It will be too late if Xiaohongshu doesn’t make money

Recently, Xiaohongshu has begun to enter the e-commerce market. Let’s take a look at the situation of Xiaohongshu~

In December 2023, Xiaohongshu COO Conan publicly stated that five years ago, he was very determined that Xiaohongshu would not engage in e-commerce. "At that time, I was standing from the perspective of the community, but now, I am responsible for the e-commerce business." Previously, Xiaohongshu had integrated the e-commerce business and the live broadcast business, and established a new transaction department, which was parallel to the community department and the business department as a first-level department.

Xiaohongshu has finally started to take drastic measures towards e-commerce.

As early as six months after its establishment, Xiaohongshu launched an overseas shopping sharing community. A year later, Xiaohongshu launched an e-commerce platform called "Welfare Club". In 2016, Xiaohongshu expanded third-party platforms and brand merchants, and began to grow rapidly across all categories of SKUs.

As the GMV targets for 2018 and 2019 were not achieved, the content community business grew rapidly. From January to July 2019, the number of Xiaohongshu users increased by 100 million in half a year. Xiaohongshu began to focus on the community and became the most popular content community for young people.

However, the growth of active users is not in conflict with e-commerce. Especially for a product that starts as a community and aims to become a platform, e-commerce is an unavoidable and unavoidable link.

1. E-commerce: an inevitable part of community products

In 2015, I posted a post:

Recently, tool apps are all transforming into social networks, social networks are all doing e-commerce, e-commerce is all doing O2O, and O2O is all trying to raise the next round of funds.

After several years of development, "tools + community + e-commerce" has become the consensus of the evolution of all APP products, because individual tools, content, and e-commerce all have their drawbacks.

Tool attributes are the traffic entrance in the mobile Internet era. The only criterion for each APP to exist on the user's mobile phone is whether it has tool attributes, that is, the application scenario, when, where, and under what circumstances, which type of users will use this APP. For example, when we are looking for a restaurant to dine, we will open Dianping. When we go out to take a taxi, we will open Didi. When browsing the news, we will open Toutiao. When checking the stock market, we will open Xueqiu and Tonghuashun. When going to unfamiliar places, we will use Baidu Maps and Amap. When watching short videos, we use Douyin and Kuaishou. When watching movies and TV series, we use iQiyi and Tencent Video...

Tools can indeed attract users quickly, but there is also a problem. Users come quickly, and leave quickly after using the tools. If you want to make users addicted and retain them continuously, you need content, that is, community capabilities.

The famous bestseller "Addicted: Four Product Logics to Develop User Habits" once proposed the "addiction model", which is to develop user habits through triggers, actions, variable rewards, and investments. Community products just meet these four characteristics:

1. Trigger

Triggers can be divided into external triggers and internal triggers. The tool attribute is the external trigger device. In addition to mobile phone push and text messages, it can quickly trigger users to open the APP. The content and the community atmosphere formed by the content constitute the internal trigger device. For example, Xiaohongshu’s rich content about young people eating, drinking and having fun constitutes a unique lifestyle community culture. This community culture has become an internal trigger engine, attracting young people to repeatedly open Xiaohongshu and understand what other young people think and like.

2. Action

To get people to take action, three elements are essential: first, sufficient motivation; second, the ability to complete the behavior; and third, a trigger that prompts people to take action. For a community product, after ordinary users browse a large amount of content, they will have the urge to communicate, which becomes a motivation. The prominent “➕” in Xiaohongshu and Douyin represents the creation logo, which becomes a trigger point. The content creation tools provided by community products help users solve the problem of being able to create content.

4. Variable rewards

In a community, there can be at least physical rewards such as views, comments, likes, collections, points, gold beans, and number of followers, as well as psychological satisfaction such as showing off, excitement, and making new friends. The platform can also provide support such as certification, medals, and traffic support, which constitute a variety of rewards.

5. Investment

Browsing is an investment, posting comments is an investment, writing content is an investment, earning points is an investment, traffic support, various medals, and various certification titles are all investments for users. Investment runs through almost the entire process of users using the community.

It can be said that community products that meet the four elements of user "addiction" will attract users to use the products repeatedly, gradually forming an increasingly powerful traffic pool.

With traffic, it is natural to monetize it. There are two main ways to monetize it. One is to direct it to other people, which is advertising, and the other is to consume it by yourself, which is e-commerce.

The advertising model is of course simple, and the larger the user base, the higher the advertising value. However, once the number of users does not increase, the growth of advertising revenue will also reach a bottleneck, coupled with the loss of traffic caused by switching to other platforms and the decline in user experience. Therefore, when the scale reaches a certain level, e-commerce becomes a must for the commercialization of all online products.

It can be seen that "tools + community + e-commerce" constitutes a stable platform form, using tools to acquire customers, communities to retain customers, and e-commerce to convert customers, thereby building a stable commercial value.

