More friends mean more opportunities, the Chinese saying goes. And as it becomes more difficult and expensive to reach shoppers on traditional e-commerce platforms, social commerce platforms are helping vendors turn their contacts list into customer bases.
The model rewards users that exploit their social media network of family members, friends and acquaintances for sales. It cuts out advertising costs – and is giving traditional e-commerce platforms a run for their money.
In early May, Yunji, a membership-based e-commerce site that leverages social interaction to expand membership and promote products, became the second Chinese social commerce company to list on the Nasdaq following Pinduoduo, a group-buy platform that encourages people to mobilize a certain number of friends to reap bargains.
A slew of similar companies have followed suit in the past several years to tap into the market, which reached 683.6 billion yuan (US$98.6b) in 2017 and is expected to account for 31.3 percent of China’s total online retail transactions by 2020, according to a report issued by the Chuangqi Social Commerce Research Center. The rapid growth has aroused attention from traditional e-commerce giants including Taobao and JD.com, who have also joined the fray. However, the new business model also faces criticism due to its resemblance to multi-level marketing, complaints of counterfeit products, poor customer service and unstable supply chains.
The business model, which blends social media and shopping, has been booming since 2015 as a distinct alternative to individual sales accounts, or vendors based on WeChat and Weibo (the Chinese versions of WhatsApp and Twitter).
Pinduoduo and Yunji, both founded in 2015, are the two fastest-growing platforms in the arena, followed by a large number of competitors. But each operates in a different way. The membership-based model of Yunji and Beidian, for example, only allows users to become vendors after buying a certain amount of product on the platform. They are rewarded with discounts on future purchases and commissions from sales, and a share in the shops of vendors they recruit. Membership levels and rewards depend on the number of people they sign on. Shen Dongmei, a storekeeper on Beidian, said she joined the way most people do – through a relative. She told NewsChina that those who register on the platform earlier are higher up on the pyramid and stand to earn a handsome income through the storekeepers they invite.
“The key lies in one’s social network or how many people you can influence. Those who are highly sociable and well-connected do a good job,” said Mary Pu, a storekeeper on Yunji.
Pinduoduo differs slightly. Shoppers are encouraged to lock in low prices by organizing group buys and mobilizing friends or family members to purchase the same product. By appealing to bargain-hunting shoppers, Pinduoduo is among the industry’s fastest growing platforms. Platforms that focus on community use the power of influencers to attract customers.
Xiaohongshu (Little Red Book) is a social media platform that pulls examples from Facebook and Taobao. Its users, mainly young women looking for beauty products, can share reviews and tips on products and services, get recommendations from celebrities, or simply browse.
Then there are companies like Youzan, which provides the tools and services needed to run shops on WeChat and Weibo, and e-commerce aggregators such as SMZDM.com, which recommends products from different shopping sites.
But these are not the only avenues for advertising. Vendors on WeChat and Weibo, and livestreamers who suggest products to their fan base, are also drivers of social commerce.
“As the growth of the internet population has hit a ceiling, given the unshakable position of giants like Alibaba and JD.com, it is increasingly becoming more expensive to get customers and services on e-commerce platforms,” said Xue Yu, an analyst with industry research firm IDC. “Businesses have to find other ways to attract customers to their shops. Social networks are important channels.”
WeChat, the largest social network platform in China which boasts one billion users worldwide, plays a critical role with its chat, payment, purchase and social networking functions. Most e-commerce apps can be accessed without leaving the WeChat ecosystem.
According to a May report by Nielsen, a leader in market research, 54 percent of interviewed customers said their impulse spending increased in the previous year. Among them, 80 percent said recommendations from friends on social networks had a significant influence on those purchases.
Chuangqi’s report shows that from 2014 to 2018, the annual growth rate of the social commerce market remained above 66 percent. Despite slowing as the market expands, its growth is still greater than traditional e-commerce and is expected to exceed three trillion yuan (US$433.1b) by 2020.
Pinduoduo was listed on Nasdaq in 2018 and maintained growth despite remaining in the red. The company’s financial report issued this March showed that in 2018, its gross merchandise volume (GMV) reached 471.6 billion yuan (US$68.2b), a year-on-year increase of 234 percent, with 23.9 percent year-on-year growth of total online retail sales. The number of active buyers on the platform reached 443.3 million in March, surpassing JD.com’s 310.5 million and second only to Alibaba.
