Marketing Frontier...M M 12 •Despite three decades of +10% GDP growth, the spending of China’s consumers has seriously lagged growth, exports and investment. •In the last 5-8

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Introduction to China’s Digital

Marketing Frontier

January 2020

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• Platforms vs. Pipelines

• Network Effects

• Economics of Digital

• Competitive Advantage: Digital vs. Traditional

• 6 Digital Superpowers

and / or

• Dynamic Digital and Traditional Competition

Main Digital Strategy Ideas

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2www.jeffreytowson.com

• Get Ready for the Chinese Consumers of 2025

• A Simple Exercise in Digital Marketing

• Shop-Around Is Replacing Loyalty

• Personalization at Scale?

• Break

• Seth Godin: Selling to Beliefs

• E-Commerce + Social Media

• Warren Buffett 25-5 and Munger Inversion

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7

1B Chinese

urbanites living in

+400 cities

200M Chinese

middle class families –

with big lifestyle upgrades

??? - Tons

of money across

Asia

3 Big

disruptors to

watch for

75M Chinese

graduates and world-

class R&D

Asia 2025

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8

• China is now the world’s most complicated consumer

market.

• However, the competition is absolutely brutal. There are

few survivors, let alone winners. You need a competitive

advantage.

• The State still creates many of the winners. Even in the

consumer markets.


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9


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10

Chinese Are the World’s #2

Consumer Market

– And the #1 Source of Consumer

Spending Growth


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11

However…

China Is Also the World’s Most

Complicated Consumer Market


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12

• Despite three decades of +10% GDP growth, the spending of China’s

consumers has seriously lagged growth, exports and investment.

• In the last 5-8 years, this has finally started to change. China is now the 2nd

or 3rd largest consumer group in the world by spending, and has the

fastest growth rate.

• Most of this is being driven by the new Chinese middle class, a group that

really didn’t exist 10 years ago.

• We define the Chinese middle class as households with over $10,000

USD in annual income. This is much less than the $30,000 in the US.


Point 1: Chinese Consumers Are Finally

Buying Stuff

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SOURCE: IHS; World Bank; National Bureau of Statistics, China; McKinsey Global Institute analysis

Consumption in China grew by $1.1 trillion from 2010 to

2015 -> one-quarter of global consumption growth

Growth in private consumption

$ billion, 2010

40

61

67

116

1,194

1,105

Japan

Germany

China

France

South Korea

United States

Private

consumption

growth share

of GDP

growth (%)

76

Share of

world

consumption

growth (%)

Consumption

compound

annual growth

rate (%)

0

2

1

40

42

40

36

35

25

24

2

1

1

1

9

2

1

2010–15

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• Consumption is shifting from value to “new mainstream”

consumers.

• This group, which has household incomes of $16,000 to

$34,000, represented just 6% of urban households in 2010.

• But by 2020, they will be 51%. That means an annual growth

rate of approximately 26%. The emergence of these new

mainstream consumers is a major wave going through urban

spending and behaviour.

• This group will be 250M families by 2025

Point 2: New Mainstream Consumers

Are The Key

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• To date, much of the China consumer story has been about “value”

consumers.

• These are consumers with household incomes between

$6,000 and $16,000 per year.

• And they tend to care most about getting good value for their

money. They want a low price.

• And they are pragmatic, as opposed to emotional.

• As the mainstream group emerges, the value group is going to

decrease from 82% of urban households (in 2010) to only 7%

by 2020.

Point 3: So Much Better Than Value

Consumers

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In May 2014, a group of Chinese

tourists took a one-week organized

trip to Los Angeles.

It was over 7,000 people. They

boarded 86 planes in China,

occupied 26 hotels in Los Angeles

and traveled around in 160 buses.

20

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Over 30M Chinese live in caves.

This is mostly in Shaanxi province

and they are a larger consumer

population than Saudi Arabia or

Scandinavia.

21

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Chinese Moms Are (Probably) the

World’s Most Important Consumers

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• Chinese mothers are the major driving force behind

increasing Chinese household consumption.

