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In-depth: The evolution of digital marketing in China and its impact on insurance

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At a glance:

  • The ways businesses market to their potential audiences is rapidly changing as more consumers choose to operate within the digital environment
  • Insurers in particular are using livestreaming to attract customers to their channels.
  • But there are lessons for Chinese insurers among a new digital marketing strategy that has captured the minds of consumers in the price-sensitive mass market.
  • This may have useful applications for their own mass market engagement.

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The last year has seen the biggest revolution in shopping since supermarkets took over suburbia in many western societies at the end of the 1960s.

It is nothing short of a social revolution, with online spending tipping the already declining bricks and mortar retail sector deeper into obsolescence.

Retail is leading the way

China is leading the charge in developing the future of e commerce. Its tech firms are constructing integrated platforms that combine ecommerce, social media, and customer experience (CX) factors, developing online channels for China’s 850 million digital consumers. And digital marketing is the secret sauce to unlocking customers’ wallets.

China has been the world’s largest retail engine since 2013, a feat based on digital transactions, not a physical presence in shops and warehouses.

Alibaba’s focus on digital made it the world’s largest ever initial public offering (IPO) when it went public in 2014. Today, China’s digital retail market is worth US$2 trillion. To put that into perspective, that is more than both the American and European markets combined.

WeChat dominates marketing

Retail ecosystems are blurring boundaries between different services and sectors. Digital payments, special offers, social media, gaming, messaging and other social media components are being blended in one place – a true one stop shop. And WeChat is the glue that holds much of China’s digital marketing together. See our infographic and video feature on WeChat here.

Many insurers are now also using livestreaming to target the TikTok generation, keen for instant information and on their favourite platforms.

AliPay, Bilbao and Manulife have all adopted livestreaming as a channel for insurance to engage with and educate their existing and potential customers.

The AliPay and Bihubao streams are presented by brokers, and appear to be delivering the desired results. But livestreaming among financial entities is also attracting the attention of the regulators, and there may be a tightening of rules in the near future.

However, Taikang Life is trying to escape the limitations Tencent’s third party rules place on them in WeChat, and is building native apps to develop leads.

For more on how these companies are using this technology, see the other two features in this month’s edition of China in Focus here.

Room for competition

The Chinese digital retail market is highly consolidated, making it hard for new players to gain traction. However, some have managed to squeeze their way in and to take the fight to the digital behemoths.

Meituan and Pinduoduo have not only launched, but successfully chipped away at Alibaba’s dominant e-commerce market share, which used to be 81%, but which is now reduced to 55%, says a recent article in The Economist.

Shanghai based Pinduoduo went public in 2018, raising US$1.6 billion through a US IPO. Back then, in early Q3, it had 195 million monthly active users (MAU), but it was developing rapidly. By the end of Q3 2020, it had 643.4 million MAUs, an increase of 330% in just two years. Source data from Statista here.

What’s so special about Pinduoduo?

The main reason for Pinduoduo’s success is not in the business model itself. It offers a wide range of products from daily groceries to home appliances and it has integrated social media components. Nothing new there, as all the big players are doing something very similar.

However, Pinduoduo’s approach is collectivist. It has developed what it calls the “team purchase model” that uses social networks WeChat and QQ to invite contacts to form a team, or pool, to bid for goods and drive down prices.

Like others, it offers cash, coupons, lottery tickets and freebies as incentives, which is a tried and tested way of acquiring users at very low cost.

Its size means discounts can be huge – as much as 90%. This is assisted by the C2M (customer to manufacturer) model it has pioneered, which ships directly from providers, cutting out the retailer. This has proved particularly effective for perishables.

It also rejected a focus on expensive brands, so in demand among China’s rising middle classes. Instead, it offers less known or non-brand items, at a good price, which is most important to its users.

This is because unlike other Chinese platforms, it is not chasing the upsell among aspirational customers.

Walking a different path

Many other platforms encourage consumers to trade up in their consumerism to the better item, bigger brand. Instead, Pinduoduo is targeting a group that has been largely ignored by others because of where they live, or that they simply weren’t connected.

Platforms like WeChat and Taobao have huge MAU bases – 1.1 billion (Q4 2019) and 755m (mid-2019) respectively – but they don’t have such good coverage in China’s third or lower tier cities, many of which are populated by senior citizens.

This latter group only recently came online and relies on WeChat, and it is these users that Pinduoduo is targeting.

In 2018, 65% of its total user base came from these lower tier cities, while other platforms like JD.com had more than 50% in these local markets.

By 2020, Pinduoduo had overtaken JD.com in terms of MAUs and more than 60% were from third and fourth tier cities, according to data on statista.com.

Those demographics are further skewed as 70% of the user base was female (2018). This is important as women are typically responsible for family purchases and are far more price sensitive. This guarantees that Pinduodou will receive more active shares and purchases from these users.

The incredible rise of Pinduoduo, China’s newest force in e-commerce

Servicing the sinking market

Some have argued that Pinduouo’s business model is a race to the bottom. Rather than encouraging aspiration and upselling to users, Pinduoduo is responsible for downgrading consumerism and consumption. The Chinese term used to summarise the third tier and lower markets is the “sinking market”.

Arguably, this is not consumption downgrading, but rather the engagement of a group of otherwise disenfranchised consumers who do not trade on brand or association with celebrity, and simply want the lowest price they can get.

