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Social Commerce (or Interactive Commerce) is a philosophy toward online shopping that humanizes the robotic online shopping experience, applying insights and design approaches that have been more traditionally associated with gaming, social media, or entertainment platforms. We deep dive into this topic with success stories, models and key takeaways for this rapidly evolving sector and is going to be the defining experience of commerce this decade.
Close your eyes. Think about your last in-person, offline shopping experience (remember when we did those?). You went with friends, hunted for bargains, discovered new products, asked store employees questions, and could touch, feel and try items so you’d be more confident about purchasing them. Just when you were about to leave the mall, your favorite burger joint beckons, and off you went.
Contrast this to shopping online - open your laptop, go to Amazon, type in what you want to buy, add to cart, checkout. Done. Simple. Efficient. Convenient.
Is it fun?
Not really. You see, shopping is as much a pastime and method of bonding with others as it is a commercial exchange of money and goods. Shopping malls serve as weekend family destinations not simply for their stores, but movie theaters, gaming arcades, and restaurants. Luxury boutiques in malls don’t simply sell expensive clothing but offer an environment of sophistication and prestige that transcends their products.
Offline shopping often holds a delightful element of discovery and serendipity that is missing from the step by step, intent-based approach of traditional e-commerce. Traditionally, these platforms are designed under the assumption that shopping is a task to be crossed off a to-do list and what ultimately motivates the user is efficiency, price, and convenience. In contrast, social commerce platforms are designed with the notion that online shopping can itself be a leisure activity, as offline shopping has often been.
Social Commerce (or Interactive Commerce) can be understood as a philosophy toward online shopping that humanizes the robotic online shopping experience, applying insights and design approaches that have been more traditionally associated with gaming, social media, or entertainment platforms.
Interactive Commerce i.e. Social Commerce Source: Defining Interactive E-Commerce Report
Social commerce does NOT simply mean connecting user accounts to Facebook. It is not the mere selling of products and services on social media. It means investing in creating physical world experiences online- specifically bringing the fun of shopping offline to online platforms.
Sure, but Amazon gives me same-day shipping and free delivery. Why should I care about social commerce?
Good question.
Short answer: Because it is not a trade-off between convenience and a more social experience. It is the best of both Entertainment and E-commerce.
It is simply an evolution to a new interactive experience that more faithfully represents how people shop in the physical world, offering a fun experience for the shopper along with improved value for money. It is an approach that takes the enjoyable, social, and psychological experience of shopping in the physical world, and applies it to the digital age. This approach has led to an integration of tools from elsewhere in the digital economy: recommendation, community, and entertainment together with one core proposition: value for money.
To understand this, let’s come to India. Retail in India has come a long way. Evolution has seen waves of growth over the past three decades which can be categorized into three distinct waves.
More importantly, this new frontier of commerce in India will help democratize access to online commerce for everyone. This makes the transition to Social Commerce not just inevitable but also necessary.
India has always had a unique retail industry. In 2019, it was valued at ~$700BN, with about 90% of it being unorganized and is estimated to reach $1.3TN by 2025. To add some context, China’s retail market is valued at $5TN in 2020 and Alibaba, by itself, crossed $1TN in GMV in FY20. That is… massive. Indian e-commerce industry is valued at ~$60BN, which is a mere 8.6% of the overall retail market. Moreover, there are only 110MM online shoppers in the country, only 10% of the overall population. This second problem is being solved rapidly by access to cheap mobile data powered by Jio, and the availability of budget smartphones. This new generation of internet users’ introduction to the internet has been mobile-first and majorly through videos and image-based platforms (Facebook, YouTube, TikTok, ShareChat etc) and not text based.
Despite having access to the internet, why is India not shopping online?
Because traditional e-commerce platforms were simply not built for these new users. These platforms are-
We believe the emerging new platforms need to build for this new generation of Internet users. They are averse to English (but are aspirational) and prefer a more visual experience than textual. Platforms need to solve for three emotions- Lack of awareness, confidence, and trust.
