Valuing Xiaohongshu: Where is the upper limit of “lifestyle e-commerce”?

Xiaohongshu, a platform that started as a content community, is gradually transforming into a "lifestyle e-commerce" with unique commercial value. This article will explore the upper limit of Xiaohongshu's valuation, from the change of consumer generations to the innovation of business models, analyze how Xiaohongshu can find its position in the ever-changing market environment, and look forward to its unlimited possibilities for future development.

In the previous report on how to value Xiaohongshu, we summarized the valuation model of content community + e-commerce, based on which we made corresponding calculations. The day after the first report was released, a source revealed that Xiaohongshu’s latest round of valuation range was around US$17 billion.

Based on user value and commercialization scale, using the same valuation model in the previous report, we can almost calculate a nearly consistent pricing range.

But just when we wanted to verify the rationality of the valuation formula through a math problem, another voice seemed to emerge from the pen: Will setting fair but inflexible numbers make people miss out on an imaginative company because of a few cents, just like Buffett missed Walmart?

So today we will put aside the absolute numbers and talk about the upper limit of Xiaohongshu’s valuation from the perspective of consumer generations and cycles, combined with Xiaohongshu’s latest strategy.

1. The Tide of the Times

(1) Generational consumption cycle

We mentioned the concept of the seven-year consumption cycle in "The 7-Year War between Short Videos and E-commerce": If the wealth stages are divided, family wealth will undergo relatively obvious iterative development every seven years, so lifestyles and preferences will also develop and change.

As luck would have it, the consensus changes in consumption history are roughly like this, from large-scale consumer automobiles: the median cycle from the launch to the mass-marketing of best-selling models in history is 7 years; to civilian e-commerce: starting from 1999, the first year of e-commerce, in 2006 the trend of the times was pointing wildly at the future giants, Alibaba's GMV increased throughout the year, and the following year its B2B business entered the capital market.

Ultimately, it is the change in the dominant discourse power of consumer generations. From entering the workplace to entering the marriage hall, to getting married and having children, and to middle-aged retirement, each generation gap is exactly 7 years. The new things and new technologies accepted 7 years ago have gradually evolved into new habits and new models.

Figure: Various stages of wealth accumulation in life over 7 years, Source: Jinduan Research Institute

The decisions made by the older generation will affect the younger generation. When the first adopters of new habits and new models become wealth decision makers, the inertial decision will be transmitted to the next generation, and the cycle will repeat.

The generation that is directly exposed to new things is the native generation, whether in terms of consumption views or technology.

Two weeks ago, Chaping wrote an article exploring why the younger generation can’t use computers. In the end, he came to a conclusion: the general environment of an era determines the skills of a generation. The so-called young people don’t understand computers is just that mobile phones and tablets have appeared with a more regular and complete technical framework, replacing the young people’s need to explore computers.

Once a habit is formed, it will not change easily. Our parents do not approve of us not having any special skills. We are addicted to the electronic world, but this does not affect the people born in the 80s and 90s who use code to change the world. We do not understand the young people's attitude of living in the moment, but the people born in the 00s can use their broader knowledge and ideas to build a business universe in which they are good at, such as short videos and live broadcasts.

All the generational arrogance and prejudice will become a slap in the face of the conservatives.

(2) Xiaohongshu has influenced two generations in its 7 years

Back to Xiaohongshu, when we discuss the uniqueness of Xiaohongshu in terms of content platforms and e-commerce platforms, we often mention a word, the ability to create trends: whether it is the early fitness Pilates, to the hiking, cycling, meditation, and City Walk in the past two years, or even this year's popular "20-minute park effect", all originated from the words and deeds of Xiaohongshu users.

If we focus on Xiaohongshu's commercialization capabilities, we can find attack points from various dimensions, such as questioning its poor conversion rate, short links, and difficulty in achieving full profit sharing, as well as the eternal problem of the conflict between content tone and commercialization.

But if we think about this from another perspective, as a content platform, why can Xiaohongshu always set off waves of popular trends? To sort out this question, we have to go back to 2017.

At that time, with a large number of celebrities represented by Lin Yun joining Xiaohongshu and using it as a circle of friends to share their daily lives, Xiaohongshu ushered in a wave of traffic explosion. In the following seven years, the Xiaohongshu community continued to generalize, and the overall number of users increased by about 6 times.

From a structural point of view, in 2017, 70% of Xiaohongshu's new users were born after 1995. It is roughly estimated that their age range at that time was between 22 and 26 years old. In 2024, the 26-30 and 31-35 year old segments in Xiaohongshu's user structure will occupy the first and third place respectively among all age groups, which exactly corresponds to the core user circle 7 years ago.

