Pursuing cost-effectiveness does not mean consumption downgrade

Nowadays, everyone is calling for consumption downgrade, and the three major e-commerce platforms are also emphasizing price, but is there any connection between the pursuit of cost-effectiveness and consumption downgrade?

The three major e-commerce platforms are increasingly emphasizing prices. Is this because people are experiencing a consumption downgrade? Those who believe that consumption is downgrading will give some examples, such as fewer people going to KTVs and bars, and more people visiting parks and Citywalks. Companies that do business with the rich are not doing well, while those that are "substitutes" and "low-priced" are generally doing well, such as Pinduoduo and Miniso.

In fact, pursuing cost-effectiveness and spending less money to achieve great things does not mean "consumption downgrade". On the contrary, it is possible to buy more things at a lower price, enjoy more experiences, and obtain a better quality of life. For example, the combination of "eating pickled mustard tuber + traveling abroad" often occurs among students.

How can we judge whether consumption is downgrading or upgrading when both low-end and high-end consumption demands are rising at the same time? For another example, the popularity of the sharing economy and second-hand economy was once considered to be proof of consumption downgrading. This view ignores the fact that young people are willing to pay for trends and are also willing to pay a premium for products with stories and culture.

In fact, judging whether consumption is upgrading or downgrading simply by price is inevitably a generalization, because it ignores the change in cost: technological progress will improve production efficiency, thereby accelerating cost reduction.

On the other hand, it also ignores the change in consumption concepts: consumers' preferences are shifting from branding to high cost performance; the focus of consumption is also beginning to shift from commodity consumption to service consumption such as tourism, catering, and movies.

As consumption concepts change, a large number of "outdated" goods and services will inevitably appear. Some high-end, non-cost-effective goods may have their prices lowered, which cannot be directly linked to consumption downgrades.

1. E-commerce platforms: reducing prices in exchange for growth

Consumption can be divided into commodity consumption and service consumption. The market performance of the leading e-commerce platforms can reflect some trends in commodity consumption. Consumption data from January to April this year showed that the national online retail sales reached 4.41 trillion yuan, an increase of 11.5% year-on-year. Among them, the online retail sales of physical goods reached 3.74 trillion yuan, an increase of 11.1% year-on-year, accounting for 23.9% of the total retail sales of social consumer goods. The growth rate of online retail sales has been quite impressive. The core reason is that consumers' consumption habits have changed.

On the one hand, after the epidemic, more consumers are used to buying things online, and on the other hand, online shopping is cheaper. Online channels have always had a price advantage over offline channels. In the past two years, another variable has emerged: major e-commerce platforms have been trying to increase prices by providing more cost-effective goods and services to gain growth in the consumer market.

Price plays a decisive role in most retail products. The competition for price power among e-commerce platforms has existed for a long time, but each platform has its own way. In the past, e-commerce platforms improved user experience and merchant ecology, optimized the efficiency of online transactions, and retained merchants with more price competitiveness, thereby consolidating the size of consumer groups and market share.

In the impression of many people, Pinduoduo has entered the market with cheaper goods since its birth. Behind the cheap prices is the efficiency optimization of Pinduoduo on the merchant side.

The most typical example is in the agricultural product sector. Many people’s impression of Pinduoduo’s cheapness comes from fresh fruits. In fact, this is a typical non-standard product. From production, processing, to circulation and sales, the industrial chain is very long, making it difficult to form economies of scale.

After Pinduoduo came into being, it connected production areas of all sizes scattered across the country with one hand, and connected with consumers with the other hand. At the same time, it invested in technology, optimized the cold chain, and gradually improved the efficiency of the agricultural product supply chain, so that people can buy fresh fruits at a cheaper price.

For example, when more people buy fruits from a certain place of origin, the logistics costs can be spread out, which in turn reduces the cost pressure on merchants and allows for lower prices. This logic of a positive cycle between price and scale has been used by Pinduoduo in department stores, beauty products, 3C digital products, etc., giving consumers more room for price selection, and online price comparison is becoming more and more popular.

In the past two years, when the demands of the vast majority of consumers have clearly shifted to high cost-performance, Alibaba and JD.com, aware of the market changes, have also begun to exchange low prices for growth.