Characteristics of Social Commerce Source: WPP Social Commerce Report
Different forms of Social Commerce
To address this glaring whitespace, we have observed a wide diversity of successful business models have risen to meet these broader human needs. There are 4 major business models which exist in this space, all trying to solve different problems (emotions) of the users.
Different Social Commerce models
Before we dive deeper into each of these models, here’s a quick overview of the businesses. Despite having different approaches to Social Commerce, all of them displayed some similar characteristics and were prone to be plagued with the same problems. Most of the companies here are mobile-first/ mobile-only and sell unbranded goods to a customer base from Tier 2+ cities. To differentiate, the 2 major factors to focus on are sourcing and logistics. 1) Since everyone ends up selling unbranded products, the only way to differentiate is to have superior quality sourcing, which will help the transition to private labeling. The collection of items showcased to the user will also become more exclusive, thus it won’t be reduced to merely a ‘discoverability’ platform.
2) Logistics in India is simply not as developed and mature as China or US- they still remain a huge source of expense. Moreover, return logistics are almost always more expensive than forward logistics making high returns (due to unbranded products) another big expense. Unbranded products have high relative margins, but low absolute margins which in turn accentuate the logistics cost, affecting the bottom line.
Reselling Platforms
90% of retail in India is unorganized and within fashion, 85% of goods sold by volume are unbranded. Traditionally, these are sold through suppliers at your local mom-and-pop stores or resellers selling to their local network through word-of-mouth. When the digital wave hit, some of these stores managed to have an online presence, with the shopping experience remaining largely similar. Adoption of online shopping through WhatsApp and Facebook also further aided these reseller entrepreneurs.
What attracts customers to these local stores/resellers? Trust, Convenience, and Proximity. Most products sold are unbranded, so trust and product discovery resides with the store owner. The stores provide convenient payment options in the form of monthly credit and help customers avoid online payments. The sheer proximity of the store or your local neighborhood aunty selling you stuff makes it a no-brainer. They have managed to solve for all of Bharat’s emotions- Awareness, Confidence and Trust.
While this works well for the customers, the need for Working Capital constrains the growth of small retailers who have the benefit of this trust. Pilferage is also a persistent problem- there are massive amounts of products which go unsold and occupy shop floor space that eventually need to be dumped. Resellers also have to constantly worry about sourcing, logistics, and payments. This is where reselling platforms like Meesho, Shop 101 step in- they promise to alleviate all these ancillary problems, so resellers can focus on selling.
Let’s take a closer look at how these platforms work.
All reselling platforms have 3 major pillars- Suppliers, Resellers, and Buyers.
Source: Socializing Indian commerce: the soonicorn Meesho
Suppliers- For suppliers, social remains an untapped distribution channel which helps reach an audience that might not otherwise have discovered their products. Maintaining a strong supply remains a moat in this business and helps build a private label. Currently, we don’t see any exclusivity in the supply amongst these platforms.
Resellers- These are the key players in the reselling business. A lot of these resellers are often first-time entrepreneurs earning Rs 5,000 to Rs 10,000 per month and leveraging the power of their existing social networks to sell to friends and family. Meesho especially focuses on housewives as resellers. India had 2MM housewife resellers in 2017, projected to grow to 20MM in 2022. While a huge market, we observed that most of these resellers have no prior experience in selling and aggregation of demand remains directly proportional to this ability.
Buyers- 650MM Indians have access to the internet, 450MM use WhatsApp and only 110MM shop online. This gap is being filled by this new generation of internet users. These buyers are the people who lack trust, confidence, and awareness about e-commerce.
All resellers
For these new consumers, reseller platforms becomes the natural first stop to solve for lack of awareness (increased product discovery) and lack of confidence in online transactions. Resellers sold within their social circles: more than 80% of sales to close friends and family/relatives, primarily through WhatsApp. These platforms inturn earn through commissions from resellers and shipping revenues. Rohit has done a brilliant job of deep diving into Meesho’s numbers and business model. We’d highly recommend reading his piece here. These were our observations of the space-
We believe that in the reselling model, the major moats a business can establish include having good reseller retention, being well capitalized, having exclusivity of products via Private Labelling, low return rates, or having cheaper logistics.
