China

Why Live Commerce? – A New Growth Point of Online Shopping

Live commerce is a combination of live streaming and online shopping. During the past five years, it has been incredibly relevant for China’s retail industry, not only because it contributed to the growth of online shopping sales, but it created a new profession for live commerce streamers. Due to the lockdown caused by COVID-19, 2020 saw a new round of growth and change in the industry. So, how does the live commerce chain actually work? Why do live commerce streamers become the new wealth creation myth in China? What are the lessons learned from the Chinese market for Latin America?. 

On November 11, 2018, a handsome young man appeared in the same live stream with Jack Ma, the founder of Alibaba Group. The two men would compete to see who could sell more lipsticks during the live broadcast. Surprisingly, by the end of the live broadcast, the young man sold 1,000 lipsticks, while Jack Ma only sold 10. This young man is called Austin Li. Through online sales, he transitioned from a cosmetics counter clerk with a monthly salary of 6,000 yuan ($930 USD) to a super salesman with an annual income of 200 million yuan ($31M USD) in just 4 years. A large part of his success should be attributed to China’s booming live commerce market, which has reached a scale of trillion yuan.

Live commerce example with Austin Li and Jack Ma

Austin Li VS Jack Ma

Live commerce is a combination of live streaming and e-commerce. In other words, it’s about the live marketing of goods on e-commerce platforms and real-time interaction between sellers and consumers. China’s live commerce first started in some less popular beauty communities. 

In March 2016, MOGU Inc, whose customers are mainly fashionable females, officially started its live streaming function; in May, e-commerce giant Taobao opened its live streaming platform, followed by JD in September. 

2018 saw the first rapid growth in live commerce. Taobao Live’s annual GMV exceeded 100 billion yuan ($15.5B USD), nearly 400% growth from the previous year. In the same year, short video and social platforms such as TikTok and Kwai entered the industry. They use live streaming as a means of traffic monetizing. The total GMV of these new-comers also reached 50 billion yuan ($7.8B USD), which had become a serious threat to Taobao Live. Since then, the market landscape of live commerce, traditional e-commerce platforms VS social platforms, has been stabilized.

While the market landscape is largely set, the growth continues. After over 10 years of development, the growth rate of China’s e-commerce market scale declined from 33% in 2015 to 14% in 2018, with a shift from an incremental market to the stock market. In comparison, China’s live commerce GMV accounted for 2% of the overall GMV in 2018, then reaching 4% in 2019 and 10% in 2020. The gap between the two growth rates means that live commerce is still a promising blue ocean, but also in fierce competition for traffic from the beginning.

As we all know, GMV = Traffic x Conversion Rate x Customer Unit Price.

Live Commerce – What Makes the Difference?

With the user scale becoming more and more stable, the power of live commerce is mainly reflected in two ways: attracting traffic and improving conversion rate. Compared to the traditional e-commerce logic – “people looking for goods”, the innovation of live commerce is a recommendation-type logic called “goods looking for people”. Unlike the centralized e-commerce platform, live commerce adds the element of “people” to the transaction chain. These people include professional online streamers, celebrities, hosts, factory or store owners, even CEOs, and governors.

Online streamers must bring their own relationship of trust. This trust either comes from the empowerment of their community relationships, such as Internet celebrities on short video platforms like TikTok; or from their personal credibility, such as movie stars; or from their professionalism, such as the top online streamers who have a team dedicated to selecting products. 

After the popularity of brand self-broadcast, many company CEOs are getting involved in live commerce and they often get better commercial effects than conventional online streamers due to their professionalism, topicality, and trust relationship. For example, the GMV of Lei Jun (the CEO of Xiaomi)’s New Year live streaming exceeded 180 million yuan ($28M USD). Besides building trust-worthy connections with their communities, the role of the broadcaster also includes attracting fans to build their private traffic; finding supply to offer in their channels, and then providing fans with vivid display and persuasion; and, relying on price advantage to gather decentralized demand. 

These connections between supply chain, online streamers, and consumers make up a precise and efficient distribution network, which plays an important role in improving transaction efficiency in a decentralized and fragmented e-commerce environment.

Lei Jun exploring Live Commerce

Lei Jun’s New Year Livestreaming

In addition to the streamers, live commerce has a higher information density than traditional marketing and a more interactive experience than watching videos. It also avoids the embarrassment of communicating with an offline shopping guide, which better fits the shopping habits in the mobile Internet era. Also, some live broadcasts are happening at real locations, like production sites or factories, to show the whole life cycle of the product, making the publicity effect go further. 