The beginning of 2023 is a turning point. Alibaba directly proposed a low-price campaign, and founder Jack Ma emphasized that Alibaba e-commerce should "return to Taobao". The next opportunity belongs to Taobao, not Tmall, which focuses on mid-to-high-end consumption.

JD.com founder Liu Qiangdong led the company's strategic shift and made "low price" the most important strategy for JD.com retail. A major weapon for the three major e-commerce platforms to implement the high cost-effective strategy is "10 billion subsidies". The intention is obvious. Since more consumers are accustomed to price comparison, the promotion strategy will be changed from "big promotion" to "everyday low price", and gradually form a high cost-effective platform mentality.

The price-performance war between cats and dogs has been going on for more than a year, and the normalization of subsidies is a big challenge for e-commerce platforms. The three major e-commerce platforms are all reducing prices, but they are not simply squeezing merchants' profits, nor are they using their traffic advantages to compete with merchants.

On the contrary, in order to enrich the supply of high-cost-effective products, e-commerce platforms need to introduce more merchants on the supply chain side; in order to maintain a high-cost-effective strategy, they also need to adjust the contradictions between supply and demand for different product categories. When necessary, the platform must also allocate resources to help merchants reduce costs and increase efficiency.

For example, Taobao and JD.com, which joined the battlefield later, launched "one-click price comparison" and "five-star price power", which are price-first traffic distribution strategies. In layman's terms, when the price of a merchant's goods is low, the platform will give a certain amount of traffic to allow the merchant to achieve small profits but quick turnover. The purpose of the platform doing this is to encourage merchants to use the cost of buying traffic directly for price subsidies and attract users at low prices.

In the first quarter of this year, although the revenue scales of Alibaba, Pinduoduo and JD.com were different, overall, their revenues grew steadily and their profits improved, proving that the "high cost-effectiveness" strategy for growth is feasible.

Especially Pinduoduo, whose revenue scale is not as large as Alibaba and JD.com, but its profit scale, revenue and profit growth rates all exceed those of its competitors, which further proves that cost-effectiveness is in line with current consumer demand, and price reduction is the main way to achieve growth.

Ultimately, the source of revenue growth for the leading e-commerce platforms is still to meet the consumer demand for high cost-effective products; the platforms compete on price and provide subsidies, but their profits are not greatly affected, which is achieved by allocating supply and demand and adjusting platform strategies. From the perspective of the industry, this round of price competition is conducive to the formation of a fair and reasonable mechanism within the platform, pushing the platform to reconstruct the traffic distribution system and drive the healthy development of the online consumer ecosystem.

2. Consumers: Buying high-cost-performance products is not about making do with what you have.

Guo Wen, who has 20 years of online shopping experience, recently lamented that the prices on e-commerce platforms are too competitive, and they are too cheap to be believed. She has always been careful with her budget when shopping online, and now she spends her time browsing the subsidy sections of various platforms. "No matter whether it is a big or small item, I will take the time to pick out the most cost-effective item."

Recently, she also bought a lot of big-name new products at very low prices on Taobao's "U First Try". A recent online shopping experience also made Zhao Lin feel that she had "earned a lot". A friend recommended to her a children's T-shirt on Pinduoduo that was on sale for a limited time at 9.9 yuan, and it was a brand. She placed an order with the mentality of "I can't lose money if I buy it, and I can't be fooled if I buy it", and found that she could use a 5 yuan coupon, and finally bought it for 4.9 yuan. When she received the goods, she saw that "the quality is very good".

When people spend money on e-commerce platforms, they pay more attention to cost-effectiveness rather than simply low prices. What is considered high cost-effectiveness? Spending less money to buy value-for-money products. Among the young people struggling in big cities, many are like Li Xia, who work hard to make money and also work hard to save money. Li Xia has worked hard in Shanghai for 5 years and has a deposit of more than one million yuan. She enjoys the sense of accomplishment brought by the continuous increase in the deposit amount, and is willing to sacrifice some time to compare prices on various e-commerce platforms and pick out high-cost-effective things.

