Social commerce, where social media is the driving force behind sales, is one of the hottest trends in China and a major disrupting force.
Social commerce has seen triple-digit growth over the past five years in China. Brands that have already embraced social commerce are testimony to its potential, with new entrants able to rapidly grow their business and reach new consumers in China’s lower-tier cities.
As competition in the sector heats up, brands should move quickly to gain early-mover advantage, and develop a winning social commerce playbook to position them for future growth.
The rise and rise of social apps
The average consumer in China now spends more than seven hours a day on the mobile internet, a figure that increased by a fifth in the aftermath of the COVID-19 crisis. About two-thirds of those seven hours is spent using social or content apps, as users increasingly seek out information from social media, social influencers, and friends in order to make decisions about purchases.
Time spent using social or content apps is now driving 50 percent of shopping interest, and 25 percent of purchases, a marked change from the 2017 figures of 37 percent and 7 percent, respectively (Exhibit 1). And the size of the overall social commerce market is expected to more than double from 2019 levels to reach gross sales of 2.9 trillion renminbi by 2021 (Exhibit 2).
Some of the biggest multinational and Chinese fast moving consumers goods (FMCG) brands are selling on such social platforms, while new brand entrants such as TST Tin’Secrets have been able to rapidly grow their businesses from scratch.
This growth comes against a backdrop of stagnating bricks-and-mortar sales, and slowing growth in online sales.
Traditional e-commerce sites such as Alibaba and JD are seeing their growth in e-commerce sales drop to around 20-25 percent, according to McKinsey’s China Digital Consumer Trends 2019 report, while the cost of customer acquisition and retention is rising sharply as brands compete in an increasingly saturated market.
The rise of social commerce combined with the slowing growth of conventional e-commerce has sparked disruption across the value chain:
— Consumer engagement with brands is becoming more active, with brand equity and loyalty nurtured through social interactions and word of mouth between consumers, rather than between a brand and its consumers.
— Business models are becoming more complex with the resurgence of direct-sales where users receive incentives for referring friends into membership programs and converting sales. These business models often require higher sales margins but less marketing spend than traditional business models, and create channel conflicts as a result.
— Innovation is becoming more collaborative, as brands work closely with Key Opinion Leaders and Key Opinion Consumers (KOLs and KOCs) to co-develop new products and shape the next wave of trends.
— Internal operations are becoming more agile, with cross-functional teams working in fast iterations, testing new ideas, and breaking down silos.
China’s five archetypes of social commerce
There are five major archetypes of social commerce in China (Exhibit 3).
— Social-first commerce–where KOLs and KOCs are used to direct consumers to emerging on-platform sales and branded stores.
— E-commerce platform with social marketing– where KOLs and KOCs are used to direct customers to established branded stores.
— Social discounter–where social sharing of products is incentivized by offering lower prices with every incremental customer.
— Community buy/S2B2C–where consumers and small businesses are incentivized to sell to their friends by receiving commission.
— Social DTC–where brands and KOLs/KOCs engage directly with consumers in brand- operated WeChat groups and convert them into sales either through the brand’s own platform or through WeChat mini programs.
Below we look at each of the emerging archetypes in more depth, namely social-first commerce, social discounter, community buy/S2B2C and social DTC.
Social-first commerce
Food and lifestyle blogger Li Ziqi is an example of a KOL that has effectively deployed social-first commerce. She has become one of China’s biggest social media stars by posting artistic videos of traditional life and cooking in Sichuan province’s rural areas. Having built an enormous fan base (26 million on Weibo, 39 million on Douyin, and 11 million on YouTube), she now operates an eponymous brand of traditional Chinese packaged food, promotes third-party brand foods, and operates a store on Tmall to sell directly to her followers.
Li Ziqi sold 100 million renminbi of products in 2019, more than three times the year before, with her success demonstrating the power of converting social engagement into commercial results.