From this perspective, it is not difficult to understand why Douyin and Kuaishou have all entered the e-commerce market? Why do Taobao, JD.com, and Meituan cooperate with content platforms while also creating their own content and doing live broadcasts?

By the same token, for Xiaohongshu, a platform with more than 100 million daily active users in 2022 and advertising accounting for 80% of total revenue, e-commerce is a must.

What is different about doing e-commerce this time than before?

2. Search conversion + live streaming sales: breaking the weeding problem

Xiaohongshu's users have always been mainly women. As of 2021, female users account for more than 80%, of which consumers in first- and second-tier cities account for as much as 60%. These people have strong purchasing power and high consumption willingness. Xiaohongshu has thus fostered a unique "planting grass" culture.

What is grass planting?

It refers to a behavior of posting various forms of notes on the Xiaohongshu platform to recommend, share and display personal or brand usage experience and feelings, thereby attracting and influencing users to purchase.

From the perspective of brand marketing, recommendation, sharing and display are similar to brand advertising, which is to establish a brand impression in the minds of target consumers.

But brand impression and actual product purchase are two different things.

I have explained the relationship between the two as "branding up, conversion down". To establish a brand impression, it is usually necessary to create positive words such as beauty, explain advantages, and praise greatness. To actually buy a product, you need to be stimulated by words such as discounts, price cuts, and limited time. Therefore, in the process of brand marketing, brand building and sales conversion are separate. Usually, offline shopping malls, supermarkets, convenience stores, and online sales channels such as Pinduoduo, JD.com, and Taobao are responsible for sales.

"Brand upward, conversion downward" has also become an important reason for the embarrassing situation on Xiaohongshu where it is easy to plant grass but difficult to remove grass.

In fact, not only are more and more brands choosing to cooperate with kol and koc on Xiaohongshu to establish brand awareness, and then use discounts and promotions to "pull out the grass" on channels such as JD.com, Taobao, and Pinduoduo, but it has also caused Xiaohongshu's e-commerce business to progress slowly, and it has to rely on advertising to support its main revenue.

This time, Xiaohongshu seems to have found a solution: search + buyers.

Searching is different from seeding. Seeking is a process of listening to others' explanations and gradually accepting something, which is similar to passive acceptance, but searching is an active behavior. Only when you are interested in a product, a restaurant, or a place, you will actively search for it. Therefore, search engine marketing such as Baidu and Sogou has always been an extremely efficient marketing method.

For a long time, Xiaohongshu was a content sharing community, where users usually browsed content, which led to a passive acceptance model such as "seeking information". As the number of content sharers reached 80 million and the content dimensions became more complex, more and more users began to search for information on Xiaohongshu. Xiaohongshu COO Conan said at the IF conference that currently nearly 70% of monthly active users have search behavior on Xiaohongshu, and one-third of monthly active users go straight to search as soon as they open Xiaohongshu.

Unlike traditional search engines that search for diversified information, Xiaohongshu users' searches are closer to consumer decisions, and official data shows that nearly 40% of searches are related to products, which also confirms this.

Therefore, Xiaohongshu began to work hard to create a closed loop from search to e-commerce. In addition to strengthening the conversion of goods to stores on the site, it also launched direct search products to achieve direct jumps to stores and product pages on the brand's external e-commerce platforms, helping merchants who have not opened stores on the platform to achieve a closed loop of planting grass-search-conversion.

Simply put, the increasingly vigorous search behavior makes it possible for Xiaohongshu to establish users' shopping habits of purchasing products on Xiaohongshu through a closed loop from search to purchase.

But in Xiaohongshu's view, the real potential for its e-commerce lies in buyer e-commerce.

In January 2023, Dong Jie launched her first livestreaming show on Xiaohongshu, and the relevant platform estimated that its GMV exceeded 50 million. Subsequently, Zhang Xiaohui, the "first generation of socialite", also became famous on Xiaohongshu. Her first livestream lasted nearly 6 hours, with over 600 million views and sales of over 50 million yuan. After that, not only celebrities brought goods, but also buyers such as "Yike KK" and "Of course it is Dang" joined the livestreaming camp.

Data shows that from August 2023 to Double Eleven, in just three months, Xiaohongshu has incubated 2 buyers at the billion level, 21 buyers at the ten million level, and 20 buyers at the million level.

During last year's Double Eleven, the number of Xiaohongshu e-commerce purchasing users was 3.3 times that of the same period last year, and the number of orders was 3.8 times that of the same period last year; the number of merchants participating in Xiaohongshu's Double Eleven was 4.1 times that of the same period last year, and the GMV of store live broadcasts reached 6.9 times. The number of buyers who started broadcasting was 3.3 times that of the same period last year, and the GMV of buyers' live broadcasts was 3.5 times that of the same period last year.

