WPIC Perspectives: Exploring Social Commerce’s Impact on China’s E-commerce Sphere

China is the world’s largest e-commerce market, with Chinese consumers shelling out over US$2 trillion in online purchases in 2023.

Perhaps the most significant factor behind China’s e-commerce prowess is innovation from Chinese internet companies. World-leading innovations in online shopping platforms, digital payments systems, and logistics networks have fueled the widespread adoption of e-commerce by both consumers and merchants. By some calculations, over half of all retail sales in China now occur via digital channels. Chinese consumers routinely buy a wide range of products online, from large durables like furniture and appliances, to high-priced consumer electronics, to everyday household goods and groceries. Product categories like cosmetics, apparel, pet, baby, supplements, and sports equipment are seeing substantial growth in online sales.

For two decades, China’s e-commerce landscape has been dominated by Alibaba and JD.com, which operate search-based marketplaces. The traditional customer journey has been that consumers come to these platforms with some degree of pre-established purchasing intent—and they use search queries to browse different offerings for the products they want.

But the last few years have seen the rapid growth of “social commerce”, a term that refers to the integration of shopping into social media channels. China’s social commerce revolution is being led by Pinduoduo, ByteDance’s Douyin, and Xiaohongshu (also known as Little Red Book). These companies are recording enormous growth in e-commerce sales, presenting a significant challenge to incumbents Alibaba and JD.com—which have responded by introducing their own social commerce innovations.

With social commerce on the ascent, the customer funnel in China has become shallower and wider—customers can now be converted more quickly, and on a wider range of digital platforms, than ever before. This carries massive implications for how brands craft their retail strategy and apportion advertising spend.

Search-based E-commerce

Traditional e-commerce on platforms like Taobao/Tmall, JD, Amazon, or Rakuten depends on search-based journeys—consumers actively seek out products through search queries. This model relies on pre-established consumer intent and the consumer’s ability to navigate through extensive product listings.

To illustrate this model, we can imagine a consumer who is shopping for protein powder—they will search protein powder on Taobao/Tmall, browse different products and prices, and ultimately make a purchase. For protein powder brands, search engine marketing is essential so that their product appears near the top of the search results. Cross-media campaigns are also key to convince consumers that protein powder is necessary—to stimulate demand and create the purchasing intent. Media campaigns also cause consumers who have already decided to purchase protein powder to recognize your brand and know your product selling points.

In the traditional model, marketing spend outside of search engine marketing on the e-commerce platforms directly—like on Weibo or Baidu—is about building brand awareness and encouraging discovery, not converting shoppers at the bottom of the funnel.

The first meaningful shift away from the traditional search-based model came with Alibaba’s introduction of livestream shopping in 2017. Consumers began using the Taobao/Tmall app not necessarily to browse product listings—but to watch entertaining livestreams. Consumers may not have had a specific purchasing intent, but they were open to buying the products recommended by their favourite livestream hosts—usually at a heavy discount.

This dramatically shortened the funnel—with livestreaming consumers could discover your brand and be converted literally within seconds.

Originally, livestreaming in China was star-driven. A handful of celebrities—such as Viya and Austin Li—drew most of the viewership and interest from brands. Their massive followings allowed them to demand high discounts and steep rates from brands for promotion—in turn, by being able to offer high discounts to viewers, their shows became even more popular. With this celebrity-led, discount-heavy model, livestreaming took off in China. By 2021, over 10% of all e-commerce sales in China were via livestream.

The Rise of Social Commerce

The integration of e-commerce into social media channels—specifically Pinduoduo, Douyin, and Xiaohongshu—has transformed the customer funnel even further.

The Pinduoduo marketplace is also search-based—but Pinduoduo’s innovative group-buying feature leverages the power of social networks, incentivizing users to encourage their contacts to make purchases in order to obtain reduced prices. With Pinduoduo integrated into the ubiquitous WeChat ecosystem in China, this has proven to be a highly effective growth tool and a differentiator from China’s other e-commerce marketplaces. By incentivizing users to advertise products, Pinduoduo encourages fast conversions and keeps customer acquisition costs low.

However, Pinduoduo is a discount-oriented platform. Many of the merchants on Pinduoduo sell commodity-oriented, functional products at low prices. It is not an ideal marketplace for most overseas or premium brands given its association with low prices and relatively limited in-platform ad tools.

However, in the last few years two of China’s most prominent social platforms have introduced e-commerce functionalities—Douyin and Xiaohongshu—creating a “preference-based” rather than search-based model of e-commerce. These two platforms offer brands highly sophisticated tools to reach and convert target consumers.

Algorithms on these platform suggest products to users through engaging content formats such as short videos and livestreams, tailored to the users’ preferences and behaviors. This approach not only simplifies the discovery process but also enriches the shopping experience, making it more engaging and entertaining.

Take Douyin, which boasts over 750 million active users. Douyin began as an entertainment platform—but starting in 2021, the platform began integrating e-commerce functionality, and now allows brands to operate flagship stores on the platform.

Douyin is so popular because of its algorithm, which provides users with tailored content that is relevant to their interests and preferences. For instance, if a male user browses several exercise-related videos every day, Douyin’s algorithm can filter content to reflect his strong interest in fitness, sports, and health. After the integration of e-commerce, Douyin now also displays ads for protein powder, athletic apparel, or other supplements—and when the user sees those products offered to him for purchase, he can make the purchase instantly withinthe app. Once they are converted on one purchase, Douyin will expose that user to additional fitness, sports, and health care content and products. This same model is applied across all possible interests and product categories—beauty, fashion, pet, baby, food, and more.

The app can continuously optimize for users’ interests and serve relevant ads. As a result, the app executes highly accurate product matching to the user’s interests, and therefore results in more conversions and repurchases. Douyin posted US$200 billion in GMV in 2022, up 80% from the year prior. For 2023 we’re expecting it to be close to $350 billion.

An Omnichannel Brand Strategy

For brands, social commerce can be a more attractive model for reaching target consumers than simple search-engine marketing.

Search-engine marketing is a battle to capture existing demand for the users that have already decided to buy a given product—whereas social commerce carries exciting potential for demand generation.

That’s because Douyin and Xiaohongshu are fundamentally social platforms that attract users for reasons other than to shop. Users are drawn to these apps for entertainment, socializing, and knowledge acquisition. The commerce functionality built into these platforms allows users to make spontaneous and seamless purchases within the apps. That allows brands to go from capturing existing demand on platforms to generating new demand. That represents a major shift in customer acquisition tactics.

The core of Douyin’s commerce is to help users discover their potential needs, then accurately match those needs with relevant products. The beauty of the marriage between social and commerce is that savvy brands can steal the spotlight by creating interesting, hyper-native content that combines short video product seeding with livestreaming. Because of Douyin’s algorithm, brands can instantly reach their target buyer with relevant content—and hopefully convert them.

Brands go from satisfying existing demand (traditional e-commerce) to generating new demand (social commerce).

In this new landscape, it’s key for brands to maintain a consistent omnichannel presence. With a wider and shallower funnel, consumers are now discovering and buying brands across multiple platforms. Traditional search-based marketplaces are still relevant and should play a prominent role in a brand’s e-commerce strategy.

But social commerce innovations on Douyin and Xiaohongshu have redefined the boundaries of online shopping—and brands need to capitalize on these unprecedented opportunities to connect with consumers in more meaningful, engaging ways.