• Chinese mothers are deeply focused on the health

and safety of their one child.

• Chinese mothers are rising as consumers in their own

right.

• Many of the biggest China consumer stories are

actually stories about Chinese moms.

• Chinese moms are going global.

23

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• Young Chinese are the passionate, emotional and big

spenders

• 16 to 26 year old groups - born and raised in abundance.

• The one child policy came into effect in the early 80s so

most of this group are only children.

• 4-2-1 family sructure

• Young Chinese consumers are the most similar to consumers

in developed economies.

• They are much more interested in trying new products.

• They are more emotional consumers.

• They are more brand loyal.

• They are willing to trade-up rapidly.

• And they are really confident about their own financial

futures (which enables spending).24

Young Chinese Consumers

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• By 2020, 35% of total consumption in China is expected

to come from young consumers.

• Young Chinese with jobs are making orders of magnitude

higher incomes than their parents did at their age.

• Even those without work have way more resources and

every survey shows they are confident that the future will

be even better for their kids.

Young, Not Old, Chinese Have the Money

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• They are getting married later. They are having children later. This

mostly follows from career pressures. But it also follows from higher

incomes and greater expectations in life.

• In 2010 approximately 25% of high school students went to

college. That number is expected to increase to about 40% by

2020. Going to college and then getting a good job usually means

delaying marriage, family and other commitments.

• In the past ten years, the average age at which women have

children in China has increased from 24 to 27. If this continues,

as is expected, it will soon likely be closer to age thirty, which is

similar to developed countries.

• This delaying of life events causes greater spending. Singles with

longer bachelorhood have more time and money. This means more

hobbies. More vacations. Nicer apartments. And this eventually leads

to more expensive weddings (and divorces).

Later Commitments = More Spending

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• 58% of Chinese regularly watch sports on CCTV5. And 32 percent

say they regularly watch sports online.

• YouGov conducted a survey of 21,000 people in fifteen international

markets (including the soccer-crazy nations of the UK, Spain and

Brazil).

• They found that Chinese have the greatest percentage of fans

who are “very passionate” (30%) about soccer.

• The global average for “very passionate fans” was 17%.

Surprisingly, only 10% of respondents in the United Kingdom

were self-declared ‘very passionate sports fans.

• Argentina and Spain were high at 27% and 26%, but still less

than really enthusiastic China at 30%.

• However, they really don’t like the national soccer team.

Sports Consumers

27

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• The vast Western 50% of the

country that, up until recently,

nobody really talked about.

• Home to over 200M emerging

middle class consumers.

• Much lower incomes.

• Growing much faster.

• Big demand in the aggregate.

Inland Consumers

28

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• Household incomes between $6,000 and $16,000 per year.

• Tend to care most about getting good value for their money.

They want a low price.

• They are pragmatic, as opposed to emotional.

• Have typically never driven a car. They don’t have

passports. They have probably never bought an airplane

ticket.

• Inland consumers are typically not experienced when it

comes to things like technology, fashion and brands. Buying

quality usually means a lot of experimentation to find out

what works in their budgets. Typically, their most trusted way

to learn about products is from friends.

Inland is Mostly Value Consumers

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• The geographic distances are huge and there is limited

infrastructure. City clusters are not as developed, they are less

integrated and they span greater distances. Plus in many places,

the roads have simply not been built yet.

• Inland road density is about 50% of what it is in the East.

• Across the nine interior provinces, logistics costs average

about 15% of GDP, compared to 10% or less in the Eastern

provinces. This compares to only 3% in the US (check).

• The topography is also a problem. Some areas, like

southwestern China, are literally landlocked behind

mountains.

Inland Consumers Are Hard to Reach

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31

1B Chinese

urbanites living in

+400 cities

200M Chinese

middle class families –

with big lifestyle upgrades

??? - Tons

of money across

Asia

3 Big

disruptors to

watch for

75M Chinese

graduates and world-

class R&D

Asia 2025

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32

• China is now the world’s most complicated consumer

market.

