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Wednesday, August 26, 2020

Ready to Join Livestreaming Commerce? Think Before You Leap

By Wang Gao

Livestreaming commerce is undoubtedly a popular buzzword in China’s retail sector today. According to statistics released earlier this year, the top 50 livestreamers in the e-commerce industry generated a total of 12.3 billion RMB in gross merchandise volume (GMV) in May 2020 alone. Two popular livestreamers on Taobao, Viya and Li Jiaqi, contributed 2.2 billion RMB and 1.9 billion RMB in GMV, respectively. For other players, however, to get a piece of the action in this booming business is no easy task. The livestreaming debut of Wu Xiaobo, a renowned finance writer, turned into a fiasco; Luo Yonghao, a celebrity entrepreneur, caught the attention of the China Consumers Association due to product problems in his livestreaming; and some stars have complained that livestreaming shows are less lucrative than traditional events. Such a stark contrast has prompted some to wonder if there is a bubble in livestreaming commerce.

Livestreaming commerce is not a novel idea. It actually shares some resemblance with old-time street vending in places like Beijing’s Tianqiao Market. Of course, every new way of doing things is closely linked with technological developments. For example, from the telephone and telegraph to radio and television, inventions have taken turns breathing new life into traditional business models.

The rapid rise of short videos on platforms such as Douyin (the Chinese version of TikTok) and Kuaishou has been followed by an increase in livestreaming. The initial business model of livestreaming was built upon offering tips, something which only generated limited revenue and lacked sustainability. As they attracted more loyal fans, some online influencers found that they could cash in on their popularity in other ways. This is when livestreaming commerce began to take shape.

Viya and Li Jiaqi are different from traditional key opinion leaders (KOLs). They emerged to meet Alibaba’s business needs and quickly learned how to monetise the platform. Moreover, livestreaming on Taobao has been proven effective in keeping customers in the online store longer, raising conversion rates and boosting sales performance.

A vivid product experience: watching Li Jiaqi try on lipstick

Livestreaming commerce is now all the rage on the internet, attracting not only KOLs and stars, but also entrepreneurs and local governments. So, what is the appeal of this new form of online vending?

First, the most prominent advantage of this selling approach is that it can help companies expand their customer base. Via livestreaming, companies can get closer to consumers, pitch products at lower prices and encourage trial purchases, thereby turning viewers into new customers.

For example, the director of a premium cosmetic brand recently told me that many consumers had stayed away from their brand due to its high-end positioning. However, by offering discounts via livestreaming, the brand attracted many new customers, some of whom could become repeat buyers later on.

By collaborating with popular livestreamers, companies are in fact going beyond their original customer base and reaching into the followers of livestreamers, which can also bring them more customers.

Second, livestreaming commerce can help boost early sales of new products and lay the foundation for stronger sales in the future. To market new products that consumers have never experienced, effective product display and promotion are indispensable, both of which can be fulfilled with livestreaming. For example, viewers have acquired a vivid product experience by watching Li Jiaqi try on lipstick during livestreaming shows. In this way, livestreaming is a useful tool for companies to develop seed users.

With a large pool of seed users and trial users, new products can then easily reach more customers and win wider recognition. This is the way most bestsellers are created through livestreaming, and companies can adopt this approach to gain the upper hand in fierce competition.

Third, livestreaming commerce can also help companies deal with inventory. Since companies have to minimise sunk costs by reducing inventory, selling them at low prices through livestreaming can be a good solution without affecting the company’s pricing structure in other channels. Products with high sales efficiency are also fit to be sold by way of livestreaming. Sometimes, companies turn to this approach to help their sales teams fulfil sales targets when profitability is not their top concern.

A profitable business or not?

The success of a livestream is dependent on the ability of the livestreamer, the number of consumers, and the alignment between consumers and products. Although products may sell well during a successful livestream, whether companies can make a profit from this remains uncertain. While recognising the advantages, we should also be aware of the limitations.

There are two forms of livestreaming shows that sell product – those featuring KOLs and those hosted by companies – both of which have drawbacks.