Since being introduced to Pinduoduo by her best friend from her hometown during the Spring Festival in 2020, Li Xia felt like she had discovered a new world. "The fresh fruits, as well as daily necessities such as toilet paper and garbage bags, are really cheap."

Compared to busy city life, Li Xia's best friend lives in a slow-paced fourth-tier city, where she has more time to budget carefully. In addition to working from 8 am to 5 pm, she likes to try new things, often buys ingredients online to replicate popular food, buys the same clothes and shoes as popular TV series, and compares prices on various platforms and picks up express deliveries, which is one of her daily pleasures.

Over time, she was completely attracted to Pinduoduo by the "10 billion subsidies" principle. She no longer hesitated even when spending big money. She just bought headphones worth less than two thousand yuan and mobile phones worth several thousand yuan. "After comparing prices through various channels, I felt that I made a profit."

Not only ordinary workers, but also many so-called "rich people" are more concerned about the input-output ratio when shopping online. Wang Na has three houses, two cars and a career in Beijing, and is considered an exquisite lady by her friends.

In the past few years, she spent money lavishly. After she had a baby, she became the "housekeeper" of the family. She consciously changed her past habit of "buying without looking at the price" and started to spend more wisely. From small things like vegetables, fruits, food and daily necessities to big things like replacing mobile phones and home appliances, as well as clothes and shoes for the changing seasons, she would compare prices for all kinds of expenses before paying, focusing on saving where possible and spending where possible.

At first, she mainly bought daily necessities on Pinduoduo, and also bought some high-quality fresh fruits for her parents. Later, she only looked at the 10 billion subsidy channel when she opened Pinduoduo. She bought Nintendo Switch for her children, Lego for her relatives' children, Huawei mobile phone for her father, big-name skin care products for her mother, and a full set of equipment for the whole family to go camping. "The prices are good and the cost performance is very high."

For example, the time she bought Lego was because her nephew mentioned a pair of Harry Potter IP building blocks that he had been eyeing for a long time. There had been no discounts in offline stores, so she searched for Pinduoduo's 10 billion subsidies and found that the price was much cheaper than in the store.

The "rich" in big cities, hard-working workers, and young people living in small cities are the main consumers of e-commerce platforms. When they adjust their consumption concepts to be more rational, they find that buying high-cost-effective things is not a compromise, but on the contrary, it can still improve the quality of life.

Li Xia's best friend obviously feels that after getting used to online shopping in the past two years, her sense of happiness has improved, because many good things are not as expensive as they imagined; Li Xia buys something online every day, but because the money is good value for money, she does not feel that she is spending money indiscriminately and is not so anxious; Wang Na's family feels that their quality of life has not declined, and most importantly, Wang Na has a stronger sense of control over the family's financial situation.

3. All walks of life are competing for cost-effectiveness

The trends in consumers' online consumption and the performance of e-commerce platforms reflect more that commodity consumption is shifting from pursuing branding to pursuing high cost-effectiveness.

This trend is also reflected in service consumption. Globally, the more developed countries and regions are, the more service consumption is dominant. In contrast, my country is still dominated by commodity consumption. However, in recent years, the momentum of service consumption upgrading is obvious. In 2023, the per capita expenditure on commodity consumption in my country will account for 55% of the total per capita consumption expenditure, and the proportion of service consumption expenditure will be 45%. Whether consumer services have been upgraded can be seen from the tourism market.

Data shows that the growth momentum of the tourism industry this year is expected to exceed that of last year. According to the National Culture and Tourism Administration, in 2023, the number of domestic tourists will reach 4.891 billion, a year-on-year increase of 93.3%, and the total expenditure of domestic tourists will reach 4.91 trillion yuan, a year-on-year increase of 140.3%. The China Tourism Academy predicts that the number of domestic tourists in 2024 will exceed 6 billion, a year-on-year increase of more than 20%.

Ctrip, the largest OTA (online travel platform) in China, summarized this year's May Day holiday as follows: small-town tours are on the rise, and short-distance outbound tours are surging. This set of data and phenomena reflects that people's enthusiasm for travel consumption is still high, but their spending is more rational.

