Wharton’s David Bell elaborates on the possible directions e-commerce in China could take in future.
The rise of online shopping in China is dizzying. With cyber consumption accounting for $36.56 billion in the first quarter of this year, purchases have risen 40.9% compared with the same period last year. Analysts predict that the country’s e-commerce market will be the world’s most valuable by 2015, which seemingly rings the death knell for brick-and-mortar shops.
David Bell, Xinmei Zhang and Yongge Dai Professor, Professor of Marketing, Wharton School, is an eminent authority on the behavior of e-consumers and has researched similar trends in the US. Published widely in academic journals including the Journal of Marketing Research and Marketing Science, Bell’s areas of research interest cover e-commerce and inter-dependent choice, social contagion and neighborhood effects, among others. Bell draws from his experience to explain the behavior of China’s online shoppers and provides companies targeting the cyber population with advice.
During a recent visit to Beijing, Bell sat down with Zhang Kaifu, Assistant Professor of Marketing, CKGSB, for a wide-ranging discussion on the implications of his research for understanding consumer behavior and the Chinese e-commerce market. Excerpts from the conversation and video:
Q. Most consumer research focuses on first- and second-tier cities. What insights do you have into e-commerce in third- and fourth-tier cities? Should e-commerce retailers be focusing on these cities?
A. There is a lower density of retailers in third- or fourth-tier cities, so people in these markets are really under-served and there is high pent-up demand for various products and services. The Internet can aggregate demand in all these cities, which means you can offer all customers, in one realm, a lot of variety. Based on my research, the more remote the area, the higher the propensity to consume from the Internet. People in these cities are developing earning potential and disposable income, they’re aware of new brands and want to consume as much as their friends in the first-tier cities. If someone wants to serve these locations, they could potentially do very well.
In a sense, it would be better to target smaller cities. You would face less online competition and you could generate interesting brand loyalty, because you have been receptive to customers’ needs. We call this demographic “preference minorities”. They have things they want, but can’t get, because not enough other people share their preferences. Isolated people are very good for e-commerce businesses.
Q. If I am an electronics seller and I want to focus on third- and fourth-tier cities, what would be your advice?
A. You should look for people that are particularly under-served. You should try to understand the pain point of customers and reinforce their pain. The aim is to remind them how painful it is to do without these goods and services and bring these things to them.
Q. In China, 70% of customers pay in cash, which may entail cash on delivery and the possibility that a product may be rejected and payment won’t be received. What strategy would you suggest to deal with this possibility of sunk cost?
A. The only solution is to deliver exceptional goods and services to people that really want them. Part of the problem is using low prices to entice customers, which can lead to attracting very poor customers. This is called the ‘Groupon problem’. In theory, if I deliver to you something you really want, you should be willing to pay. Rejection comes from mis-targeting–and too much of a price focus in the beginning.
There is a company in the US called Trunk Club, which is targeted towards men. An advisor from the company will interview a customer to assess his style, and put together a collection of clothing that is delivered to his house. The customer purchases only what he wants. Shipping 10 things is not much more costly than shipping one and you get more inventory into the hands of the customer, which may increase the chance of him buying. It’s a good method to increase the probability of sale. The incremental cost of shipping is not proportional to the items shipped. If you deliver one thing, the probability of a sale may be 20%, however, if you deliver 10 items, it is not 10 times more expensive and the probability of a purchase will increase.
Q. Online companies in China seem to have a larger proportion of the market share than their offline competitors. Despite this, many online companies are not making profits even though their sales are high. Is there any way to get around this issue?
A. A business model will survive (in the) long term if it creates value. The question is how the value should be divided. If I make $1 of value, I don’t want to give 99 cents or $1.02 to the end customer, as that would be a losing strategy. So you should divide value so some of it is returned to the company. It is a mistake to focus exclusively on market share and customer acquisition, because ultimately this will not provide you with a profit. It is also difficult to raise prices when customers get used to low prices. Chinese e-commerce companies need to think of the total value and make sure that a piece of that is retained. Otherwise it becomes a race to the bottom, where no one wins.
The first thing that you can do is target less price-sensitive customers. The second thing you can do is differentiate your brand.
Q. Do you think Chinese online retailers will be able to go global despite the reputation that some have of providing poor-quality products?
A. There are no shortcuts. In marketing, we say that perception is the reality, so if the perception is that your quality is not good, this perception will be very hard to overcome. What we’ve seen over the last few years is US companies building successful brands, but using the expertise and high-quality manufacturing in China to source the product. The next challenge for China is to take high-quality manufacturing and market it in a way that builds a brand that customers can rely on. Maybe China can take the lead in a certain sector and that sector becomes synonymous with a new level of quality. For example, Korea: most customers in the US consider Samsung or LG to be the best TV brands you can buy. That leadership in consumer electronics is carried into cell phones and automobiles.
If you do something well, it gets magnified online through social media, the same thing happens if you do something poorly. Being online creates transparency, which is good if you’re better, but not if you’re worse. It allows things to happen more quickly, but the substance still needs to be there.
Q. How do you leverage the e-commerce framework to create other alternative business models?
A. More Internet business models are about ultimate access. Not price, convenience or standardization, but about high-end products that may take a long time to reach you, but are completely customized. Also some Internet companies are based on experiential grounds. For example, Bespoke Beijing gives you access to things you can do that you might not otherwise know about. This model is not using price to attract you, but will give you knowledge to enhance your experience. So there are two lessons to learn: firstly, find the customers’ pain point and secondly, don’t give everything away. Retain some value for the firm. You’ll need that to grow in future and to build the company, which leads to better products and services going forward.