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China's new obsession: 'Private traffic'
Acquiring new users is getting expensive as internet growth slows. So Big Tech is trying to deepen engagement with the ones they have.
When shopping site Pinduoduo was founded in 2015, it had a problem: Taobao and JD.com already dominated the Chinese ecommerce market. Pinduoduo wasn't yet a $195.2 billion company, so instead of taking on the titans head-to-head, it carved out a new path to acquire users at scale: find them on a different platform altogether. Pinduoduo targeted WeChat, a platform flush with what's now called "private domain traffic."
"Private domain traffic," or siyu liuliang (私域流量), is a term that's enamored Chinese tech CEOs over the past two years as the country's internet growth approaches a natural limit. With overall internet penetration at 70%, upstarts and tech giants alike are increasingly focused on turning casual users into dedicated ones; that is, capturing "public traffic" and turning it into "private traffic." Private traffic can come from users dedicated to a company's app, or from followers of an influencer's personal livestreaming channels. A U.S. equivalent might be newsletter subscribers.
The biggest source of private traffic, however, is WeChat, and businesses are obsessed with finding users, engaging them and retaining them there. This poses a huge business risk: Big platforms and small businesses alike are not only seeing less traffic on their own apps, but they are handing user troves of data to WeChat for free.
Still, it's too tempting to ignore. Public domain traffic — which lives on the big, wild Chinese internet — is often acquired and then reacquired at considerable cost through platform algorithms, search optimization and ads. This type of traffic isn't loyal, and is only getting pricier as the ranks of new web users in China thin, while those already online deepen their existing habits and loyalties. By contrast, private traffic connects brands, merchants and platforms connecting directly with users, who become easy to access once acquired. If cultivated correctly, private domain traffic becomes "stickier" over time.
Pinduoduo brass had this insight early, and what looked several years ago like an unconventional strategy is now conventional wisdom, and key to the company's success. Instead of waiting for potential customers to buy stuff from its native app, Pinduoduo has encouraged users to invite friends on WeChat groups to purchase collectively, further lowering prices on products that were already heavily discounted. In 2017, Pinduoduo launched a "mini app" — an app inside WeChat's larger ecosystem — to rake in more private domain traffic.
Pinduoduo is now the top ecommerce mini program on WeChat by monthly active user size. "Without the initial boost of private domain traffic, there would be no Pinduoduo," Jie Chen, managing partner of VC firm Celtic House Asia Partners, told Protocol.
The big picture: China's internet growth is slowing
China's online population growth is about to touch a natural ceiling. As of December 2020, China has 989 million internet users. That's about 70% of the country's total population, a slight increase of 6% from March 2020. Meanwhile, Tencent, Alibaba and Baidu have each captured more than 90% of existing internet users, according to market research firm QuestMobile. In other words, there aren't a whole lot of new web users left, and existing ones are choosing sides.
International expansion doesn't seem to be the answer. While big tech firms elsewhere have the entire global market to tap, Chinese tech giants, the darlings of Beijing's "indigenous innovation" push, are largely caged in their home market, fighting for a limited traffic pool that's huge, but no longer growing terribly fast. ByteDance, known for the internationally popular TikTok, is the exception that proves the rule.
As the room for user growth shrinks, tech companies are getting nervous, aware that the cost to acquire new users will only increase. For example, ecommerce juggernaut Alibaba's annual active user base is approaching 800 million, the largest among all platforms in China. In the first quarter of 2020, Alibaba's average customer acquisition cost amounted to around $125, more than eight times its 2013 costs. By comparison, Pinduoduo's average spend to acquire a new user in the same period was $26, a fifth of that of Alibaba's.
Many recent trends in Chinese tech can be viewed as battles within the larger private traffic war. Community group buying, which grabbed headlines in late 2020, is one of them. Didi Chuxing, Pinduoduo and Meituan were among Big Tech companies that competed to ally with community group leaders, often a corner-store owner, who buys goods in bulk from ecommerce platforms at a discounted price for neighbors in the same residential compound. The conversations between residents and group leaders all happen — you guessed it — in WeChat groups. This creates huge savings for last-mile distribution and helps to acquire new "private traffic" customers at low cost.
Who's winning the private traffic game
One group of winners from China's newfound obsession with private traffic is key opinion leaders, or KOLs. They are the super-sellers on Taobao Live and the fashion influencers on Xiaohongshu and Douyin. KOLs host chat groups on WeChat, where they can interact with loyal followers and those followers can meet one another. Once these mini-communities are established, KOLs can market directly and repeatedly to their loyal followers without having to pay any platforms for additional exposure (yet). Li Jiaqi, one of China's top KOLs who's known for peddling record-highs of lipsticks through livestreaming, reportedly operates over 500 WeChat groups, each with 500 active members, the maximum allowed.
But the biggest beneficiary of the private domain traffic craze is WeChat. WeChat's 1.2 billion monthly active users and closed-circle socializing makes it one of the few true private traffic hosts in China. Pony Ma, CEO of WeChat's parent company Tencent, claimed in the company's Q2 2020 earnings report that the WeChat ecosystem was "redefining online advertising in China."
Other businesses' reliance on the platform means "smaller startups are basically just working for WeChat," Liu Xu, a researcher at Tsinghua University's National Strategy Institute, told Protocol.
As businesses and tech companies have flocked to WeChat, some analysts expect it to incubate the next batch of tech giants. Others warn that WeChat's dominance in private domain traffic could destroy the entire internet ecosystem. "Each platform should build their own private domain traffic pool," a tech columnist wrote under the pen name "Dependable Xing." "Only if private domain traffic blooms everywhere on each platform, not just on WeChat, will the whole internet industry thrive in the long term. Otherwise, it's going into a dead end."