This final measure is the determining factor. Data published in TechCrunch in 2018 showed that, a RMB1 difference in price would made no difference for most urban users of these platforms. However that price differential could be the trigger for a purchase among users in lower tier cities and rural areas.

It has certainly proved successful for Pinduoduo. So successful, that Taobao launched its own lower end user app called Taobao Tejia – justification for Pinduoduo’s adherence to its strategy and a demonstration of the old adage that if you can’t beat them, join them.

New lease of life for old world bricks and mortar

This adage is not lost on the western markets that have lost ground against China in recent years. Big US tech firms have stuck to core competencies and remained rooted in silos, some are now trying to break out.

There has been much discussion about Amazon making a move into healthcare and even insurance. Meanwhile, Facebook, is now promoting shopping services, using social media livestreams for selling and leveraging WhatsApp as a messaging app between buyers and sellers.

One sleeping giant has been the traditional retail operation. These groups, like Target and Walmart in the US have made little impression in recovering the territory claimed by the tech giants into online selling.

Most analysts have been waiting to see which of these dinosaurs would become extinct first. But some are looking to evolve.

In December Walmart hosted its first live shopping event within TikTok, which it is hoping to buy a stake in.

Platforms are in demand

Consumers are hungry for e-commerce platforms that meet their requirements. During lockdown, that demand increased, because there was no alternative.

In the last quarter of 2020, consumers in France embraced Vova, a platform linked to the Pinduoduo founder, to the extent, that it became the sixth most downloaded app.

The American market is also making progress. Shopify, an alternative retail platform to Amazon, is now valued at more than $140 billion.

And the Chinese model is making it elsewhere. Ecommerce firms such as Grab and Sea in Southeast Asia, Jio in India and Mercado Libra in Latin America have embraced the super app that offers a bucket load of services from food delivery through financial services and are hoping to replicate the success.

The big western brands that dominate markets are also looking east, because they make more money in Asia than they do in America or Europe these days. Understanding how China deploys digital marketing, branding and distribution is very much at the top of their agenda.

Regulatory oversight

China may be a model for digital marketing but it’s not always one of impeccable character from a consumer protection perspective. Consumers benefit from fierce competition and low prices, but there is more fraud.

Concerns have been raised about security and privacy of customer data, not least by the outgoing Trump administration (Huawei, TikTok, etc) and to a lesser extent, the Johnson government in the UK (Huawei).

Yet, China may be about to become the innovator in digital regulation, too. On December 24, it was announced that Alibaba, for some time China’s most valuable listed firm, was under investigation by authorities for potential antitrust breaches.

The regulator could be taking a hard line against a business it sees as having become too big and powerful for its liking. The alternative is that it can see international budgets itching to be put to work in a growing economy and is seeking to ensure it can create and control a market that encourages such investment. And consumer protection and market regulations are not concerns that are confined to China.

The rules of engagement are changing – everywhere

What the Chinese authorities are doing, is nothing new to the residents of Silicon Valley. Amazon, Apple, Facebook, Google, and Microsoft have all faced showdowns with the European Commission over antitrust concerns.

Most have felt the US Department of Justice or Federal trade Commission breathing down their necks, but Facebook is really in the regulators’ spotlight at the moment.

It is currently under scrutiny from the Federal Trade Commission and Attorney Generals from almost all 50 US states.

If found to be in breach of antitrust rules, it may be compelled to break off some of its component parts. This could be disastrous for its latest strategy.

Digital marketing will continue to develop and at pace. This informal channel will see increased regulatory oversight.

If the rules are to some extent harmonised in different jurisdictions, there’s no chance of arbitrage. The opportunities that fall to big tech in the west in the Chinese market, will also be on offer to the Chinese.

Insurers should be concerned. Both sides have huge war chests, and if a land grab begins for the global insurance market, laggard incumbents may find themselves cut out by an east/west pincer movement.

Insurers need to grab this chance with both hands

Insurers must also see this as an opportunity to accelerate their digital transformation.

The example of Pinduoduo offers interesting insights. It has bucked the trend of building aspirational narratives by building a business model that services the mass market extremely effectively.

This may offer possibilities to the insurance industry as to how to tackle the mass market conundrum – that of covering the risks at a premium that makes it attractive and profitable.

What’s happening in retail also has a parallel with the insurance market. The old fashioned bricks and mortar brands like Walmart realise they must evolve, or face certain extinction.

The big tech firms that have been eating the big box brands’ lunch have had things all their own way, but that is starting to change.

They increasingly feel the heavy hand of the world’s regulators on their shoulders. Facebook alone is fighting on different fronts with the FTC and almost every state’s Attorney General. It continues to face operational challenges from the European Union’s General Data Protection Regulation.

This is good for traditional insurers. They may not have the necessary platforms – yet – but they know how to operate in a highly regulated environment.

Increased regulation may level the playing field for insurers and make partnerships with the platform companies more equitable and therefore profitable in the future.

There’s a long way to go and much ground for traditional insurers to recover. But digital marketing offers opportunities for incumbents to engage a new audience now, while they are still trying to catch up.

Further reading

The Economist

https://www.economist.com/leaders/2021/01/02/why-retailers-everywhere-should-look-to-china

Techcrunch

https://techcrunch.com/2018/07/26/the-incredible-rise-of-pinduoduo/

Statista

https://www.statista.com/statistics/1006368/china-pinduoduo-monthly-active-users/#:~:text=This%20statistic%20shows%20the%20number,year%2Don%2Dyear%20growth.

 

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