This method of social commerce is an effective way of building a customer base, as well as strengthening engagement and building brand loyalty through rich content and interaction.
Social-first content platforms are core to exploiting the opportunity. Most notable among them are Douyin, the hugely successful short-form video platform, and RED, a lifestyle platform where consumers review products and share lifestyle tips. In addition to generating traffic for established e-commerce platforms Taobao and JD, these social- first platforms have launched their own e-commerce sales functions and branded stores, though they are still at an early stage of development and have yet to bring significant brands on board.
Social discounter
Zhihu is an example of a brand which has successfully captured consumers through the social discounter platform Pinduoduo. By offering a price that is typically less than 30 percent of its peers to consumers who can gather enough of their friends to buy the product together, Zhihu has grown to become a top 4 tissue brand in China within just two years.
Beauty brand KanS has enjoyed similar success, tapping into the customer base of lower-tier cities and seeing year-on-year growth of roughly 100 percent in online sales. By discounting as much as 40 percent for group purchases on Pinduoduo, it has been able to clear slow-moving or near-expired inventory.
One of the key strengths of social discounter platforms is being able to target price-sensitive customers with value-for-money propositions. Although much of the attention of China’s new generation of consumers has focused on urban centers such as Beijing and Shanghai, lower-tier cities such as Mianyang, Yancheng, and Zigong are increasingly important thanks to their large pools of consumers with significant levels of disposable income and a keen appetite for online deals.
Community buy/S2B2C
Platforms Xinsheng Selected and Yunji, and skincare products seller TST Tin’Secret, are examples of the fast-emerging community buy/ S2B2C archetype. The archetype is characterized by a digital adaptation of the direct sales model, where individuals receive referral bonuses and commissions for sales made to their friends.
TST Tin’Secret is a beauty brand which has harnessed the ‘WeShang’ social-direct business model to grow sales to an excess of 30 billion renminbi in 2020, gaining six million members after just seven years in operation, and enjoying a compound annual growth rate of 150 percent since 2017. Individuals are paid a commission of between 15 and 32 percent for referrals within their social network, and it now has several notable celebrities within its direct-sales ranks. It is currently expanding from an own-brand direct-sales model to a lifestyle membership-based community model.
Community O2O and S2B2C platforms–although still fragmented–saw a resurgence during the COVID-19 lockdown, especially for high- frequency purchases such as fresh produce. In such models, brands sell through a platform which incentivizes group leaders to sell to their friends and connections. In the case of S2B2C, such as membership-based Yunji which sells select value-for-money products, these platforms and group leaders exist entirely online. In the case of community O2O, such as Xinsheng Selected's platform for everyday goods, group leaders are typically small store owners at the center of offline residential communities. This allows brands and platforms to deliver merchandise in bulk directly to small store owners, who further distribute merchandise to a broader customer base. This helps reduce logistics costs significantly, a key barrier for online sales of smaller-ticket items such as fresh produce.
The community-buy platforms’ reliance on consumer and individual sales incentives to drive growth is fundamentally different from ‘traditional’ e-commerce. Many brands have been playing with shifting brand-driven marketing spend to consumer sales incentives. Several brands have even launched new independent product lines and brands to take full advantage of the opportunity without cannibalizing traditional channel sales.
Social DTC
Beauty brand Perfect Diary exemplifies the potential of social DTC, becoming an emerging leader in cosmetics after just three years. From a small base, it achieved gross sales of more than 3 billion renminbi in 2019, growing 5x over 2018. Almost all of its sales are online. And the social DTC operations of WeChat groups and WeChat mini- programs are central to managing its consumer base, capturing roughly a quarter of sales.
Its growth has been driven in part by the success of its social DTC operations. Members are pulled into WeChat groups where they engage actively with brand-managed virtual avatars, lifestyle content, and beauty tips. A 6,000-strong KOL and KOC network drives engagement both in the public domain as well as within its private domain social DTC. Perfect Diary’s strong social DTC operations has allowed it to own consumer traffic higher in the sales funnel, at the acquisition and interest levels, providing it with more natural repeat traffic, as well as helping it build a strong bargaining position with Tmall and Taobao for resource exchange.
