From March 2008, dealers in Kohler bath products, Mobo stairs, Dulux or Nippon paint in Beijing began to notice something unusual: the sudden appearance of large numbers of group customers, all carrying blue Liba cards. These cards entitled the holders to special low prices for products available on the Liba website (http://www.liba.com) and, more importantly, valuable VIP services such as free delivery. Even brands that had previously refused to provide home delivery services now found themselves obliged to extend this courtesy to Liba customers.

Founded in 2003, Liba now covers nearly 100 shops in Beijing selling a host of mainstream decorating material brands. However, it should be noted that Liba is not just an e-commerce website, but also a web community which hosts forums on home decoration and other topics. It attracts huge numbers of consumers who use these forums to exchange ideas on such subjects as home decoration, wedding planning, or even getting a driving license. But in addition they can also take advantage of commercial promotions organized by Liba. Thus, unlike many other community based web sites, Liba has been extremely successful in making the leap from community information to commercial operation.

Reverse Matching

“We are engaged in those businesses in which there is marked information asymmetry; home decoration, wedding organization and driver training for instance. We attract consumers by lowering the cost of getting relevant information,” says Xu Xiangtao, co-founder of the website. The first step in the website’s business model was to develop a user base through its community forum element. In fact, the website started out life as the “Happy Liba Decoration Forum” (or BBS as they are often referred to in China) which the founders set up to protect themselves from being cheated during the redecoration of their home. However they discovered that even after they had finished their project, the forum continued to increase in popul arity. The website currently has 2.1 million registered users, all of whom have clear demands and come at absolutely no additional outlay.

This figure gives the website crucial leverage when it comes to negotiating with upstream vendors, thereby providing the second step in its business model. Presently, it has over 2,000 vendors, for which it acts as a channel distributor. Of course, the channel value of the website varies according the commodity category. For instance, in the Beijing market, which Liba has only recently entered, it accounts for a remarkable 20-30% of the local vendors’ total number of customers. And in Shanghai, there are even companies for whom the website supplies over 60% of their customers. “For some vendors we are virtually an outsourcing service provider,” points out Xu. So far, the website has recorded more than 100,000 consumer transactions.

On the one hand, Liba gives consumers (its users) access to cheaper goods, while on the other it acts as a channel distributor for vendors, and helps them source potential consumers. It then makes money by taking a commission from each transaction. This is normally around 8% of the transaction value; however it can vary slightly depending on the sector involved. In sharp contrast with more traditional retailers, Liba gets as close to the demand as possible, and then reverse matches the upstream vendors in the industrial chain with that demand. In the five years since it was founded, the website has seen transaction values soar, from RMB10 million (US$1.4 million) in 2003 to RMB640 million (US$93 million) in 2007.

Even in 2008 with China’s property market in recession, transaction value is expected to hit RMB1.3 billion (US$190 million). For the boss of one vendor, Kalabay Curtain in Beijing, Liba is a godsend; the site is responsible for 30% of his total number of customers. And for those at their wits’ end with the whole decorating process and unsure where to turn, the site offers the chance to discuss and compare experiences with others in the same position - as well as buy materials at discount rates. More importantly, in the notoriously chaotic home decorating market, the website provides the luxury of standardized after-sales service for consumers. In the event of a dispute, Liba’s customer service department will become involved and help broker a resolution satisfactory to both sides.

In the Name of Service

Asked which is more important - the upstream vendors or the downstream registered users - Xu Xiangtao has no hesitation in opting for the latter. In addition to lower prices, and a more comfortable and efficient shopping experience, another key factor which enables the website to retain its customers is continuously improving service.

One upstream vendor partner of Liba, a Shanghai-based aluminum gusset plate maker, serves as an example of this. The supplier’s standard delivery procedures were overly complicated and meant a customer who had placed an order was obliged to wait at home on four separate occasions. As users of Liba mostly tend to be young, employed people, this was obviously inconvenient in the extreme. Consequently, Liba asked the vendor to simplify its procedure by halving the number of visits required. Initially the vendor was reluctant to change its long-standing system; however, due to the large volume of transactions carried out through Liba, it eventually yielded to the request. Obviously when Liba linked transactions account for much of the total sales of a vendor, the website has plenty of muscle to exert influence and improve terms of service. Naturally where Liba’s share of total customers is not so great this influence wanes proportionately, In fact, the website constantly adjusts the type of goods it promotes in various categories to ensure that its share of vendors’ sales is as high as possible and that, consequently, it is in a position to influence vendors in this way.

Liba users are all well aware of the website’s system for accurately tracking the performance and reputation of vendors. Just two factors affect this word-of-mouth based indicator. One is the number of orders, while the other is the number of complaints. When an order is completed, the system awards three points; however if a complaint is registered then 12 points are deducted, thereby cancelling out all the points gained from three orders. Of course, this deduction is primarily intended to track the quality of follow-up service provided. If, after the consumer files a complaint, the vendor responds and takes effective remedial action the consumer may decide to return the 12 points, partially or in whole, to the vendor.

Obviously the better a vendor’s reputation the more likely it is that it will be able to outdo its rivals in attracting consumers. In this way Liba hopes to cajole vendors into providing ever better levels of service. If a particular vendor is the subject of a consistently high level of complaints and fails to take action to address them, Liba will eventually remove it from its site and end its cooperation.