Figure: The proportion of Xiaohongshu users in different age groups, Source: 2024 Xiaohongshu CNY Investment Promotion, compiled by Jinduan

This means that Xiaohongshu has had a high user stickiness over the past seven years and has been able to create a word-of-mouth communication effect among the same group portrait (compared to the current higher MAU base, it means that the base of the same age group has also increased accordingly).

The sustainability of the structural growth of the core user circle lays the foundation for the long-term influence of the platform. For example, the early mainstream circles of community forums such as Mop and Tianya also had high stickiness, but the sustainability was not strong. This is a typical case of the platform accompanying the growth of users. When this part of users gradually deviates from the mainstream mass group, the glorious past can only be missed.

At present, the content-based approach of Xiaohongshu community has solved the logic that content communities always only serve one generation. The future circle users aged 19-22 ranked second among all age groups. At least from the content perspective, Xiaohongshu has achieved the healthy development of the winning generation and the native generation.

From the exam preparation notes and certificate strategies that are essential for students, to the travel and outfits for working people and practical tools, to the parenting strategies for parents, sports references for young people, travel planning, asset allocation for middle-aged people, and financial management of real estate, almost all issues can be solved by sharing real experiences on Xiaohongshu.

Therefore, for Xiaohongshu, whether it can rely on two consumer generations to achieve a commercial leap is the top priority for raising its valuation ceiling.

2. What does “lifestyle e-commerce” mean?

E-commerce is an important part of Xiaohongshu's commercialization. In the past two years, when discussing Xiaohongshu's e-commerce, two issues cannot be avoided: the link is not perfect, and it is not clear how to achieve both brand effect and brand effect at the same time; compared with other platforms, the difference of Xiaohongshu's e-commerce model has not been clear.

However, regarding these two topics, the author has gained some different understandings from Xiaohongshu’s recent external statements and ecological cases.

Not long ago, COO Conan proposed "lifestyle e-commerce", the core meaning of which is to allow users to buy not only good products on Xiaohongshu, but also a desirable life.

Is this a bit abstract? Let me explain it to you first: the supply side cannot compete with traditional e-commerce. If you want to expand revenue, you have to make personalized products and content, because non-standard products have a higher take rate, and you can use a smaller GMV lever to leverage higher revenue.

The core of making non-standard products is to give meaning to the products, and this meaning is the lifestyle.

Some investors and onlookers believe that this is another word-making movement by Internet e-commerce platforms, but in my opinion, Xiaohongshu's lifestyle e-commerce does have considerable practical value this time.

First of all, Xiaohongshu does have such a gene. A large number of brands will spontaneously gather on Xiaohongshu to establish their own "content base", from Perfect Diary, Huaxizi, and Half Acre Flower Field in beauty to Pop Mart and Yuanqi Forest in retail. The stories told include domestic beauty narratives, IP appearance narratives, and healthy life narratives.

After a product itself is given a scenario, users can finally truly consume its experience.

Take Pop Mart as an example. For the same product, would it be more attractive to you if it were displayed on Taobao with a few product pictures of boxes and dolls, or if it were displayed on Xiaohongshu with a scene depicting a vivid doll in a boring study room or a dull cubicle?

Secondly, not everything can be successful if it has the right genes, but Xiaohongshu has a relatively clear idea of ​​the main line of lifestyle e-commerce. The main logic is two points:

As a long-tail demand, non-standard products are essentially economies of scale, and the scale advantages of standard products need to be filled through extensive supply.

Figure: Short-head and long-tail economic model, source: Internet picture

Xiaohongshu has no shortage of content. The most core issue on the supply side is to build a creator ecosystem. Only when more users are willing to actively become lifestyle promoters (buyers) can the widespread supply of non-standard products be achieved.

In the past year, the number of buyers on Xiaohongshu has increased by 6.7 times, the number of users placing orders in buyers' live broadcast rooms has increased by 9.8 times, and the number of brands cooperating with buyers has increased by 5.2 times. At this stage, Xiaohongshu has initially realized a creative ecosystem with extensive supply, which is an achievement that simple business data cannot reveal.

In June 2024, long-tail search terms (search terms with more than 8 characters) accounted for more than 60% of all search terms on Xiaohongshu.

In order to highlight the significance of non-standard products, in addition to the product itself, the marketing channels and the connection between people, goods and places need to show their individuality.

As some e-commerce platforms adjusted their terms of service, the low-price, volume-supply model proved to be unsuitable for all e-commerce platforms.

Whether it was a blessing in disguise or premeditated, Xiaohongshu has been questioned by some investors for a long period of time because of its overemphasis on the balance between content and commercialization. But when the core of competition in live e-commerce began to shift from low prices to content experience and emotional value, Xiaohongshu stood on the high ground.

