How Does Alibaba Work? Complete Beginners Guide

How Does Alibaba Work? Complete Beginners Guide

Alibaba.com is the original business of the Chinese Alibaba Group. It’s a world leading wholesale marketplace for global trade that is quickly becoming a household name. But how does Alibaba work?

Alibaba works by connecting manufacturers and suppliers to buyers, usually in the form of wholesalers, retailers and small businesses. It does this so effectively through the use of an online B2B wholesale marketplace where suppliers pay to list their products. Buyers simply search for what they need and then contact the relevant manufacturers.

Additionally, Alibaba offers its users complete supply chain services, including customs clearance, communications, trade financing, payment and order solutions like Trade Assurance and logistics services.

Just getting started with Amazon FBA? Head here now: How to Start an Amazon FBA Business 6 Step Guide

How Alibaba started

For some background…

Alibaba was founded by Jack MA, and 17 friends of his friends in 1999. Their goal is to improve the domestic e-commerce market and perfect an e-commerce platform for Chinese enterprises.

Their focus was on empowering small and medium-sized enterprises SMEs, to help the export of Chinese products to the global market. However, they achieved a lot more than just that.

On its IPO closing date, Alibaba was worth $25 billion – the highest in history. As of December 2018, Alibaba’s market cap stood at $328 billion, making it one of the biggest and most valuable companies in the world according to fortune.

Why Alibaba is so Successful

Aliabba.com can be considered the Amazon of China, where customers buy in bulk and often resell through their own businesses.

I see three reasons why the giant is so successful:

  • Business model – Services are mainly provided to small enterprises, giving them a unique opportunity to market themselves to a huge pool of buyers. The combined productive force of these smaller enterprises offers a great range of consumption choices for consumers.
  • Profit model – Alibaba make their money from marketing fees and technical support rather than admissions. Advertisements and keyword bidding generates 57% of their profit margin and technical services offering data on consumer behaviour makes up 25%.
  • Credit model – Making a transaction safe between two parties on different sides of the globe can be difficult. As such, all sellers have to pass an online certification test to verify their identity. All transactions are traced, and the addition of their Trade Assurance ensure increases legitimacy of buyers and sellers alike.

How to find a product/supplier on Alibaba

When looking to find a new supplier, the best way to find a suitable partner is using the suppliers option in the search box.

Search box – Search for the exact product you are looking for, or for the type of product you are looking for. The idea is to find who makes the product and contact them. Suppliers usually specialise in a type of good or type of material.

The search box has two options, products or suppliers.

I prefer to use the suppliers option, as this will list all the suppliers that manufacture the product you search for. It will also show all some related products that the supplier makes – this enables you to assess whether the supplier is suitable for your product requirements.

Read through some of their product pages and explore their profile as a bare minimum, but how do you know if they are safe and reliable?

How to choose a good supplier that is safe

Not all suppliers are made equal on Alibaba. Ultimately, you won’t know if you have a good one until you receive the products and are happy.

Ideally, a supplier would manufacture high-quality products, communicate effectively and timely, offer a reasonable lead time and all for a good price. However, in reality they won’t be perfect at all of these things.

At this stage you can at least make sure they are as safe as possible with some transaction history.

Do this by filtering results to include:

Trade Assurance – Any supplier worth doing business with will accept Alibaba’s Trade Assurance system. I won’t consider doing business with any that don’t. This is important as Trade Assurance is an accountable way to order, pay and track your purchase with the supplier. Any problems can be disputed for a refund and your money is held in escrow by Alibaba to ensure both parties deliver their side of the deal!

Verified – Suppliers with the verified check have had an onsite check by a third party. This means the physical premises exist and the company is an established business. This doesn’t guarantee anything more than that but it’s at least a start.

Additionally, it’s good practice to ensure your supplier satisfies:

  • 3+yrs selling on Alibaba.
  • 1 or more orange diamonds of transactions.
  • Good size catalogue or store (not essential but I like this for peace of mind).

Once you have found a suitable supplier, click ‘Contact Supplier’.

How to communicate with Alibaba suppliers

For my full guide on communicating with suppliers (including templates), see my article here: Negotiating with Alibaba Suppliers EASY Guide for Amazon FBA

However, here’s the basics:

It’s important to realise that not every supplier on Alibaba is desperate for your business. When making contact please consider:

  • Be clear and concise with what you are looking for.
  • Make it easy for them – you are less likely to receive a reply if a non-native English speaker has to put a lot of thought and effort into the response.
  • Try to appear as well established as possible (without telling too many porkies).

