Will decentralized e-commerce save brands?

Private traffic can be the next strategy for international players in China

August 2020

This is an article posted on Technode. Here can direct you to the original one.

We have all dreamt about e-commerce saving the traditional retail business, turning an asset-heavy industry reliant on expensive square meters and armies of ground sales staff into light online front stores managed by a few tech-savvy marketers. 

Well, it happened, and e-commerce has become the new normal—at least in China. By next year, with a predicted 50.5% penetration rate (versus 17.1% worldwide), China will be the first market in the world to sell more goods online than in offline stores. In some industry verticals such as cosmetics, e-commerce has already surpassed traditional retail. And with offline retail stores being forced to close, Covid-19 has accelerated the shift toward a so-called “post-e-commerce era” where consumers are empowered to buy “ATAWAD”—at any time, from anywhere, and with any device.

Has e-commerce saved the retail industry? Hmm… not really. In fact, the industry is threatened by an unprecedented dependency on paid media and platforms.  They may boost sales today, but they are dangerous for brands in the long run. 

Paid media: the necessary evil

Something from the old retail world that remains true today is the “no traffic, no business” golden rule. Online traffic has replaced “foot traffic” as the sine qua non of online shopping. In the eight years from 2010 to 2018, as the industry grew to be worth $4 trillion globally and nearly $2 trillion in China, internet advertising in China has multiplied by over 17 times, from $3.7 billion in 2010 to $65 billion in 2018, according to data from Emarketer.

E-commerce giant Alibaba has become the largest digital ad seller in China. Its advertising revenues account for more than 32% of the market this year. Although Alibaba doesn’t report its advertising revenue separately, the company’s CFO reportedly remarked in 2017 that ad division Alimama produces 60% of its revenue.

With this paid media-powered retail market growing at a steady pace (25.9% YoY growth for 2019 in China), a key issue is the decline of the media’s ability to drive sales. With information overload and the attention deficit of new consumers, even the most creative ads cannot guarantee to convert traffic into sales. This phenomenon is well known to marketers, who call it “the great CTR decline.”  

Since the very first online ads were introduced in 1994, the click-through rate (CTR) on display ads has continuously eroded. The most famous early banner, an AT&T ad on Hotwired.com (now the magazine “Wired”) achieved 78% CTR. Nowadays, 2-3% is often considered good.

Oct. 27, 1994: A famous early banner ad was clicked at the record rate of 78% CTR. (Image credit: Thefirstbannerad.com

Marketers have been working tirelessly to counter the “great CTR decline” with more interactive ad formats, precision marketing, native advertising techniques or engaging influencers. But for brands, the unit cost of traffic keeps increasing, year after year. 

The e-commerce platformization

In China, platform-led e-commerce usually accounts for 80% to 90% of a brand’s online sales. Platforms such as Tmall, JD.com, Pinduoduo, RED, or VIP.com drive most business, while direct brand-to-consumer e-commerce is struggling to get traction.

As brands and retailers have become heavily reliant on media spending, they are also losing the war for consumers’ attention downstream in sales. They’re at risk of a standardized shopping experience that locks them into unbalanced partnerships with e-commerce giants, on the platforms’ terms. 

In November last year, Nike pulled its products from Amazon’s website. Is this a new direction for the industry? In China, where brand.com websites get even less attention from users than in the West, regaining control over e-commerce is going to be tricky. But a new form of commerce is emerging, based on media hacking strategies and decentralized commerce.

The era of pervasive commerce

A ubiquitous and frictionless e-commerce utopia is slowly becoming a reality in China thanks to QR codes and Mini-programs. It is called “pervasive commerce”—a vision for turning every consumer touchpoint into a point-of-sale. 

The QR code economy, which builds digital connections between people, things, and places, is not new in China, but it’s still growing. WeChat scanned QR codes 140 billion times between Jan. 23 and May 6, the company wrote in a report on the “2020 Pandemic and the QR Code Economy.” 

There are over 4 million WeChat Mini-programs, which can be accessed seamlessly across more than 60 different touchpoints within the Tencent ecosystem according to 31TEN, a digital agency for WeChat Mini-programs. They are directly shareable in chats and articles, and can easily be integrated with WeChat features such as membership cards, payment receipts, and coupons. They are used by 450 million active users every day, and to date, 95% of e-commerce brands have already started to use them, according to Tencent. WeChat reports that in February, 26 merchants enjoyed average daily sales over RMB 1 million (about $140,000), and had over RMB 100 million in transactions.