Let’s first take a closer look at livestreaming commerce featuring KOLs. This is hardly a sustainable business model, because such livestreaming shows tend to generate one-off transactions. Despite large viewerships, consumers tend to be loyal to the KOL rather than the brand, which makes it difficult for the company to convert followers into fans of the brand through one livestream.

Moreover, the fairly short life cycle of KOLs makes this model less sustainable. Consumers favour one KOL over another because he or she can satisfy their emotional needs in the moment. But such needs are unpredictable. Consumers can show strong passion and support for a KOL for a limited period of time, but may eventually get weary.

In fact, the main purpose of teaming up with KOLs in livestreaming commerce is for marketing rather than sales. However high sales may be, the company has to pay a fee for the livestream (ranging from several thousands to hundreds of thousands of RMB), and pay the livestreamer a commission of 20%-40%. How much gross margin can be left for the company after deducting the fee, commission, return and refund costs, and product costs? It would be a stretch to break even for many companies.

Big names entering the game

Since co-operating with KOLs may not be profitable for companies, should they try to sell products through livestreaming on their own?

The products sold via livestreaming often boast the lowest prices online and therefore have thin profit margins, which is not helpful to a company’s fulfilment of profit targets. Nevertheless, that does not mean companies cannot have a go in this new game.

From the era of traditional media to the internet era to today’s mobile internet era, knowing your customers has always been the essence of business marketing. A company should think of its customers and their changes instead of itself before adopting an innovative marketing approach.

Therefore, to decide whether or not to engage in livestreaming, a company must learn about the media consumption habits of its mainstream target customers. If its target customers change, the company has to make a change, whether they like it or not.

Then, how should companies integrate resources to sell products through livestreaming?

This first step is to attract viewers. Although livestreaming platforms have a set of methods to push a company’s content to some users, the company should not take it for granted that its content will invariably find an audience.

A few celebrity entrepreneurs, such as Luo Yonghao, Lei Jun, Dong Mingzhu and Liang Jianzhang, are natural traffic generators. Popular as they are, these big names still exert themselves to hawk products during livestreaming. Apart from these efforts, heavy investment is also indispensable for successful livestreaming shows.

The growing diversity of KOLs offers companies more alternatives

As the ecosystem of KOLs grows more diversified, companies have more choices when it comes to business collaboration. Apart from top livestreamers, there are many mid-range and long-tail KOLs on livestreaming platforms to choose from, through which companies of different types can tailor livestreaming shows to their own needs.

Leading companies have less reliance on KOLs, for their main purpose in livestreaming is to acquire customers and promote new products instead of spurring sales. In fact, given the low prices and profit margins of the products offered via livestreaming, the more they sell, the more damage they will bring to other distribution channels and the brand itself.

For mid-range companies, however, partnering with KOLs may give them a chance to stand out. These companies have fewer resources and weaker market operations as they compete with bigger players in other channels. However, with livestreaming commerce, investment can drive sales and boost visibility.

In practice, it may not be necessary for these companies to choose top livestreamers with huge fan bases. Instead, they can work with a number of mid-range and long-tail KOLs so as to reach target customers in an affordable way.

As for small companies, it will be difficult to sell products through KOLs. Their limited brand influence offers them little bargaining power when negotiating livestreaming deals with KOLs.

Ultimately, I think livestreaming commerce is here to stay. That said, although it may grab the spotlight as a high-profile supplement to marketing and sales models, it will not steal the show for long.

For companies, while trying their hand at this new approach, they should continue to develop and manage their both traditional offline and online and social channels, and facilitate omni-channel integration.

Finally, we need to understand that livestreaming commerce is not a solution for long-term sales, but a marketing initiative that we should not expect returns from in the short run. After figuring this out, it will no longer be difficult to decide how to leverage livestreaming in your business.

Wang Gao is Associate Dean (Executive Education Programme) and the Baosteel Chair in Marketing at CEIBS. For more on his teaching and research interests, please visit his faculty profile here.