The results of a special survey conducted by the China Tourism Academy also reached a similar conclusion: more than a quarter of tourists care about cost-effectiveness when choosing a destination. Behind the cost-effectiveness is the change in consumption concepts.

In our parents’ generation, traveling was more like a “luxury consumption” and people would show a photo of themselves with famous attractions in the hope of gaining social recognition.

In the past few years, outbound travel was a standard for the urban middle class, but now, travel has become a daily routine. When people spend money to travel, they no longer care about external recognition, but a cost-effective personal experience. In order to seize the opportunity of "cost-effective travel", OTAs took the lead in adjusting their product structure. For example, last year, "blind air ticket boxes" were all the rage. In the first quarter of this year, Ctrip, Tongcheng and other platforms achieved strong performance growth.

The biggest feature of the "blind air ticket box" is "random destination + cheap price". Last summer, 25-year-old Fang Chao won a round-trip ticket from Tianjin to Yibin, Sichuan, "less than 400 yuan".

This summer, he plans to go out in the same way, because it is cost-effective and exciting. Not only OTAs, but also local governments have tried their best to promote local tourism and food. Last summer's "Zibo BBQ", winter's "Harbin Ice and Snow World", this year's Tianshui in Gansu and Zhangjiajie in Hunan, all became popular in this way.

The movie market and catering industry also show the same cost-effectiveness and downward trend as tourism.

During this year's Spring Festival, movie ticket prices returned to below 50 yuan, the lowest average price in three years, thanks to the ticket subsidies issued by the platform. According to Maoyan Movie Professional Edition data, third- and fourth-tier cities accounted for 59% of the box office, a four-year high. The high cost-effectiveness and sinking have a very direct effect on boosting movie consumption.

After breaking the record for the Spring Festival box office, the May Day box office continued to exceed 1.5 billion yuan, ranking among the top three May Day box office in Chinese film history. The same is true for catering consumption, which has recovered quickly and is very popular. According to Meituan statistics, the number of catering dine-in orders in the first three days of the May Day holiday increased by 73% year-on-year.

However, the consumption structure is also changing. High-end catering is supported by the rigid demand for business banquets and continues to grow; mass catering is shifting from the middle consumption of 200-300 yuan per capita to fast food.

For example, the leading hotpot brand Haidilao launched an affordable version of hotpot, and coffee brands such as Luckin Coffee, and tea brands such as Heytea and Nayuki all cut prices to attract users, which shows that consumers are more particular about cost-effectiveness in catering consumption. The more affordable prices for catering consumption have objectively allowed brands to enter a wider consumer market. The above-mentioned catering brands, without exception, are sinking through the franchise model, opening stores in county towns, and exchanging cost-effectiveness and sinking strategies for growth.

Conclusion

Regardless of the industry or size of a company, if it wants to achieve further growth, it must start with insight into the consumer market. What is certain is that from daily necessities to durable goods and even "luxury goods", from commodity consumption to service consumption, the pursuit of high cost performance and a return to rational consumption is the general trend. It can even be said that many individuals and families have become more rational in commodity consumption, and have more room to adjust their spending structure and spend money on travel, catering, entertainment and other service consumption.

However, the pursuit of high cost performance does not mean blindly pursuing low prices, and returning to rational consumption cannot be linked to downgraded consumption. It is not reliable to judge whether the consumption trend is upgrading or downgrading based on chaotic and trivial consumption phenomena.

For example, the change of a low-priced or high-priced consumer item, or a new consumer trend, is not enough to infer the progress or retreat of consumption upgrading. From the changes in commodity consumption and service consumption analyzed in the previous article, it can also be determined that the fluctuation of average prices cannot be used as a basis.

More than one interviewee mentioned that what they need is cost-effective consumption that satisfies their inner needs and values ​​functionality. Spending less money to buy better products and enjoy better services is a consumption trend that cannot be described by the term "consumption downgrade".

References:

Consumption Upgrade vs. Consumption Downgrade: Debunking Myths, Cheng Shi. Service Consumption Unafraid of Economic Fluctuations, Wang Yi.

*At the request of the interviewees, Guo Wen, Zhao Lin, Li Xia, Wang Na and Fang Chao are pseudonyms.