Following the success of WeChat, “10 digital platforms have since adopted mini programs: Kuaiyingyong, Alipay, Toutiao, Douyin, Baidu, Taobao, QQ, Weibo, and JD,” according to the 31TEN agency. The luxury house Dior recently launched a Douyin e-commerce mini program for its 520 campaign. Viewers of the “Dior Confession Balloons” video could directly add products to their cart and checkout with WeChat Pay or Alipay without leaving the app. On June 15 this year, the Japanese cosmetic brand Shiseido launched a live streaming shopping experience with Ayanga, a Chinese musical theater actor, singer and songwriter celebrity, also enabled with a Douyin mini program.

(Image credit: 31ten)

Transacting directly with private communities

This pervasive and decentralized architecture, based on QR codes and Mini-programs, allows brands to turn any medium into an online store. More importantly, it allows them to transact directly with private communities of customers, most often within WeChat groups, bypassing pay-to-play e-commerce gatekeepers such as Tmall.

Also known as private traffic marketing, these marketing techniques reduce media buying costs, improve conversion rates, and reduce the dependency on platforms.

Like in many disruptions, small businesses, startups, and new market players are showing the way. The successful China beauty brand Perfect Diary is one of them. Customers are led to follow a personal Wechat account belonging to a fictional lady named Xiao Wanzi, who will then invite them to join a WeChat group, along with other fellow customers. As the community grows, other groups are added and Xiao Wanzi operators (in fact, community managers and WeChat bots) nurture customers with content, tips, and offers presented via dedicated Mini-programs. Perfect Diary focuses on selling directly to its private community, estimated to be more than a million customers according to Parklu, a Chinese influencer platform.

Joining the private traffic pool of Perfect Diary through the brand Wechat account (Image credit: Fabernovel)

Ctrip, the online travel agency, is also very familiar with building private communities on WeChat. Travelers are similarly invited to follow a Ctrip personal account from which they can join WeChat groups named “Wei Ling Dui” (Weguide). Each group is dedicated to travelers going to the same destination during the same period of time. Groups are managed by a local travel concierge, usually one of Ctrip’s local travel agent partners, who will assist members of the group with locals tips and exclusive offers through WeChat coupons and mini programs.

(Image credit: Fabernovel)

Through these “personal accounts,” Ctrip can also access users’ WeChat Moments feed to publish campaigns, deals, and promotions directly and at zero cost.

(Image credit: Fabernovel)

Wechat Work, the ultimate e-commerce catalyst

How to sell online without e-commerce? In the post-COVID period, many brands have revised their strategy and are looking at turning their sales associates into online sales operators. 

WeChat Work in its 3.0 version is empowering brands such as Perfect Diary to deploy decentralized commerce strategies. New features offer deeper connections with consumers that can be leveraged for consumer acquisition, social selling, and clienteling.

Consumer acquisition

WeChat Work now offers the possibility for sales associates to show branded name cards and branded welcome messages. The name card displays the sales associate’s name and personal profile picture. 

Consumers using WeChat Work can be connected to CRM databases. Sales associates can import CRM tagging but also enrich customer profiles through direct inputs.

(Image credit: Fabernovel)

Social selling

WeChat Work now allows users to create chat groups of up to 200 users, so sales associates can group consumers based on their interest or status. A welcome message for new members can be configured for group chats. When a new member joins the group chat, the welcome message will be sent automatically.

To avoid losing customers, the company can also reallocate the customer databases of departed employees to existing staff. 

(Image credit: Fabernovel)

Clienteling

Members can share posts in WeChat Moments to interact with customers. Companies can create content centrally, and after confirming by members, they can post directly to the customers’ moments.

WeChat Work also provides customer relationship management for retaining customers. It can serve as a portable content library for sales associates to choose the brand promotion content and information that match consumers’ needs. Brands can develop their own staff management system, assigning followup tasks to build relationships and creating opportunities for upselling.

(Image credit: Fabernovel)

A new approach to e-commerce

Because platforms such as Tmall and JD.com are becoming increasingly expensive, it is time for brands to embrace decentralized commerce strategies that leverage private traffic to reduce dependence on platforms and create more intimacy with their consumers.

If WeChat provides useful features, operating multiple private traffic pools at scale is not an easy task. According to the private traffic solution provider PJ Daren, “it requires a specific tech infrastructure as well as the human-intensive workflow for its maintenance.” A few agencies have already started to specialize in that field.

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