• However, the competition is absolutely brutal. There are

few survivors, let alone winners. You need a competitive

advantage.

• The State still creates many of the winners. Even in the

consumer markets.


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• Break




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1. Create a digital good

• Short books for entertainment

• Article series on marketing or technology for executives

• Education videos for high school students

• Data on real estate sales and prices for companies and investors

• Software for a small business

2. Who are you customers? Go niche.

3. What is your product?

• Book? Video? Song?

4. What is your service?

• Subscription to content or software?

• Membership to a community?

• Education course? A degree or certification?

Design a Digital Product or Service


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35

Attractive But Dangerous Economics of

Information / Digital

• Zero marginal production costs

• Non-rival goods

• Low distribution costs

• Bundling and versioning

• Complements and consumer surplus


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• Get Traffic

• Convert to Sales

• Gather Data

• Iterate and Improve Product

Simple Digital Marketing Is T–S–D-P


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6 Digital Superpowers

37

1. Dramatically improved user experience and journey. You need sufficient delta of

improvement (vs. pain of adoption)

2. Creates a platform (and gets complements or soft MSP advantages). Including without

NE.

3. Captures network effects, including data network effect. Including 1-sided without MSP.

4. Captures other competitive advantages - including switching costs and digitally-

enhanced share of consumer mind (habits, behavior, etc.).

5. Viral or other powerful customer acquisition and/or retention mechanism.

6. Scalable. Especially if gets massive demand-side scale. Global scale is best.

• Also awesome is recurring revenue, freemium and pre-pay if you can get it. Slack has this and all of above.

• B2B criticality is also great (Microsoft has)

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Digital Competitive Advantages

38

1. Revenue Advantages

• Share of consumer mind – software excels at hacking behavior. Gamification.

Habit-creating. Dopamine hits. Personalization and curation.

• Switching costs – Rare for consumers. Stronger for platforms, merchants,

content creators, B2B, app developers, etc. Integration of workflow can be

powerful.

2. Production Cost Advantages

• IP / tech cost advantage. Code written over time. Growing with AI and

algorithms.

• Special resource: Data. Partnerships.

3. Economies of Scale – Cost Advantages

• Marketing

• R&D

• Web services / tech – particularly if open to market

• Logistics / delivery – particularly if open to market

• Medical teams? Driver services? Auto alliance?


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Digital Competitive Advantages (cont.)

39

3. Government. Licenses. Access to data / smart cities.

4. Network Effects

• Network effects in main platform.

• Data network effect

• Emerging: AI? Autonomous vehicles?

5. Efficiency of Scale

Other

• MSP soft advantages. Subsidized or free pricing. Chicken-and-egg

• Data soft advantages

• Complementary platforms

• Linked business models: Customers, data, capital

• Combined services and digital conglomerates

• Platform vs. product / pipeline

• Platform vs. platform

• Platform vs. digital conglomerate


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• Organic traffic to a webpage, mobile app or mini-app:

• SEO (Search Engine Optimization)

• Email Lists

• Free gift, quizzes

• WeChat or other messengers, including groups

• Word of mouth

• Platforms and other site traffic:

• Official pages (Facebook, LinkedIn, WeChat, etc.)

• Content creation and sharing. On-ramps.

• Paid traffic: CAC? LTV?

• Display ads

• Search advertising

• Platform marketing

• Affiliate marketing

How Would You Get Traffic?


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1. Marketplaces and Transaction Platforms

2. Coordination and Standardization Platforms

3. Payment Platforms

4. Innovation (and Audience-Builder) Platforms

5. Learning Platforms

• These re not mutually exclusive. Each platform can be a combination of users,

interactions and feedback loops. And you can combine them.

• Payment platforms are probably a type of coordination but pulled it out as

separate.

5 Common Types of Platforms

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• Get Traffic


• Gather Data




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• Free product or freemium service

• Versioning?

• Sign-up for email on landing page?

