360buy's supplier squeeze is unwise in the long term

According to Beijing Morning Post, citing an anonymous supplier, 360buy has required suppliers to pay 20 percent of their gross profits from sales on the site to the company, as well as pay a service fee of 200,000 yuan ($31,739).

Suppliers are up in arms, as their gross profit is now no more than 10 percent and net profit is lower than 2 percent, according to 21st Century Business Herald.

360buy's practice shows its desperation to increase its earnings, with the company reportedly also upping its retail prices.

According to a survey released by Etao, a shopping search engine under Chinese e-commerce giant Alibaba Group, 360buy raised its prices by 5 to 15 percent in the fourth quarter of 2011, higher than the other three top B2C platforms dangdang.com, amazon.com.cn and tmall.com.

Though the credibility of the data has been questioned, as Etao is operated by a rival of 360buy, I believe there is truth in it.

Many consumers, including myself, have noticed the price hikes. Also, an investigation by IT website Donews showed that 360buy, whose success mainly came from its attractive prices, is gradually losing its price advantage.

In the competitive B2C market, a low price is the main strategy for companies to gain more market share. Unless 360buy was experiencing severe pressure on its profit margin, it would not raise its prices.

The pressure largely comes from its IPO plan. 360buy is looking to go public in the US market in 2013, which requires a financial statement showing attractive earnings and profits. According to Liu Qiangdong, CEO of 360buy, the online mall is expected to realize a profit before the end of this year.

However, it is not a good idea to ease its earning pressure through squeezing the profit margin of suppliers, which will hurt cooperation with them in the long run.

Instead of mandatory fees for suppliers, I suggest 360buy provide more optional value-added services, such as charging fees for featuring products on its home page. In this way, the company can generate more income without souring its relationship with suppliers.

Also, I suggest that the company should better plan the use of its capital. Since 2009, 360buy expanded quickly from an online shop selling consumer electronics to a B2C giant offering books, clothes, food and health products.

In the same year, it started to build its own warehouse and logistics center, using 70 percent of the cash it raised from its last round of venture capital funding. Also, its number of employees rose from 200 in 2007 to 10,000 in 2010.

To ease its capital pressure, it should temporarily slow expansion and put off venturing into new areas to give it time to focus on its core business.