Liba provides regular reports analyzing vendors’ operations. In its Summary of Vendor Operations, it analyzes the data covering orders received and deals reached by vendors and the reasons complaints were made against them. It also makes suggestions on how vendors might address these complaints and in addition provides long-term plans for their future expansion. Of course, in most cases these plans will closely coincide with the planned development of the website itself.

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Growing Pains

Liba boasts a healthy cash flow, and has only received two tranches of investments totaling no more than US$ 18 million. Although the website currently has no worries in terms of growth rate and cash flow, it does needs to solve at least two problems if it is to extend its growth beyond its current boundaries.

The first of these is how it can copy its model to different territories. Currently, 60% of the website’s registered users come from Shanghai, while users in several cities where it has more recently entered the market, including Beijing and Hangzhou, account for less than 40% of the total. It has been reported that Liba intends to expand southward - including to the large cities of Guangzhou and Shenzhen - in 2009. However, the question of how to successfully transplant its business model to new markets is a common challenge for many community websites. The key difficulty is how to continue to satisfy personalized demands while providing standardized service.

Differences in habits, customer profiles, ideas, geography, and even climate, can often give rise to unexpected difficulties in expanding the business. As an example, young females make up 70% of the customer base of Liba. This is because amongst couples in Shanghai, Jiangsu or Zhejiang, it is more common for the woman to take charge of the whole area of home decoration. But the case is very different in the northern part of China. In Beijing, for instance, men expect to play a major role in this regard. This was something that Liba did not foresee when it expanded into Beijing. Many aspects of its operations that catered specifically to women then had to be adapted to the new market.

The second problem is how to expand its portfolio. Currently, Liba is mainly engaged in the areas of home decoration, wedding organization and driving lessons. Although these are all businesses that suffer from a high degree of “information asymmetry” they are also, for the most part, one-off, once-in-a-lifetime purchases for consumers. Despite involving the spending of relatively large sums of money, the chance of repeat business is extremely limited. This fact represents a major bottleneck, which Liba will have to overcome if it is to continue to grow its business.

Expansion into new areas of business, whatever they may be, presents Liba with similar problems to those we have seen it faces when moving into new geographical areas. The difficulties and unseen factors can easily be imagined. According to some industry insiders, the easiest way forward is to transplant new, but linked, products onto its current markets. For instance, it could incorporate used-car sales businesses alongside its driving lesson channel; or sell mother and baby products on its wedding organization channel. However all these possibilities also bring with them new challenges for Liba.

But before tackling the aforementioned problems, Liba has already apparently begun addressing another one: the website is reportedly developing its own payment platform which is expected to be launched in a few months. What’s more, a co-branded payment card, launched jointly by Liba and Bank of China, is soon to be released. This customized card is carefully designed to satisfy the particular needs of the website’s users, who need a much higher line of credit than most ordinary card users due to the special nature of their high value purchases. According to some investment professionals, this means that Liba has transformed itself from an information manager in the industrial chain to a third-party platform, whose “value should not be underestimated.”

Comments on the Model

By You Qingji (Senior Manager, Investment Banking Division, Credit Suisse)

The channel business is naturally dependent on the supply chain. The key to this business is “targeting”, i.e. the value of the channel hinges primarily on whose attention it can grab.

There exists a category of clever business owners who are highly skilled at formulating standards and rules for the supply chain, ranging from product design and selection of materials, right through to pallet sizes, operating on the principle that nothing is impossible. It is these businesses that generally dominate the value chain, even deciding how profits should be distributed. For instance, Ikea, which was created by Ingvar Kamprad from Sweden, is, to all intents and purposes, a moneymaking machine.

Meanwhile there is also another talented group which is adept at quickly snapping up all the available positions on the supply chain. Redbaby and Liba are two typical examples of these new channels. Once Redbaby realized that it should operate as a pure channel business, it quickly converted from a website selling mother and baby products to a channel retailer delivering a variety of products and channels. Gone are worries about how to find the right customers for different products, or how to go about selling those products. This is an example of a top-to-bottom approach in which the retailer remains close to the products.

Liba is an example of the opposite approach; by using the technique of “reverse match”, it gets as close as possible to the customers. The idea of an online “community” is a powerful one; it can be energizing just to imagine people gathering together for a common purpose. For these reasons, communities such as Facebook have no difficulty in attracting large investments. But communities which have models for sustained profit are rare. In the eyes of many people, the success of Liba is somewhat unintentional. In my opinion, however, its current success was inevitable. For a top-to-bottom model to be successful, the key is to find “a market where there is information asymmetry”. In this market, the standard of supply is haphazard, with a mishmash of both good and bad suppliers. It is against this background that the sharing of experiences and lessons amongst customers becomes so valuable.

From the perspective of investment value, both models have positive points. The thresholds for a Redbaby-like website include marketing based on databases, the management of a huge number of different product categories, and a highly efficient logistics operation. In addition to remaining a highly popular community, an excellent Liba-like website should also have the ability to study the consumption behavior of customers’ life cycles, and convert such behavior into actual cash deals.

Any business that can give full play to its advantages may become an outstanding company. However, excellence may also be the biggest obstacle to attaining this preeminence. Successful matching is the core skill needed by a channel distributor. Increasing product range and expanding marketing methods are undoubtedly important, but they should all aim towards the goal of increasing the total value of transactions. There is no doubt about the appeal of having access to precise information on demand - and creating real information sharing amongst customers. But what is perhaps most important is that this can increase the rate of successful transactions.