• Quizzes

• Free product

• Viral mechanism

• Group purchasing

• Collaborative or communication software

• Affiliate marketing

• Acquisition, usage vs. retention

Convert to Sales


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• Get Traffic


• Gather Data




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Online Retailer

or Marketplace


Consumers

Demand-Side

Scale (early)

All About Demand-Side Scale

Users, Participation and Data

Merchants / Brands

• Users

• Participation

• Data

Network Effects:• Primary Interaction

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• Break




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• CPG companies focused on brands with mass appeal

• Supported with lots of brand advertising to the mass market.

• Plus privileged relationships with larger retailers. Get shelf-space and

promotion and marketing support.

• Do promotions

• Lock customers in with loyalty programs

• This builds economy of scale (organically and by M&A) with a brand

portfolio had a lot to do with this.

• Think Nestle, P&G, Coca-Cola, Pepsi

For +70 Years, Consumer Goods Have

Relied on Mass Marketing

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• Nimble, digital marketing and social media-savvy brands are

reaching and engaging consumers.

• Niche brands are eating away at the mass market.

• And consumers are changing rapidly in their:

• Preferences

• Use of technology

But This Strategy Is Under Assault

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• Big brands’ hold on retail space is being broken.

• Ecommerce platforms are powerful

• Retail consolidation

• Direct-to-consumer business model

Plus Retail Is Changing

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• Products and services are everywhere. Controlling supply, distribution or

retail no longer works as well.

• Plus, there is information and content about products and services

everywhere.

• Tools for researching and buying products / services are

everywhere.

• Price comparisons

• Peer reviews

• Social media

• Consumers can’t help but shop around. And loyalty is falling. Even from

loyal, long-time customers.

The Problem is Abundance

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• You customers are now “shop around” customers

• You have to get them to consider you.

• And you try and have as much engagement as possible. You need to be

communicating with your customers.

• But the limiting factor is attention and hours in the day.

The Best You Can Do Is Get Customers’

Consideration

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• Your strategy for “shop around” customers

1. You need to be in your customer’s consideration set.

2. Then you need to actively fight during each round of active

evaluation.

3. Then you need to maximize your conversion odds at the moment of

purchase.

4. You also want to double your focus on the small percent of loyal

consumers.

The Best You Can Do Is Consideration

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• You need to be in your customer’s initial consideration set.

• Do broad-based targeting to get lots of consumer segments into

initial consideration.

• If no experience with the brand, initial consideration is much

harder and more complicated.

• May not understand the brand

• May not have considered it.

• May not consider the entire category.

• Lapsed previous consumers have a higher likelihood of initial

consideration. Target them.

1. Initial Consideration is Critical

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• Then you need to actively fight during each round of active

evaluation.

• Study no purchase and especially lapsed, no re-purchase

customers.

• A better offer stole them away?

• No emotional connection?

• A bad experience?

• Lifestyle has changed?

2. Fight During Active Evaluation

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• Then you need to maximize your conversion odds at the moment of

purchase.

• One-click purchasing. Convenience. Impulse purchases.

• A/B testing

• Lots of AI focused here

3. Maximize Odds at Point of Sale

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• Your #1 strategy is winning and re-winning the shop-around

customers

• Your #2 strategy is to focus on the small percent of loyal consumers.

• Target them with loyalty programs and incentives.

• Build relationships. KOLs are good at this.

4. Niche Loyalty is Your #2 Strategy

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• Get Traffic


• Gather Data

• Improve Product



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• Your strategy for “shop around” customers

1. You need to be in your customer’s consideration set.

2. Then you need to actively fight during each round of active

evaluation.

3. Then you need to maximize your conversion odds at the moment of

purchase.

4. You also want to double your focus on the small percent of loyal

consumers.

The Best You Can Do Is Consideration

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It’s About Users, Engagement and Data

But who controls the front door matters

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• Break




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• Break




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• The more powerful the need, the easier the sale.

• But we actually need very few things in life.

• So what is going on?

• What is the difference between a $30k and $80k car?

• A $1,000 vs. a $300 laptop?

• Antibiotic vs regular eggs?

