Prioritizing the Consumer-Influencer Relationship in E-Commerce Platforms

27 September 2023

In September 2021, a mother embarked on a unique online journey, sharing daily conversations with her two daughters on the Douyin platform, a sister app to TikTok under the ByteDance company umbrella. These interactions featured amusing arguments and genuine conflicts, delivered in the tone of conversations between a mother and a princess within the harem of an ancient Chinese emperor. You can access their content through WeChat by navigating to channels and searching for the account “Wuli瑜的琳姐.”

These videos quickly struck a chord with parents and children alike, garnering a substantial following, which now stands at 2.5 million on Douyin. Their newfound popularity led to unexpected opportunities, including collaboration with tea merchants. They started selling tea through live streams, seamlessly integrating a “buy” button at the bottom of the screen. Remarkably, despite the tea’s unrelated nature to their content, fans eagerly made purchases.

This phenomenon exemplifies the transformative power of impulse buying, catapulting Douyin from obscurity to a gross merchandise value (GMV) of 1.2 trillion RMB by 2022, boasting an annual growth rate of 75%. A similar app, Kuaishou, achieved a GMV of 0.7 trillion RMB in the same year. These achievements stand in stark contrast to traditional platforms such as Alibaba and Jingdong (JD.com), where GMV declined by 1.1% and 8.8%, respectively, in 2022. Furthermore, Douyin and Kuaishou dominated the livestream content e-retailing sector, capturing two-thirds of the market in 2021, with their influence poised to expand further.

Changing User Behavior

The traditional e-commerce giants, Alibaba and JD, find themselves in a state of concern. Jack Ma, co-founder of Alibaba, sounded the alarm within the company, warning that without innovation, Alibaba’s core e-commerce group could face a fate similar to Nokia on the brink of its mobile phone downfall. Consequently, Alibaba initiated a radical restructuring effort, dividing into six independent business units, each with its CEO and board of directors. JD.com followed suit, overhauling its leadership team, flattening its organizational structure, and pivoting its strategy towards price, quality, and service.

These concerns are not unfounded, as platforms like Douyin offer a fresh approach. In the traditional shelf-based e-commerce model, users visit platforms like Alibaba and JD.com solely when they have an active shopping need. They search for desired products in the search box and rely on product recommendations to complete their orders.

In contrast, content-based short-video platforms like Douyin and Kuaishou offer a new paradigm. They create captivating video content and seamlessly integrate relevant products for sale beneath the content. As users engage with the content, they form emotional connections akin to friendship or even love, driving their motivation to make purchases. In this context, customers buy for engagement and enjoyment rather than out of necessity, as the product resonates with the content they consume, or because they are fans of particular influencers. Even if they later realize they don’t need the purchased item, they still derive satisfaction from the experience.

Moreover, individuals have limited daily online time, and they allocate an increasing portion of it to short videos and live streaming. A recent data.ai survey revealed that people spend an average of four to five hours daily browsing content of this kind, with TikTok consuming half of this time. Consequently, they devote less time to traditional e-commerce platforms for product browsing and purchasing.

Beyond Network Effects

Although both models rely on user traffic as the basis for conversion into actual transactions, their economics differ substantially. Traditional shelf-based platforms thrive on network effects, hinging on their ability to connect numerous providers and consumers. Success revolves around the volume of providers conducting business on the platform and the variety of goods offered, which in turn is influenced by the influx of consumers.

In the new content-based e-retail model, platforms assume a proactive role in generating user curiosity and interest by offering engaging, creative, and emotionally resonant content. The majority of this content originates from individuals or small to medium-sized enterprises (SMEs), some of whom achieve influencer status unexpectedly, making their success unpredictable and subject to fluctuations. In most cases, the commercial platforms did not foresee this influencer content business model emerging.

While platforms have traditionally generated revenue through advertising, their real breakthrough occurred when influencers transformed into product ambassadors, effectively monetizing their emotional bonds with followers. This revenue potential is substantial. Consider the case of New Oriental Education, China’s largest English-language training school, which faced an 80% revenue drop when the Chinese government banned for-profit tutoring. To adapt, the founder ventured into selling agricultural products on Douyin. Despite the initial skepticism due to the staff’s lack of agricultural expertise, the venture found success.

What Yu Minhong, the founder, recognized was that his staff excelled at storytelling. One staff member, Dong Yuhui, emerged as an online star, sharing historical insights, poems, and reflections during live streams. Users engaged with him on the platform and eagerly purchased the products he recommended. This venture, known as East Buy Holdings, became a separately listed company with a market capitalization of US$5 billion.

Competing in the New Era

As the content-based platform sector matures, savvy platforms are supporting influencers’ success by offering essential tools such as the shopping basket. Furthermore, AI plays a pivotal role in predicting user preferences, thereby prolonging user engagement on the platform. For example, TikTok stores detailed information about user interactions with content, enabling precise predictions about what users want to watch next. AI-based platform support also aids influencers in refining their product recommendations.

By leveraging such tools, content-based platforms can substantially boost commission and advertising revenues, as influencers divert traffic from traditional online marketplaces. However, the long-term sustainability of this model necessitates further platform evolution. Beyond serving as intermediaries between providers and consumers, platforms must learn to manage the intricate relationships between influencers and their followers. This involves seamlessly transitioning from declining influencers to rising stars while maintaining consistent revenue streams.

Not every platform will succeed in this evolution, and as the sector matures, we can anticipate the emergence and disappearance of various sites. Additionally, concerns persist regarding the impact of these new business models on public well-being, potentially leading to more stringent regulations.

The Future of Emotional Commerce

What Douyin has achieved in China, other platforms may replicate in the U.S. Despite dissimilar consumer behaviors between the two countries, there’s no reason why the newfound emotional connection between consumers and influencers can’t lead to direct sales in the U.S. The question remains: Will U.S. e-commerce platforms ignore this impending transformation, or will they find ways to embrace this innovative model?

Source: Harvard Business Review by Christoph Loch and Haijian Si