Yunji also saw fast growth. Its GMV, which was 22.7 billion yuan (US$3.3b) in 2018, boasted an increase of 134.4 percent over 2017, while its GMV in 2017 saw an increase of 428.1 percent from 2016. Total revenues reached 13 billion yuan (US$1.9b) in 2018, a rise of 102 percent over 2017, according to the company’s letter to investors.
While traditional e-commerce remains the mainstream, 80 percent of online shoppers make purchases through social commerce, while 57 percent of them have tried group buying, according to the Nielsen report.
Social commerce stands to increase as more people use social media, particularly those born in the 1980s. Statistics from iiMedia Research Institute, a mobile internet consulting firm, shows that in 2017, the number of users on social commerce retail platforms reached 223 million, an increase of 46.7 percent over 2016. The institute predicts that number to reach 573 million by 2020.
Despite the rapid growth of these leading companies, social commerce is still new and has great potential for development, Xue told NewsChina. He explains that Pinduoduo has led the way for e-commerce with its extended reach to consumers in small cities and rural areas. “There, the demographic dividend and the dividend for e-commerce still exists,” said Xue.
“Social commerce already has impacted traditional e-commerce. If Pinduoduo, for example, keeps up its current pace of growth, it could even surpass JD and Alibaba,” he added. Established e-commerce giants are already on the defense. Taobao released a discount group-buying app in 2018. JD.com also added group-buying sections to its site. This March, the Beijing-based company released another mini app that takes a cue from Xiaohongshu, attracting shoppers with web celebrity endorsements.
However, growing stigmas shadow these successes. Personal selling accounts on WeChat and Weibo, the first form of social commerce, are now notorious for selling fake products, engaging in excessive advertising and even harassment on social media. Despite better business practice on larger platforms, the aggressiveness of private vendors has turned off some consumers to social commerce altogether.
Sarah Zhang, a 34-year-old living in Beijing, said she has blocked posts from WeChat and Weibo vendors after growing weary of their “distorted promotion of products and dogged marketing.”
Though she sometimes also buys on Pinduoduo, most of the time Zhang chooses more established platforms like JD.com and Alibaba’s Tmall. “When I think about membership-based platforms like Yunji, my first thought is that they’re like pyramid schemes,” Zhang said.
Li Yongjian, an internet economy researcher at the Chinese Academy of Social Sciences, pointed out that despite the price benefits of social commerce, the industry must address issues such as multilevel marketing (MLM), counterfeit products and unstable supply chains.
In 2017, the Zhejiang Province government fined Yunji 9.58 million yuan (US$1.4m) for engaging in MLM. In March, Peanut Diary, a Guangzhou-based social commerce portal, was fined more than 70 million yuan (US$10.1m), the largest fine dealt to the industry to date. In April, the US Trade Representative’s office put Pinduoduo on the “notorious markets” blacklist for sale of counterfeit products, causing Pinduoduo’s New York-traded shares to plummet. False advertising, fake products and poor customer service are common grievances of social commerce shoppers.
Problems also exist on platforms that rely on key opinion leaders (KOLs) and internet celebrities to reach shoppers, or livestreamers who run online stores or are hired to act as a guide to recommend products. Some KOLs are accused of not trying the products they advertise, while reports of fake customer reviews are rampant.
Wang Ying, a fruit seller on WeChat, told NewsChina that individual sales accounts have seen a marked decline in quality over the past two years, with many vendors pushing unbranded products and forgoing customer service.
Not only are improved laws and regulations a priority in solving these issues, but also industry supervision, including mechanisms for customers to report bad business practice like those traditional e-commerce platforms provide, Zhu Wei, a law expert at the China University of Political Science and Law, told the Legal Daily.
Xue agreed, pointing out that the framework for an e-commerce law published early this year could also be expanded to include social commerce management.
“We need more specific rules to make the law more implementable. Unified standards, whether in the form of law or administrative rules, are needed to close the loopholes in management and supervision,” Xue noted.
Some platforms are making headway. For example, Pinduoduo has cracked down on counterfeit products and is making efforts to improve the quality of its products by cooperating with more high-end platforms.
“It’s inevitable for new things to have problems. In the long run, the social commerce retail market will develop toward high-quality products at mid-range prices. It will become more regulated. The current price war will only last for a certain period of time before irresponsible platforms are weeded out,” said Xue.
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