The rise of online shopping in China is dizzying. With cyber consumption accounting for $36.56 billion in the first quarter of this year, purchases have risen 40.9% compared with the same period last year. Analysts predict that the country’s e-commerce market will be the world’s most valuable by 2015, which seemingly rings the death knell for brick-and-mortar shops.
David Bell, Xinmei Zhang and Yongge Dai Professor, Professor of Marketing, Wharton School, is an eminent authority on the behavior of e-consumers and has researched similar trends in the US. Published widely in academic journals including the Journal of Marketing Research and Marketing Science, Bell’s areas of research interest cover e-commerce and inter-dependent choice, social contagion and neighborhood effects, among others. Bell draws from his experience to explain the behavior of China’s online shoppers and provides companies targeting the cyber population with advice.
During a recent visit to Beijing, Bell sat down with Zhang Kaifu, Assistant Professor of Marketing, CKGSB, for a wide-ranging discussion on the implications of his research for understanding consumer behavior and the Chinese e-commerce market. Excerpts from the conversation and video:
Q. Most consumer research focuses on first- and second-tier cities. What insights do you have into e-commerce in third- and fourth-tier cities? Should e-commerce retailers be focusing on these cities?
A. There is a lower density of retailers in third- or fourth-tier cities, so people in these markets are really under-served and there is high pent-up demand for various products and services. The Internet can aggregate demand in all these cities, which means you can offer all customers, in one realm, a lot of variety. Based on my research, the more remote the area, the higher the propensity to consume from the Internet. People in these cities are developing earning potential and disposable income, they’re aware of new brands and want to consume as much as their friends in the first-tier cities. If someone wants to serve these locations, they could potentially do very well.
In a sense, it would be better to target smaller cities. You would face less online competition and you could generate interesting brand loyalty, because you have been receptive to customers’ needs. We call this demographic “preference minorities”. They have things they want, but can’t get, because not enough other people share their preferences. Isolated people are very good for e-commerce businesses.
Q. If I am an electronics seller and I want to focus on third- and fourth-tier cities, what would be your advice?
A. You should look for people that are particularly under-served. You should try to understand the pain point of customers and reinforce their pain. The aim is to remind them how painful it is to do without these goods and services and bring these things to them.
Q. In China, 70% of customers pay in cash, which may entail cash on delivery and the possibility that a product may be rejected and payment won’t be received. What strategy would you suggest to deal with this possibility of sunk cost?
A. The only solution is to deliver exceptional goods and services to people that really want them. Part of the problem is using low prices to entice customers, which can lead to attracting very poor customers. This is called the ‘Groupon problem’. In theory, if I deliver to you something you really want, you should be willing to pay. Rejection comes from mis-targeting–and too much of a price focus in the beginning.
There is a company in the US called Trunk Club, which is targeted towards men. An advisor from the company will interview a customer to assess his style, and put together a collection of clothing that is delivered to his house. The customer purchases only what he wants. Shipping 10 things is not much more costly than shipping one and you get more inventory into the hands of the customer, which may increase the chance of him buying. It’s a good method to increase the probability of sale. The incremental cost of shipping is not proportional to the items shipped. If you deliver one thing, the probability of a sale may be 20%, however, if you deliver 10 items, it is not 10 times more expensive and the probability of a purchase will increase.
Q. Online companies in China seem to have a larger proportion of the market share than their offline competitors. Despite this, many online companies are not making profits even though their sales are high. Is there any way to get around this issue?
[This article has been reproduced with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China's leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge.]