When Taobao.com launched its business-to-customer (B2C) business, many people didn’t believe mall.taobao.com would make any money. It is argued that although Taobao provided a light-asset sales channel, its users might face more complicated competitions and marketing environments after opening their online flagship stores on the channel. But it seems that the companies need no longer worry about these problems because Taobao now has legs.

Taobao recently launched a brand-new online marketing model called Taoke. In this model, everyone can help sellers at Taobao with promotion and sales, and receive a commission from the transactions.

This isn’t anything new, though. Since September, when Taobao acquired the online marketing platform Alimama.com, it has been the trend to use this platform to sell products on Taobao. Still, the performance of the Taoke model has far exceeded expectations, after just two months of trial operations.

The reasons are obvious. Firstly, Internet users who have their own websites, often write blogs, visit BBS or chat online are all ideal targets of the transaction-based commission sales model. That is to say, the Taoke model has a very low threshold, making it accessible to nearly all Internet users. Secondly, the sellers, who participate in the consumer warranty program or have done more than four transactions with good responses, can take part in the Taoke program. Statistics show that in the two-month trial operation, the program attracted over 200,000 participants. Nearly 10,000 of them made at least RMB1,000 (US$146) and as much as over RMB10,000 (US$1,460).

Taobao might have started out as an online sales platform, but it now provides marketing services for many users thanks to tens of thousands of participants through the Taoke program. Store operators on Taobao now no longer have to wait passively for Internet users to visit them. Instead, they can proactively promote themselves.

In its model, Taoke participant gets commodity information and codes from Taobao and incorporates that information into their own websites, blogs or BBS. When viewers click the commodity information and place orders, the participant receives a commission. Technically, this model is no different from Google Adsense. But because it is not directly involved in sales, Google Adsense is a pure advertising platform for most businesses. In contrast, through Taoke, Taobao has transformed into a virtual supermarket with abundant commodities.

Taobao is an intermediary platform that is based around Internet users who look for commodities for the shelves. And now it is commissioning them to market commodities on the Internet. It thus covers the upstream and downstream of the value chain. With a body like eBay, Taobao has now grown legs of Google. Consequently, the company, which has been under constant pressure for profits in rapid expansion, has come up with more business prospects.

However, Taoke has a large potential population of participants and they operate with few restrictions from Taobao. As such, this could generate competition from the network of the participants in the future. The experiences that B2C websites such as Joyo.com and Dangdang.com had with subordinate alliances are good examples (See the article Reversion of Online Channels featured in the June 2008 issue).

The B2C website alliances initially looked like the present Taoke program. Some small and mid-sized websites helped B2C websites with their sales and received kickbacks based on the transactions. However, to further increase the traffic, some websites directly channeled the kickbacks to consumers to attract them. Eventually, the profits from kickbacks became scarce. As a result, B2C websites and the kickback websites were no longer two ends of the value chain and instead became competitors.

Recently, Taobao opened the Application Programming Interface (API) of Taoke program to Egou.com, a large kickback website. Along with the progress of this program, more well-performing kickback websites and price comparison sites will join. But if and when the B2C website alliance history repeats itself, Taobao’s program will be severely impacted. Consumers, after all, naturally head to the sites with the best prices. This could affect not only the emerging small and mid-sized channels, but also the traffic and sales on Taobao as well. Taobao is the foundation for all services. Should that foundation be eroded, there will soon be problems up the value chain.

So Taobao’s challenges include not only how to guide users to further promote the growth of Taoke program, but also how to prevent itself from being smashed into pieces once that growth takes off. Addressing that challenge will mean either keeping a safe distance like Google, or gaining more control over the direction of that growth.