My preference is to firstly introduce myself and company, state what product I’m interested in and what specifically I require from them. Attach some pictures to further illustrate what it is you are after.

Here’s a template letter to get you started:

Sir/Madam,

My name is Dom, I purchase products for a shop/brand called Company in the UK and online. We are looking to make a new addition to our catalogue and can see that you manufacture products similar to what we are looking for.

We are interested in your gaming chairs, specifically a design similar to those shown in the pictures attached. 

Could your company offer a design that includes:

1. Adjustable arm rests in both height and angle.
2. White and Black colour scheme.
3. Ability to put our logo on the cushions and on the seat. 
4. A metal 5-star base with large casters.
5. Adjustable back tilt and frog mechanism seat tilt.

Are you able to provide a rough MOQ and price per unit for us? Do you have a product catalogue that you can send across please?

I would be very grateful if you might consider my proposal and many thanks for your time. I hope this can be the start of a relationship that brings both sides great fortune.

Kindest,

Dom Haines

Purchasing and Procurement
info@Company.co.uk
Company Ltd

This template can be copy and pasted to each supplier that tickles your fancy. Once you’re happy that the supplier can manufacture the product and you have some rough MOQ’s/prices, consider asking for a sample to be made.

How to negotiate with suppliers for the best deal

I will summarise the main points, but I’d encourage you to read this for more guidance on negotiating: Negotiating with Alibaba Suppliers EASY Guide for Amazon FBA

Price – Traditional haggling works with limited success on the platform. Expect to be able to knock 10-20% off the original asking price. However, this will depend on the product, material, whether they have it in stock and don’t need to make it only for you etc.

In order to get real discounts, you must leverage order quantity – the more you order the cheaper it will be.

MOQ – Minimum order quantity, order as many units as you can for the cheapest prices. This will clearly be limited by how risk adverse you are and by how much cash you have. Let the supplier know a simple annual volume projection, how many you will be ordering in future. This will help persuade them that you don’t want a quick 100 units and to never be seen again – they make their money on the big orders!

How to buy on Alibaba

In my opinion there is only one way to buy on Alibaba, using Trade Assurance.

Once you have come to an agreement with your supplier, ask them to draft a Trade Assurance order for you. This will allow you to manage the whole order process from your account.

Things to check on the Trade Assurance order:

  • Contract – Make sure the contract is attached and correct. Open it and check all prices, shipping terms and contact information.
  • Company and contact name – Double check that the company and person you have been speaking with is the same as on the order.
  • Shipment terms – A final check of the shipping method, date and addresses on the order is wise.

At the bottom you should see the important Trade Assurance terms to the effect of:

  • Your actual payment will be fully covered
  • If the quality of the products does not match the standards set in your contract or the supplier did not ship the goods on time, you will be eligible for a refund within 30 days of delivery.

I’ve only ever had to adjust the shipment terms before but it’s worth checking everything is correct to avoid any mishaps.

Now you’re ready to pay.

How to pay on Alibaba safely and cheaply

The common methods to pay on Alibaba are considered to be via PayPalwire transfer (T/T) or by debit/credit card. PayPal is the safest of the three as it affords some payment protection with the ability to open a dispute if there is a problem.

It doesn’t however, provide any buyer protection for example if the goods you receive are substandard in quality or arrive three months late with half of it missing. It also costs the seller a nifty 5%, which you the buyer, will usually end up covering.

To improve the safety of the buyer/seller exchange, Alibaba created the escrow service, Trade Assurance. Which does what it says on the tin, a third party will hold funds until the goods are delivered. This allows us as the receiving party, to open a dispute should we be unhappy with the service.

However, PayPal cannot be used with Trade Assurance. Debit/credit cards incur a 2.95% fee and wire transfers are traditionally expensive too!

What’s the answer then? Long story short, TransferWise.

I now only use TransferWise in conjunction with Trade Assurance for all my orders (other than cheap samples).

If you’ve never heard of TransferWise, it’s a free to use online payment service who have banks in multiple countries to eliminate international exchange fees. You just make the payment, paying them a rock bottom price and they do the rest.