The potential of buyer e-commerce is still huge. From the beginning of 2022 to August 2023, in a year and a half, the number of buyers and managers of Xiaohongshu increased by 27 times, the number of active merchants increased by 10 times, and the number of purchasing users increased by 12 times. Xiaohongshu COO Conan also revealed that among the daily active users of Xiaohongshu, the number of users with purchasing intentions is nearly 40 million.

Xiaohongshu is building its own e-commerce system through search conversion + live streaming. While meeting the shopping needs of this group, it is also cultivating the shopping habits of other groups on Xiaohongshu.

Judging from the development path of Douyin, with the improvement of the e-commerce system and the formation of users' purchasing behavior, advertisements have also begun to move from outside the site to inside the site, which is bound to further enhance the commercial value of Xiaohongshu.

Yes, Xiaohongshu, which has been established for 10 years, has also come to the time to prove its ability to make money.

3. 10th Anniversary - Xiaohongshu needs to make money

Xiaohongshu was founded in 2013 and received an angel round investment of several million yuan from Zhen Fund that year. It then completed six rounds of financing over the next few years, with a total financing amount of over US$900 million and a post-investment valuation of over US$20 billion.

However, after completing the financing led by Temasek, Tencent, and Alibaba in 2021, and followed by Tiantu Investment, Yuansheng Capital, etc., Xiaohongshu has not made any other capital moves.

Xiaohongshu positions itself as a lifestyle platform for young people, where users can record their lives through short videos, pictures and texts. The valuation of such products is generally supported by the user scale and actual monetization capabilities.

After failing to reach its revenue target in 2018 and 2019, Xiaohongshu began to focus on user growth. As of the end of 2022, Xiaohongshu's monthly active users reached 260 million.

This number seems satisfactory, but in comparison, as early as the end of 2021, Xiaohongshu's monthly active users reached 200 million, and the growth has shown signs of fatigue.

It was revealed not long ago that He Tong, the head of community content at Xiaohongshu, resigned because the growth in 2023 did not reach the target of 140 million daily active users, which also proved that the growth of Xiaohongshu's user scale has encountered great challenges.

This also directly affected the value of Xiaohongshu in the capital market. In the private equity market share sale transaction in 2022, its valuation was fixed at US$16 billion, a decrease of nearly US$10 billion compared with before.

As user growth is facing difficulties, Xiaohongshu must focus on commercial monetization if it wants to further increase its valuation.

Therefore, we can see that starting from 2023, Xiaohongshu, which has always emphasized the community atmosphere, has shifted its focus to commercialization, from the adjustment of organizational structure to the attempt of live streaming, and then to the end of 2023, open data cooperation, so that "Xiaohongshu planting grass, full-domain conversion", the effect can be measured, the process can be optimized, and the conversion is more efficient. And opening up the search field to the outside world are all manifestations of this strategy.

However, as a lifestyle sharing platform, once it is commercialized on a large scale, the influx of a large amount of commercial content will inevitably affect the original content atmosphere, weaken the user experience, and even lead to user loss.

Some users have begun to complain that "Little Red Book is full of soft advertisements" and "opening the notes is full of product links."

Another challenge comes from competitors in live streaming. Xiaohongshu tried live streaming e-commerce in 2019, but due to strategic issues, the GMV of Xiaohongshu's live streaming e-commerce in 2020 was not even as good as that of the declining Mogujie. At the same time, live streaming products such as Douyin, Kuaishou, Taobao Live, Video Number Live, JD Live, Duoduo Live, Vipshop Live, Bilibili, and Mogujie are making great strides.

Can Xiaohongshu stand out in the fierce competition in the live streaming sales field, especially among the giants such as Taobao, Douyin, Kuaishou, and Video Account? This will be another big challenge for Xiaohongshu.

But Xiaohongshu, which was founded 10 years ago, has no other choice, and some old shareholders have begun seeking to cash out.

As early as April 2018, Qu Fang, the founder of Xiaohongshu, revealed that the IPO would be completed before the end of 2021.

After Yang Ruo, former managing director of Citi Group's TMT investment bank in Asia Pacific, joined Xiaohongshu as CFO in 2021, rumors about Xiaohongshu's listing continued to emerge.

The latest news is that Xiaohongshu will be listed in Hong Kong in the second half of this year. Considering the performance of domestic Internet concept stocks in the Hong Kong market in recent years, it is difficult for Xiaohongshu, which has encountered difficulties in user growth, to obtain a high valuation. In order to give investors and Xiaohongshu employees a generous return, the commercialization problem must be solved.

From the perspective of Xiaohongshu's growth, facing competitors such as Douyin, Kuaishou, and Bilibili, Xiaohongshu also needs to reserve more ammunition, which also requires solving the problem of commercialization.

All signs indicate that Xiaohongshu will have no choice but to make money in 2024.

Author: Yang Ze; WeChat public account: Zero State LT