• Nike vs. regular sneakers?

Sales and Marketing Are About Meeting

Needs

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• Most people actually need very little.

• It is mostly about what a consumer feels, which is a real thing

even if the facts are false.

• Marketing and sales are story-telling.

• Some people feel better when they buy a more expensive car

or clothes.

• People like to try on and buy Nike. And run with them.

• Marketing is not about features and facts. It is about story-telling

and feelings.

The Difference Is What the Consumer

Believes and Feels

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• Does it capture the imagination of a big or important audience?

• Don’t appeal to everyone. Go for a targeted group.

• Great stories happen fast. Make a big first impression.

• A great story is true.

• Not factually. But consistent and authentic. Consumers can sense

inconsistency.

• Don’t appeal to logic. They appeal to the senses.

• Great stories make a promise

• Bold, authentic, exceptional. Worth the listener’s time.

Godin: How Do You Tell a Great Story?

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• Great stories are trusted. A rare resource.

• Great stories are subtle. Less is more.

• Great marketers tell stories that consumers choose to believe.

• Companies need a complete dedication and embrace of the story.

Telling a Great Story

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• Break




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A decade ago, China accounted for less than

1% of the value of worldwide transactions.

74

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Today, China’s e-commerce market is

larger than those of France, Germany,

Japan, the United Kingdom, and the United

States combined.

Online retail sales are expected to reach

$1.8 trillion by 2022, representing 25% of

China’s total retail sales volume.

75

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• Some of the thinking in this section is

adapted from a book by Michael Zakkour

and Ahsley Dudarenok

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Ecommerce Is Really Dynamic in China

77

• Common language for 1.4B people

• Increasingly wealthy

• Rising GDP per capita

• Delaying of marriage and life events

• Increasingly sophisticated. Travel, education, etc.


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Consumers Are Fickle and Spoiled

78

• Too many brands and services trying to get their attention.

• Lots of choices

• Immediate delivery and great customer service

• Convenience – especially mobile payment

• Increasing personalization

• Weak brand loyalty

• Social media mania


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• It’s big and complicated

• They ignore mass media and television advertising.

• They do lots of research.

• Average luxury Chinese consumer needs to come into contact

with a brand 7-8 times before considering buying (McKinsey).

• KOLs are good at this function.

• Word of mouth is critical. KOLs also help here. They can post

content, interact, comment and teach.

An Introduction to Marketing to Chinese

Consumers

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Foreign Brands Have 3 Options

80

• Use a local distributor

• Large regional vs. smaller locals

• Lots of sales staff

• Could add significant mark-ups

• Enter China directly

• Establish a WFOE

• Possibly with a Special Purpose Vehicle in Hong Kong

• Establish a representative office. Simplest form but can’t do operational

• Establish a FIPE (a WFOE for partners)

• Do a Joint Venture

• Do cross-border e-commerce


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Selling Online Is Required Either Way

81

• Put up a website outside of China

• But cannot advertise in China without a business license

• Hard to offer returns and customer service

• Payment compatibility is a problem

• Delivery risks

• Website will be slow

• Open a store in an online marketplace (Alibaba, JD)

• Need to be a Chinese national or have a legal business entity in China

• Tmall Global and others set up for cross-border

• Significant set-up fees. And dependent on platform (advertising and

commissions).

• Open a store in an online hypermarkets (Kaola, Jumei)


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Selling Online Is Required Either Way

82

• Open a store in a vertical specialty market

• Fewer customers but more focus (Beibei.com for maternity)

• Sell goods on a flash sale platforms (VIPShop).

• Good to test appetite.

• Use WeChat (i.e., social media)

• Official accounts for broadcast messaging and customer service / CRM

• Now doing sales with mini-programs

• Tied to WeChat (huge strength)

• Don’t need legal business entity

• But a closed and private ecosystem so harder to get traffic

• Go big, go niche or go home.