Capturing the opportunity
Although many brands have entered the social commerce arena, their spontaneous and scattered approach has not always led to success.
Some brands have been unable to generate substantial, high-quality traffic, or are generating low-sales and conversion rates in their social commerce stores. Others have struggled with poor channel integration, siloed functions, limited ownership of consumer relationships, and inconsistent messaging within groups or content.
Building successful social commerce at scale requires a new playbook. For example, building a winning social DTC playbook requires four new or updated capabilities: user acquisition, user/ community operations, social content operations, and social and CRM infrastructure
User acquisition: Users come from a combination of three sources: the public domain (by purchasing traffic), social referral (from existing customers) or traffic exchange (from e-commerce platforms or department stores, for example). Perfect Diary takes people on this consumer journey from the public to private domain, attracting traffic through rich social content, referring them to WeChat groups to build engagement and loyalty, and facilitating conversions in either its WeChat mini-programs or Tmall flagship stores. Their journey is simple, and consumers are always more accessible from either the private WeChat groups or conversion in their online stores.
User/community operations: The community then needs to be carefully managed to ensure that members stay active. A leading sportswear retailer, for example, has store managers act as ‘mini-CEO’s to manage their community as well as their stores. They recruit three types of KOLs/KOCs to elevate community engagement: brand ambassadors offering sports activities, internet celebrities to endorse and model sportswear and promote it on social channels, and community partners to offer advice in-store or at sports venues. Other brands may opt to employ KOC (key opinion consumer)–or even avatars–to drive the conversation. In addition, consumers need to be carefully segmented to ensure the best possible fit, and content then thoughtfully developed to maximize its potential.
Social content operations: A steady flow of strong content needs to be developed and closely monitored to take advantage of the viral nature of social media. Content should come from a mix of brand-made, user-generated, and third-party sources. Lifestyle content is key, as too much content which overtly promotes products risks becoming tedious. Perfect Diary, for example, posts appealing, relevant content–not just the expected beauty tips but also general lifestyle content about food or leisure. While the content should reflect the essence of the brand–by focusing on carefree people enjoying an active lifestyle, for example–it doesn’t necessarily need to mention the brand by name. Once again, the use of KOLs/KOCs is critical, and their use should be maximized with strategies to build up to, and follow up on, their input.
Social and CRM infrastructure: Underscoring all of this is the need for the correct infrastructure to manage these relationships. This involves migrating to WeChat at work, for example, running mini-programs to launch DTC e-commerce, and integrating existing systems with department stores. CRM systems and other tools to manage the customer relationship should also be integrated across all channels.
Other archetypes of social commerce will require their own playbooks, each adapted to the specifics of that model. For example, the community buy model often uses a differentiated portfolio strategy, to ensure the platforms maintain a sufficient margin and sellers minimize the risk of cross-channel leakage.
A roadmap for success
With social commerce continuing to evolve, drawing up lengthy strategies or looking for an established model to replicate may not be the best approach.
Instead, brands should place a strong emphasis on testing and quickly adapting pilots in sprints, before codifying a playbook and rolling out operations at scale. Successful brands have been able to build new social commerce businesses within 6 months.
A social ‘war room’–where agile teams respond to daily challenges and trial different methods before settling on the best approach–is a key part of the pilot stage (Exhibit 5). These learnings are then consolidated before the brand scales up further and expands its operations to other products and regions.
Continual change
In order to harness the power of social commerce, brands will need to be agile; developing a new playbook and acting on data to scale up. In order to overcome their own internal hurdles, brands will also need to be prepared to disrupt their existing norms and business models.
For brands that embrace rapid change, social commerce presents a game-changing opportunity for penetration and transformational growth.