I really like the company and have written a large review about them if you would like to know more: The ULTIMATE TransferWise Review

How to ship your products from the supplier

There are three common choices here – the right one for you will depend on the order size, weight and how quickly you need it!

Air Express (simplest)

In general, if your item is small and lightweight then air shipping using a courier such as DHL/TNT is my preferred option. The supplier can get you a quote that will deliver your items directly to an address (called DDU – delivery duty unpaid). All you need to then do is pay the required import taxes / VAT that will come through the letter box in the weeks following. Delivery time 5-10 days

Sea Freight (cheapest)

If you have heavier and larger items, sea shipping is the way forward being much more cost effective. However, you will need a freight forwarder to get your items from customs and to your door, similar to air freight. Boats also travel very slowly – delivery time 30-50 days.

Air Freight (compromise)

Alternatively, you can use air freight, which will be slightly cheaper but means you will have to employ a third-party freight forwarder which adds complications (but not unworkable) to ensure your items get through customs and to your door. Delivery time 5-20 days.


Shipping terms (Incoterms) you may come across on Alibaba

When organising your shipping, your supplier will likely quote you prices based on a certain incoterm. For example you may be quoted $2 per unit FOB or $1 per unit EXW for the same item. What’s the difference?

Here’s an explanation of the most common shipping terms:

  • EXW (Ex Works) – This means the factory will manufacture the product only. It’s the buyer’s responsibility to arrange all transport and export from the factory. This make’s this the cheapest option but the most difficult to manage – advanced buyers only!
  • FOB (Free On Board) – The factory will manufacture, send the goods to the port and load them onto a boat. Anything from this point onwards is the buyer’s responsibility, including marine freight transportation. You will need to arrange for a freight forwarder to get the goods off the boat and to your door.
  • DDU (Delivery Duty Unpaid) – The manufacturer will deliver to your door but won’t pay taxes or import duties. Dependant on the order it will either get delivered and a letter will come through your door asking for duties payment after a week or so. Or, customs will contact you and request payment when being imported before they release it.
  • DDP (Delivery Duty Paid) – The manufacturer will deliver the goods to your door with all duties paid. This is effectively the same as ordering a pair of shoes online. This is the simplest and recommended for first timers (though not the cheapest).

In short, for your first orders consider using DDU or DDP to learn the ropes. Move to FOB and use a freight forwarder once you’re happy with the process. Then finally, consider using EXW if you can organise a more cost efficient transportation solution from factory to customer (experienced buyers only).

How to not get scammed on Alibaba

Firstly, follow the steps in this guide! Secondly, remember that anyone can register for free on Alibaba and claim to be a supplier. Thirdly, above all else, remember to use common sense. If something seems too good to be true, it is. If something seems a bit odd, it probably is!

Remember:

Pay and manage your orders using Trade Assurance – This escrow service is the only real way you will get any buyer protection. You have 30 days upon receipt of the goods to file a dispute if the order is not as expected. If you just sent some money to a supplier via PayPal for example, you have no protection – use Trade Assurance.

Use verified suppliers – It won’t guarantee a supplier won’t run off with your money or send you dud products – Trade Assurance does this. However, the verified tick does ensure that the factory premises exist. This is an assurance you might as well have.

Use suppliers with lots of transaction history – They won’t always give you the cheapest prices, but they are often more reliable. There is a reason they have many transactions.

Paying a different account or company – Always double check the payment information and that the company is what you are expecting. Also, never be persuaded to pay into a different account that belongs to the ‘boss’ or is the ‘sister company’ or similar.

Shipment charges – If you let your supplier organise the shipping for you, make sure to get a few quotes from other companies. This will allow you to crosscheck and ensure the wool isn’t being pulled over your eyes. This is quite common!

Parting thoughts

Alibaba is an amazing place where you can find genuine and fantastic manufacturers. You can also find partners who are not so good. Hopefully my ramblings above will allow you to effectively use the platform to find a good one.

Final reminders:

  • Use the ‘Suppliers’ filter in the search bar.
  • Use experienced suppliers where possible.
  • Negotiate order pricing using MOQ.
  • Use Trade Assurance to order.
  • Use TransferWise to pay in conjunction with Trade Assurance.
  • Ship first orders using air express for simplicity and speed.
  • Have your wits about you and use common sense.

Take care,

Here’s some other Amazon FBA guides to get your teeth into:

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