjustment of merchant rules. In addition to rates, refunds only, shipping insurance, etc. will be the focus of discussion. We understand that Taobao will "relax" refunds only in August. For merchants with store experience scores exceeding 4.8 points, the decision-making power of refunds only will be returned to them.

Alibaba’s financial report for the first quarter of 2024 (the fourth quarter of Alibaba’s fiscal year 2024) showed that Taotian’s customer management revenue grew by 5% and its transaction volume grew by 10%, which means that Taotian’s revenue from merchants was lower than the growth rate of the platform’s transaction volume.

One reason is that in the low-price competition in the first half of the year, the transaction growth rate of Taobao merchants, which are more price-competitive, exceeded that of Tmall; another reason is Taobao’s reduction of operating costs for merchants.

In the past four years, Taobao has continued to reduce or exempt operating tools, various service fees, annual fees, deposits, etc. for merchants. After the new CEO Wu Yongming took office, the actions around merchants have become more intensive. In April this year, the store management tool Business Advisor was provided to Taobao merchants for free; this week, Taobao will also provide a "global free shipping plan" for clothing merchants. Merchants only need to send the ordered goods to the domestic shipping warehouse, and they can confirm the receipt of the goods after the goods arrive at the warehouse.

Only refunds are "relaxed": if the store score exceeds 4.8 points, the decision-making power is returned to the merchant

"Refund only" means that when a user initiates a refund, they do not need to send the product back, and the refund will be credited to their account in real time.

At the end of 2023, Taobao will implement new dispute resolution rules, which will determine product quality issues based on big data, giving buyers the opportunity to get a refund without having to provide evidence of product problems themselves, and without having to return the products.

This change was interpreted as Alibaba's attempt to learn from Pinduoduo's refund-only policy.

Pinduoduo's refund-only policy was launched in early 2021. Pinduoduo directly refunds orders below 20 yuan. When it comes to orders with higher amounts, the system usually considers multiple indicators and proactively provides partial refunds for users with excellent credit records.

Together with the "10 billion subsidies", it has become Pinduoduo's most deeply rooted product design in the minds of users.

However, Pinduoduo's rules are too biased towards users, which has triggered boycotts from merchants. The most direct conflict between the two sides broke out in March 2023, when small and medium-sized merchants placed batch orders in some Pinduoduo brand flagship stores as consumers, and applied for "refund only" after delivery. However, this did not affect Pinduoduo, and the refund policy alone did not loosen.

A Pinduoduo employee said that he considered the “refund only” policy to be one of the best designs of domestic Internet products in the past few years. In his opinion, the design helped the platform maintain the trust of users and saved a lot of after-sales costs.

But most of these costs are borne by merchants. Two Alibaba industry operations employees believe that the refund policy alone may only apply to 10% of Taobao's products.

The product structures of the two platforms are different. Pinduoduo has more white-label products and a high defective rate. Many merchants have already included the cost of refunds in their operating budgets. Taotian has more branded merchants, and some merchants may ask: "What should I do if consumers take too many refunds to Xianyu for circulation?"

We understand that starting from August 10, for merchants whose store comprehensive experience score is greater than or equal to 4.8 points, Taobao will no longer actively intervene through Wangwang to support consumers in refunding only after they have received the goods, and will adjust it to allow merchants to negotiate with consumers first.

Experience score is a new merchant rating system that Taobao began to fully implement in June, including "store experience score" and "product experience score (PXI)". In the past, the store score was directly linked to GMV, but now various indicators of merchants' service to consumers have been added, such as logistics timeliness, praise rate, return and refund rate, etc.

The product experience score is a core factor that affects search and recommendation algorithms. The higher the score, the greater the weight. The higher the store experience score, the more autonomy the merchant will have in after-sales service, such as the "refund only" scenario mentioned above, and others including complaints, delivery anomalies, etc.

An e-commerce industry insider believes that refunds are more suitable for specific products in specific categories and that conditions must be set. Looking at retail around the world, this is unlikely to become a mainstream model, "because you can't go against human nature."

Merchants' rules are adjusted intensively: 0.6% is charged, and there are many exemptions.

The basic software service fee charged by Taotian this time is 0.6% of the confirmed transaction amount of each order. Although it is applicable to all sellers, there are many exemptions for different types of merchants.