Meesho enjoys a comfortable lead over its competitors currently due to it being the first mover, being well capitalized (raised >$200MM), and the sheer number of resellers it has amassed and better reseller retention it enjoys versus its competitors.
Video and Live Streaming Commerce
If there’s one thing that’s been bountiful in 2020, it’s video content. The future of commerce belongs to brands and creators who bring commerce and content closer together in a seamless, engaging, and interactive viewing environment. These shoppable video experiences meet the viewers where they are, have the potential to unlock valuable user data, and empower brands to connect with consumers through more meaningful interactions. Video commerce has been around for a while. Taobao pioneered ecommerce livestreaming in late 2016, but it wasn’t until 2019 that livestreaming ecommerce really started to take off in China. Coupled with retail stores shutting down due to COVID, live commerce exploded. China still remains the gold standard for live streaming commerce numbers. Of course, their GDP/capita is also 5x ours, but these make for a great reference point for how big the industry truly is.
Taobao is truly a giant in the video and live commerce industry Source: McKinsey
Reseller platforms help solve for lack of confidence and awareness. By now, the customer has transacted enough to be aware of products and is confident enough to transact online. Live and video streaming commerce helps solve for the final emotion- trust in the quality of online products. To understand these better, let's look at HomeShop18. HomeShop18 is a brand synonymous with late-night TV, with the overly enthusiastic hosts trying to sell you the most random stuff. In its prime, it was valued at $360MM in 2013. Their tag line was ‘Always Live, Always Interactive’. But if you take a moment to think about it, nothing about the entire experience was ‘live’. You could stop it, you could start it, you could move through the stream. There was no way to interact with the host, it was always a one-way communication. It was solely optimized for TV (or desktop) with the hosts most definitely targeting middle-aged people. Moreover, they sold a limited collection of products and the show would go on for hours. No one has the patience or the attention span for that right now.
Now that we have set some context, one interesting way to think about the new world video and live streaming platforms is QVC/HomeShop 18 on steroids. Plus, since they’re optimized for mobile, it feels like you’re scrolling through any other entertainment app.
Characteristics of a live streaming and video commerce platform
The fabric of social selling is vast and nuanced. Video commerce can be done through hiring hosts/anchors, micro-influencers, freelancers with a network to sell, or simply the brand’s sales associate. Different platforms choose any of these options to do the ‘selling’. On paper, they are successful in solving all problems of the users. But they are unable to do it sustainably. For these platforms to actually be viable, they need to figure out their unit economics. Here’s the problem- they sell low ASP products (unbranded goods) to low income customers (Tier 2+ cities) who don’t frequently purchase. A bad experience with quality could ensure a user, who is already lacking trust, never returns.
Unit Economics of Video Commerce platforms Source: The Ken
Typically, these companies spend $1-$2 on customer acquisition and $2-$2.5 to ship an order. As ticket prices are low ($3-5), companies find it difficult to recover their costs. Add to this the commissions taken by hosts/influencers (10-30%) and the inability to drive repeat purchases due to the lower incomes of their target audience, the Math doesn’t work out.
Simply hiring influencers doesn’t ensure transactions either. If the right kind is not chosen, the traffic attracted is unsustainable – akin to attracting customers via discounts. For live commerce to work well, the hosts need to have the right kind of skill sets to sell enthusiastically. Moreover, creating Platform Generated Content (PGC) is expensive as compared to User Generated Content (UGC). To attract customers to use the app, it needs to have a well-defined use case. We have discovered no real hook for consumers to engage with the app too often, hampering product discoverability and a lower CAC. We find content driven commerce to be an interesting but ‘yet to be proven’ strategy in India. Most of the companies in this space are trying to replicate the success obtained in China without the necessary infrastructure present here. The most pressing problem in this space is to make the unit economics work. One workable strategy could be to be vertically focused, sell branded goods to Tier 1 customers, and ensure high AoV and frequent purchases.