Most of the live broadcast rooms on Xiaohongshu are not traditional hawking live broadcast rooms. When selling cultural relics, short video platforms always attract traffic by attracting attention with "high-value" gems, kilns, etc., while Xiaohongshu is more of a cultural relic science popularization form. The most typical example is Yinobennuo, the manager of a cultural relic fashion brand.

Based on the understanding of the consumer group, Yinuo Bennuo, which has been in the industry for ten years, was afraid that live streaming was not suitable for selling high-priced goods, so it hesitated to start live streaming and rejected the invitation of the industry waiter to start live streaming three times. Later, after trying three live streaming shows, it discovered the differentiation of Xiaohongshu's live streaming and found that its "edges" could be tolerated by users. Therefore, Yinuo started live streaming on Xiaohongshu. The live streaming transaction volume in the first month was 180,000, and in March 2023, it jumped to a 1 million merchant.

In the live broadcast room, Yinuo will not simply explain the selling points of the products, nor rely on low prices, but will explain the ins and outs of the products and industry knowledge in an all-round way, more like a "literary science live broadcast room". In the area of ​​note output and sharing, Yinuo will also describe his true feelings to share his products. In addition, he will also share his daily life, and the daily sharing content will also be interspersed with stories between fans many times, enriching the account content while allowing fans to have a deeper understanding of the owner.

In Xiaohongshu’s recent external statements and ecological cases, the phrase most mentioned by buyers and creators is: “You can be yourself on Xiaohongshu.” Because the core of Xiaohongshu is “people.”

Finally, although the emphasis on content has always been controversial, some e-commerce people believe that Xiaohongshu’s so-called lifestyle e-commerce is just a gimmick to raise the average order value, and giving up on low prices within a rational consumption cycle is a dead end.

But in our opinion, the lifestyle presented by Xiaohongshu is not expensive. Lifestyle is a collection of scattered demands. It can be a high-value-added product that highlights individuality, or it can be a cost-effective product that actually meets real-life needs.

As long as the product usage scenarios are refined, this kind of lifestyle is not only inexpensive but also very practical. Lifestyle does not refer to daily necessities, but practicality and personality.

In my opinion, lifestyle e-commerce is a "very pleasing" expression. A thousand readers can read a thousand Hamlets. In the eyes of the general public, lifestyle is clothing, food, housing, transportation and entertainment in leisure time. Compared with the cold definition of e-commerce, lifestyle seems to be able to bring people a more intuitive, lower decision-making cost and easier to accept expression.

There is no universal succession formula in the Internet world. Image symbols are only the first step. Part of the benefits of Xiaohongshu's current rapid growth comes from its previous low base. For long-tail non-standard products, the test is still Xiaohongshu's content quality in the long term, the sustainability of its creative ecology, and its ability to supply a large number of products.

To sum up, the author is cautiously optimistic about the e-commerce development prospects of Xiaohongshu, but if Xiaohongshu can maintain its current advantages and growth trends, there is still a lot of room for imagination in the upper limit.

3. Extended Thinking

Above, we spent a lot of space to explain the upper limit of Xiaohongshu's valuation, from generational changes to specific business logic.

Many readers and viewers may have a question: "Not all visions can be realized. The bubble of tulips is always more tempting than the rotation of steam engines. How should we distinguish steam engines from tulips?"

In other words, Buffett missed out on Walmart because of a few cents, and he also blindly invested in Netjets. It should be reasonable to know when to choose to believe and when to choose to be cautious.

In my opinion, to judge the long-term investment value of a company, "Tao, Shu, and Shi" are all indispensable.

Just like Danone and GM in 2008, both seemed to suffer from a double blow in valuation and performance due to external pressure. However, Danone was able to keenly perceive the changes, change its pricing strategy, and unite the supply chain to get out of the crisis. However, GM was ruined by its long-term unwillingness to change, single model, and rigid products, and eventually filed for bankruptcy.

The main reasons why we single out Xiaohongshu from the valuation model of content community platforms to discuss the upper limit are as mentioned above:

From the perspective of user structure, Xiaohongshu has become a content platform that has influenced consumer generations. Users' lifestyles in all aspects are gradually becoming inseparable from Xiaohongshu. As a content platform, Xiaohongshu is gradually finding its own "path".

From the perspective of business model, Xiaohongshu has gradually figured out the "art" that matches the "Tao" - lifestyle e-commerce. Compared with shelf and traditional live broadcast, Xiaohongshu's differentiated model with people as the core has achieved relatively rapid short-term growth results (but after all, the base is small and needs to be continuously observed).

From the perspective of the economic cycle, Xiaohongshu is in a rational cycle with large macro fluctuations, and its valuation has reached the lower limit. This also means that Xiaohongshu does not have as much valuation pressure as companies founded during the bubble period. Similar to Pinduoduo, which has risen in the field of essential consumption today, the elasticity coefficient of its valuation will be very large after the reversal of the optional consumption cycle in the future.