We understand that for small and medium-sized merchants, if the annual payment received does not exceed 120,000 yuan, the basic software service fee will be refunded 100% in cash; for high-order and wholesale merchants, from September 1 to December 31, 2024, orders for more than 100 categories of goods such as computers, mobile phones, refrigerators, jewelry, etc. will be charged a maximum of 60 yuan; during the same period, for mid-level merchants, if the confirmed transaction amount is between 120,000 and 1 million yuan, they will receive advertising coupons equal to 50% of the basic software service fee.

An Alibaba insider said that the overall reduction and refund of fees amounted to tens of billions of yuan, covering more than 5 million merchants.

Today, the operating cost structure of merchants on the Taotian platform is mainly divided into six aspects:

- Store opening expenses: deposit (mostly 1,000 yuan, waived in March 2023), annual fee (30,000 and 60,000 yuan, waived this time);

- Tool costs: business advisors and other operating tools (reduced in April 2024), data tools, and customer service tools;

- Platform service fees: basic software service fees (newly added this time, 0.6%), technical service fees (commonly known as "commissions", only charged to Tmall merchants, generally 2% - 5%), Tmall points, etc.;

- Traffic promotion fees: through train, Gravitational Cube, Wanxiang Wujie (mainly including keywords, full-site promotion, precise groups, Wanxiang TV), event pit fees;

- After-sales costs: only refund, freight insurance, etc.;

- Logistics, warehousing and other costs in cooperation with the platform.

Previously, Taobao C stores would not pay a certain fee to the platform based on the store’s order turnover. Now, a basic software service fee of 0.6% is also charged to Taobao merchants.

Many merchants believe that the impact of canceling the annual fee is not significant, "it's just a change of name." Previously, as long as the annual transaction volume of the store reached a certain amount, the annual fee could be waived.

We understand that among the above-mentioned operating costs, overall, store opening fees and tool costs account for less than 1%, logistics and warehousing costs account for about 5% (the proportion varies in different industries), and platform service fees including commissions account for more than 20%, and the largest cost is traffic promotion fees.

Many merchants told us that their traffic promotion fees on the platform account for more than 50% of their cost structure, and some even reach 70%.

In the third quarter of 2020, in the financial report, Alibaba merged commission income into customer management income. The latter is the traffic promotion fee collected by the Taotian platform from merchants. Referring to the revenue ratio before the merger, the ratio of commission income to traffic income is about 1:2.4, that is to say, of the various fees collected by Taotian from merchants, traffic income accounts for at least more than 60%.

Taotian is conducting a more comprehensive review of merchants’ operating costs - not only to reduce them, but also to improve the efficiency of traffic promotion expenses, which account for the largest proportion of merchants’ costs.

In terms of traffic promotion, Taotian’s latest move is “full-site promotion”, which can help lower the threshold for merchants to place advertisements. Simply put, merchants only need to select products and set daily spending budgets in the full-site promotion system, and the system can run the rest.

Wu Yongming stated in the May earnings call that the core requirement of full-site promotion is to "help customers achieve business growth while ensuring their ROI (return on investment)."

We understand that the full-site promotion has not yet been fully launched and is still in the small-scale internal testing stage. It will be vigorously promoted in the second half of the year. Taotian’s internal expectation is to use this to increase the monetization rate to more than 4%.

During the testing phase, some merchants who participated in the full-site promotion said that their advertising expenditures were reduced by 5%-10%, and GMV and conversion rates increased by more than 10%. According to a survey data from a capital market insider, the full-site promotion helped the top merchants to increase their ROI by 5%-8%, and the middle and lower merchants increased by 12%-15%. He estimated that for new stores and new merchants who have just started Taobao business, their ROI can be increased by more than 35%.

A big seller in the same industry said, "This year, the platform incentives that our company's big stores received on Taobao are unprecedented, much more than all other platforms combined." However, he also said that the company also has dealers and small stores, and they receive less incentives. "The platform gives merchants a lot of exemptions and support, but with a focus."

A senior executive recently told his subordinates that Taobao's biggest challenge is competing with its own past. Most of Pinduoduo's initial merchants came from Taobao. According to our understanding, in the past six months, more than 1 million Pinduoduo merchants have flowed to Taobao, and they have chosen to open stores on multiple platforms at the same time.

The strengths of this platform over the past 20 years are the certainty of business operations for merchants. The test is whether Alibaba can continue to allow merchants to make money amid low-price competition.

Title image source: Visual China