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Ways to Open a WeChat Store

83

• WeChat Official Account Stores

• Fewer customers but more focus (Beibei.com for maternity)

• Stores Hosted by Third Parties

• Mini Program Online Stores

• Apps within the app, including KFC, Coach and Tesla

• 580,000 apps as of 2018

• 20 industries and 200 subcategories

• Easy to develop. Easy for testing the market.


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Social Media In China vs. West

84

• Lots of connecting and messaging in both

• Lots of sharing of content (news, entertainment, personal, etc.) in both

• But in China, social media is an e-commerce channel

• Integrated with payments

• Increasingly direct sales.

• Content broadcasting

• Deals, discounts, promotions, coupons, special offers

• Lots of marketing and campaigns – often led by celebrities and influencers

• Also good or customer service and CRM. The most important function. A semi-closed

platform.

• Also for product testing


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WeChat (Weixin) Is #1

85

• WeChat

• Instant messaging

• Official accounts

• Content broadcasting. Articles and messages.

• WeChat pay (go Dutch)

• WeChat Wallet: Red Packets and paying bills

• Third party apps and mini-programs

• Search: Official accounts, mini-programs, chats, stickers, etc.


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WeChat Founder: Allen Zhang


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But There Are Others

90

• Weibo (sina) – official accounts

• Toutiao

• Zhihu – Q&A platform. Good for B2B marketing.

• iQiyi, Tencent Video, Youku

• Bilibili – anime, manga, game fandom

• Douyin (musical.ly), Kuaishou

• Ximalaya

• Xiaohongshuwww.jeffreytowson.com

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A Day in the Life of WeChat

91

• Wake-up

• Check messages (individual and group)

• Check Moments for friends posts.

• Go to 711. Shake phone for special offers. Pay at counter with WeChat.

• Use Mini-Program to rent bike, rent moped, get taxi. Get metro or bus. Pay with WeChat.

• At Work

• Communicate and collaborate with team members in WeChat groups

• Communicate with customers / clients

• Order coffee with app or mini-program. Pay WeChat. Have delivered or pick-up in lobby.

• Lunch

• Order food in mini-program for entire team.

• Pay with WeChat pay. Team members pay you back by sending money.


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A Day in the Life of WeChat

92

• Afternoon break

• Look at reviews for clothes and fashion.

• Make order of clothes in mini-program.

• Buy plane tickets for vacation.

• Share text, picture, short videos and articles on Moments.

• At home

• Play games

• Shake phone for special offers on TV with “WeChat Shake” logo

• Checks Moments and friends messages and chats


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WeChat for Brands

93

• Content broadcasting

• On hot topics: Whatever is trending

• Useful Information: Practical tips, tutorials, lists. Shareable. Tips on using

products.

• Interactive Content. Collecting opinions, creating polls, invite to participate in

discussions. Triggers discussion.

• Sales information embedded in content. Can be Lucky Draws in end of article

(prize for best comments).

• User generated content. Encourage users to take photos or leave comments or

other. Visual content is more powerful that text content.

• Take payments. Costs 0.6% fees.

• Do CRMwww.jeffreytowson.com

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Weibo Is #2

94

• A discussion platform for news, gossip, entertainment, and personal interests

• Think Twitter plus Facebook

• Think entertainment

• Social networking

• Sales

• Tied with Taobao

• Tied with Tmall

• Weibo Window for mini-stores


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Weibo Is #2


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• Break




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Warren Buffett’s “25-5 Rule”

• Make a list of your top 15

professional goals for the

next 5-10 years.

• Circle your top five. Make

sure these are really your

top five and put them in

order.


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Goals 6-15 Are Your Problem

Page 98

98

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Charlie Munger’s “No List”

• “Invert, always invert.” –

Charlie Munger

• Make a list of the top 10 things

people do to screw up their

professional and personal list.

• Don’t do these.

• Seth Klarman’s Margin of

Safety takes this approach to

investing. Study the mistakes of

others and avoid them.99www.jeffreytowson.com

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Documents

Marketing Frontier...M M 12 •Despite three decades of +10% GDP growth, the spending of China’s consumers has seriously lagged growth, exports and investment. •In the last 5-8