It took place on April 1st, 2020. Yet, it was anything but an Aprils Fool’s joke. Chinese rocket KZ-1A took off from its launch pad in the Hubei province carrying more than the usual satellite payload: Taobao’s live-streaming super-star, Viya, sold the right to paint & press the launch button of the rocket for 40M RMB (USD 6M) a few days before, setting a new record for the most expensive single item sold over live-stream.
Beyond being more of a PR opportunity from Alibaba, Taobao’s parent company, the boldness of the sale is a good representation of how increasingly relevant live-streaming has become in China, especially since the beginning of the Covid-19 pandemic. From live crabs to condominiums, an estimated 300 Bn RMB (USD 45Bn) worth of goods has been sold this way in 2019(1), exceeding the entire GDP of Bolivia. The market estimates 2020 could reach the trillion RMB mark (USD 150 Bn)(2).
The live broadcasting and showcasing of products for sale has existed since the early days of television. Yet, the evolution of this concept to cellphones has gained unprecedented traction with Chinese consumers, where live-streaming of all sorts have taken society by storm in recent years, going far beyond what is now referred to as social commerce.
While the underlying concept is simple, a large variety of formats have emerged, relying on different platforms and business models. We distinguish 5 main formats that stand out from this universe (figure below).
The common denominator across these formats is having dedicated anchors, KOx* of all calibers, who become synonymous with the show. For the rest, creativity knows no bounds. Guest stars are a common occurrence, from brand spokesperson to legitimate industry experts to foreign CEOs. The products can be either sold directly on the platform or via coupons to be redeemed in-store. As it is often the case in China, promotional schemes can reach exceedingly elaborate levels. The ecosystem of live-streaming is in a permanent state of reshuffling, with new apps or in-app services poping up everyday, yet, we observe most international brands will stick to a shortlist of major platforms.
Most brands operating in China have taken the plunge and are now involved and selling through live-stream in one way or another. Many have fully embraced it; others are far more reluctant and slowly testing the approach. There are 2 major drivers behind this widespread adoption.
First, live-streaming is a recognized booming market, and most brands now fear being a late mover and missing the opportunity, especially if they are targeting younger demographics. More than 70% of Chinese Generation Z consumers (those born after 1995) have declared preferring buying products directly via social media than through other channels(3), not just drawn by the intense promotion, but also finding an important element of trust absent from regular e-commerce.
Second, brands realize that taking part in live streams organized by the large e-commerce platforms with their star KOL is a way to increasingly solidify and foster a relationship between them. Conversely, never participating might put them at a disadvantage when discussing potential partnerships with the platforms in the future.
Yet, it is not all sunshine and rainbows. Now that the initial euphoria, amplified by the Covid-19 lockdown, has passed, and the live-streaming market has grown into a distribution channel in its own rights, challenges are becoming increasingly evident.
The most obvious and immediate threat is short-term profitability, being severely hindered by two aspects most live-streaming formats share. The first is quintessentially promotion-driven. Consequently, most KOL will want a guarantee that the discount they offer is unbeatable; a claim that they can use as initial bait. The second, fees always exceed that of regular e-commerce and can go as high as 3 times more for celebrity-KOL on Taobao.
The sustainability of live-streaming in the long term also presents challenges.
A major risk is an impact on brand image, especially for premium brands. Beyond the intense promotion that can degrade the brand’s perceived value, large live-stream platforms can feel like browsing at Walmart after an earthquake, where vastly different products are swirled in together, many being unknown local Chinese brands not of the same caliber. When products end up being showcased between a segment on elderly diapers and an unknown brand selling fish-feeding pellets by the gallon, one could argue the fight to continue building and retaining a high-end image will be even tougher. This in turn may also put off some of the brand’s highly valuable, loyal customers.
Another source of concern derives from the quality of the customer acquisition and how it might lead to an explosion of cannibalization. Today, most of the sales from live-streaming are made by customers new to the brand. The question remains whether or not they have become brand loyal and will continue with repeat purchases in the future. Two scenarios can be assumed,. The first subset of these consumers were purely drawn in by the buzz and the generous promotions, making them unlikely to stay loyal to the brands or products they purchased. In the case they someday do repeat purchase, it will likely be similarly opportunistic. The alternative is that a subset of customers did develop brand loyalty for the product and will continue to explore the brand’s products further. However, it is likely that as long as these products remain available for consumption at a discount over live-streaming platforms, many will continue to fail to venture onto the company’s regular e-commerce websites or in-store, out of the purchase habits formed and at the risk of not receiving an incentive. As the population exposed will ultimately plateau, recruitment will fall and we can expect the cannibalization rate to rise dangerously, as solely opportunistic purchases will actually be generated. This will be a high cost to pay for low-margin and low-retention sales.
A common misconception is that live-streaming needs to be steered like any other distribution channel: an on-off switch triggered by its actual or estimated EBITDA. This approach leads to a sub-optimal, if not dangerous, use of it. A more educated approach towards live-streaming is to consider it an integral part of the overall marketing strategy, in a similar fashion for any other lever. As such it should:
be arbitrated and optimized based on efficiency internally (between formats & KOLs) & externally (against other marketing levers)
consider potential synergies and cannibalization with other channels & levers
account for short- but also long-term effects, including customer retention
The key here, but also the main trap, is leveraging data.
A very tempting but often misleading use of data is solely looking at the metrics provided by the platforms to quantify the ROI or cannibalization rate of your live streams. It surely is a valid way to compare different sessions and types of content for tactical improvement. However, these measurements are inherently biased and have no ability to account for both requirements mentioned hereinabove: omnichannel and long-term impact.
If a holistic performance measurement is in place, such as marketing mix modelling or unified measurements, it is a good place to start. Once the live-streaming is properly integrated into the models, this will provide an accurate estimation of the cannibalization rate, which is the most fundamental metric to gauge the true profitability and define a successful strategy. Indeed, if the cannibalization remains low, it means this particular live-stream enables to tap into a virtually new market, and even though the cost might be high, the business case is straightforward. If the cannibalization rate is already high, it might be better to rely more upon or experiment with different vehicles, potentially giving up a format altogether. Even if this channel only has a short history, live-streaming is a fast-evolving battleground where we observe substantial changes in most metrics measured. Any learning drawn at a given time should not be assumed valid for very long, calling for frequent updates and a flexible, data-driven governance.
Customer analytics is also an important facet to consider here. Noteworthy, it will provide an important complement to the efficiency measurement, adding in the element of long-term impact generated by the potential retention of customers. Estimating the lifetime value of customers recruited by different types of live-streams enables a fairer comparison, as we often observe significant disparities on this front. Where Taobao celebrity anchors may sometimes post higher immediate ROI (usually the first few sessions), streams from smaller KOL actually overperforms consistently when considering the much higher retention rate of their viewers. Customer analytics also assists in the comprehension of the drivers and the customer journey of this new audience, leading to an improvement of the current CRM strategy to specifically cater for it, ultimately maximizing the value that can be generated.
Live-streaming has become a crucial lever of growth and a major expenditure in China, on which there is a very little track record of learnings or academic literature we can truly rely upon. That is why leveraging data with advanced analytics is ever so crucial to make the best of such a thriving and dividing channel.
As live-streaming seems to be taking off globally, ensuring there is a clear understanding of its current environment and performance in China will provide valuable learnings to be leveraged in other markets as well.
*KOx refers to KOL (Key Opinion Leader: social media influencer), KOC (Key Opinion Consumer) & KOA (Key Opinion Advisors, belonging to brands or retailers salesforce)
ZhaoShang securities database
Accenture 2019 Digital Consumer Survey
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