Live commerce at Production Site

Livestreaming at Production Site

Research shows that if the conversion rate from store to purchase is set at 10%, then the rate of live commerce can reach 6.5% compared to the 1% final conversion rate of traditional marketing techniques.

Final Conversion Rates for Different Marketing TechniquesFinal Conversion Rates for Different Marketing Techniques

If we say the high conversion rate of live commerce comes from the trust relationship between viewers and online streamers, then its promotion of traffic growth is more from the entertainment property and the Netflix effect that comes with live streaming. Traditional online shopping is based on search logic and explicit purpose – people open the app to buy what they need and then go offline; while live commerce is based on recommendation logic and non-purpose, even blurs the line between entertainment and shopping. Many online streamers craft their own image and sales pitch or even perform a story specifically to promote a product. This has led many people to start treating live commerce as entertainment or companionship, using it to pass the time. And regardless of whether these live streams are ornamental enough, they do allow more people to spend more time in shopping-related apps, thus generating more traffic for monetizing.

For those big brands that can hire top online streamers or celebrities to their live streams, the short-time exposure with huge traffic brings long-term publicity effects. This “billboard effect” is accompanied by a high threshold and high investment behind the high revenue. First, each top streamer and MCN (Multi-Channel Network) company have a professional selection team to examine the quality, price, target customers, etc. of the goods, and the elimination rate is higher than 95%. And then, to keep the attractiveness of their own live room, online streamers often ask businesses to give a “lowest price on the network”. 

Take Austin Li as an example, from January to April 2020, he recommended a total of 24 listed companies’ products, 14 of which had a discount of 50% on some or all of their products. However, for a typical e-commerce live stream, at least 20% of its GMV has to be given to the platform and the online streamer/MCN as a commission, which means that merchants who work with top online streamers often lose money. However, it should be considered that top streamers like Viya and Austin Li can attract more than 30 million viewers and generate more than 500 million yuan GMV ($77.5M USD) within three days. So, this is still a worthy investment.

The Typical Distribution of Live Commerce GMV

The Typical Distribution of Live Commerce GMV

Future of Live-Commerce After the Pandemic

COVID-19 is a gray rhino event that swept the whole world. However, with danger comes opportunity, and this is particularly evident in the live commerce industry. With the impact of the pandemic, live streaming became a source of interesting and useful content for people in lockdowns. The DAU and usage hours of related platforms were much higher than in 2019. Taking Taobao Live as an example, its Top 20 streamers attracted an audience of 113 million people in January and grew 2.2x to 360 million by March. Meanwhile, offline brick-and-mortar stores had suffered greatly, with merchants turning to online live streaming as a survival resource. According to statistics, an average of 30,000 people opened online stores in China every day after the outbreak, and the number of merchants who entered Taobao Live increased by 719% in February 2020. Despite the downturn in the real economy, people’s enthusiasm for online consumption had risen rather than fallen, with the estimated sales of Taobao Top 20 streamers increasing nearly 2.7 times from 1.25 billion yuan ($194M USD) in January to 4.1 billion yuan ($636 million) in March. The above-mentioned phenomena showed the great potential of live commerce during the epidemic.

Compared with other regions, Latin America has formed a large-scale e-commerce industry system, which has produced several cross-functional platforms even super apps. As for the cultural atmosphere, Latin Americans, like the Chinese, attach more importance to interpersonal communication. Short video software such as TikTok and various live streaming platforms also have many users in Latin America. 

These similarities could mean that Latin American users may be more receptive to the new form of live commerce and unlock an opportunity to explore how to develop intentional products that could leverage this behavior. At Polymath Ventures, our role as a Venture Studio takes us to explore global trends and understand how to elevate these opportunities in our region. Our company building process allows us to validate these ideas in our current segment to confirm its viability and desirability in one of our markets. 

Reference

  • CITIC Securities “What Kind of  Market Landscape Is the Live Commerce Industry?”
  • CCSmart “2020 Live Commerce Industry Insight Report”
  • 36 Krypton “2020 China Live Commerce Industry Research Report”
  • Leo Moo Management Consulting Firm “Live Commerce Industry Research Report”
  • Foresight Industry Research Institute “2020 China Live Commerce Research Report”
  • TOPKLOUT “2020 ‘Jun 18th’ Live Commerce Data Report”
  • MIT Sloan Management Review “What the West Can Learn From China’s Live Commerce Success”

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