Commerce layer on top of Content
Social Commerce is an often-used buzzword in the short-form video space. It’s the true messiah for their monetization strategy and all apps want to jump on the bandwagon. You can read our last blog on the rise short-form video apps here. These apps can be monetized as discovery platforms for other commerce websites (brand ads) or can be used to direct traffic directly to the commerce platform on their app.
Platforms like Trell and TikTok have in-app commerce
These video content platforms truly alleviate a lot of the major issues we mentioned in the previous section-
1) An already present robust content layer makes for a strong, well-defined use case attracting millions of users to the app 2) Due to the massive number of users, CAC is almost negligible, solving one of the key growth levers 3) User Generated Content is much cheaper than Platform Generated Content
The problem with this business model is more fundamental- we have found it difficult to gain comfort around a single short-form video platform. We haven’t been able to find solid differentiation amongst them and hence believe it is too early to pick a winner. Moreover, all of them plan to sell branded products. After all, selling branded products is a double-edged sword- you can end up as a mere discovery platform, which we fear.
Group Buying
There is perhaps no one company whose philosophy, growth story, and impact is more tightly intertwined with social commerce than Pinduoduo (PDD). A lot has been said and written about Colin, its founder, and his journey towards building a $100BN company in 5 years. This is a staggering number- it took Microsoft 25 years, Google and Facebook more than 12 years, and even for their closest competitor—Alibaba—it took 14 years. Moreover, all of its growth happened at the expense of Alibaba- PDD’s share in the ecommerce market went from 4% to 14%, Alibaba’s went down from 72% to 63%. The PDD story is important and special because in only 5 years, they made Group Buying “special” and a unique feature.
Their S-1 prospectus called them a mixture of “Costco” and “Disneyland”. This defines social commerce perfectly! “Disney” as it provides an entertaining, engaging, and socially connected user experience. “Costco” in that it can leverage insights drawn from users and direct relationships with manufacturers to achieve efficient economies of scale, and thus superior value for money. No wonder PDD has been the poster child for this industry- they were setting up the stage to combine the power of Social and Commerce even back in 2015. If you don’t believe us, believe the numbers- they did $70MM of revenue in Year 1. Colin wanted to start an ecommerce company to capitalize on the rising incomes, the emergence of the middle class in China, and the rising consumption. It helped manufacturers cut out middlemen by selling discounted items directly to low-income consumers and monetized largely with advertising. PDD’s initial business model consisted of buying fruit in bulk from farmers and then selling it directly to consumers. China’s fresh fruit market was growing fast in 2015, but less than 3% was sold online. On top of this, they added social features unique to PDD when they were introduced- Price Chop, Group Buying, and in app games incentivized by purchases.
Pinduoduo’s C2M model Source: Defining Interactive E-Commerce Report
We believe PDD has built its business on 5 strong pillars- Cultural, Social, Logistical, Technical, and Financial. They could create this mammoth of a business because China’s infrastructure allowed all these pillars to exist simultaneously. PDD’s business model is as ‘social’ as social commerce gets. For a similar ‘Group Buying’ business to exist in India and be as smooth in its execution, these pillars don’t just need to exist, they need to exist simultaneously.
The Pull vs Push Model
Source: Defining Interactive E-Commerce Report
It is abundantly evident through the case of Pinduoduo that humans crave more from the shopping experience than the cold and impersonal experience that is accepted as status quo. We believe through these 5 pillars, it is possible to encapsulate many of the most enjoyable aspects of shopping in the physical world onto our phones.
Conclusion
We believe Social Commerce is a rapidly evolving sector and is going to be the defining experience of commerce this decade. It is a space to look out for and we have our ears firmly to the ground, looking out for companies in the video commerce + influencer space. If you’re building something fascinating in this space, please reach out to us.
If you enjoyed this blog, we've also unbundled the short form video apps space here and what it takes to build a brilliant company.
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