Close your eyes. Think about your last in-person, offline shopping experience (remember when we did those?). You went with friends, hunted for bargains, discovered new products, asked store employees questions, and could touch, feel and try items so you’d be more confident about purchasing them. Just when you were about to leave the mall, your favorite burger joint beckons, and off you went.

Contrast this to shopping online - open your laptop, go to Amazon, type in what you want to buy, add to cart, checkout. Done. Simple. Efficient. Convenient.

Is it fun?

Not really.

You see, shopping is as much a pastime and method of bonding with others as it is a commercial exchange of money and goods. Shopping malls serve as weekend family destinations not simply for their stores, but movie theaters, gaming arcades, and restaurants. Luxury boutiques in malls don’t simply sell expensive clothing but offer an environment of sophistication and prestige that transcends their products.

Offline shopping often holds a delightful element of discovery and serendipity that is missing from the step by step, intent-based approach of traditional e-commerce. Traditionally, these platforms are designed under the assumption that shopping is a task to be crossed off a to-do list and what ultimately motivates the user is efficiency, price, and convenience. In contrast, social commerce platforms are designed with the notion that online shopping can itself be a leisure activity, as offline shopping has often been.

What really is Social Commerce?

Social Commerce (or Interactive Commerce) can be understood as a philosophy toward online shopping that humanizes the robotic online shopping experience, applying insights and design approaches that have been more traditionally associated with gaming, social media, or entertainment platforms.

   Interactive Commerce i.e. Social Commerce
Source: Defining Interactive E-Commerce Report

Social commerce does NOT simply mean connecting user accounts to Facebook. It is not the mere selling of products and services on social media. It means investing in creating physical world experiences online- specifically bringing the fun of shopping offline to online platforms.

Sure, but Amazon gives me same-day shipping and free delivery. Why should I care about social commerce?

Good question.

Short answer: Because it is not a trade-off between convenience and a more social experience. It is the best of both Entertainment and E-commerce.

It is simply an evolution to a new interactive experience that more faithfully represents how people shop in the physical world, offering a fun experience for the shopper along with improved value for money. It is an approach that takes the enjoyable, social, and psychological experience of shopping in the physical world, and applies it to the digital age. This approach has led to an integration of tools from elsewhere in the digital economy: recommendation, community, and entertainment together with one core proposition: value for money.

To understand this, let’s come to India. Retail in India has come a long way. Evolution has seen waves of growth over the past three decades which can be categorized into three distinct waves.

1. The first wave in the 1990s was all about a new physical world of retail experience through large format, multi-brand stores. With the opening up of the economy, organized players like Future Group and Trent launched exclusive branded outlets (Pantaloons and Westside). 
2. The second wave in the 2000s was triggered by the entry of large players in food retail through hyper and supermarkets. Organized players started competing with smaller stores through larger stores and formalized supply chains marked by the entry of Big Bazaar and Reliance Fresh.
3. The third wave in the 2010s was fueled by the rise of e-commerce and foreign brands. E-commerce has come a long way from the Yellow Pages style online catalogs with a fax number to the one-click, same-day delivery which many consumers have gotten used to. As we head into a new decade, we’re also noticing a new wave of commerce sweeping across the industry.
4. The fourth wave in the 2020s, we believe, will be marked by the rise of Social Commerce. The next Amazon competitor is likely going to look like a social or video app, not a shopping app. The next big revolution will come from the combination of social, entertainment, and commerce industries.

More importantly, this new frontier of commerce in India will help democratize access to online commerce for everyone. This makes the transition to Social Commerce not just inevitable but also necessary.

India has always had a unique retail industry. In 2019, it was valued at ~$700BN, with about 90% of it being unorganized and is estimated to reach $1.3TN by 2025. To add some context, China’s retail market is valued at $5TN in 2020 and Alibaba, by itself, crossed $1TN in GMV in FY20. That is… massive. Indian e-commerce industry is valued at ~$60BN, which is a mere 8.6% of the overall retail market. Moreover, there are only 110MM online shoppers in the country, only 10% of the overall population. This second problem is being solved rapidly by access to cheap mobile data powered by Jio, and the availability of budget smartphones. This new generation of internet users’ introduction to the internet has been mobile-first and majorly through videos and image-based platforms (Facebook, YouTube, TikTok, ShareChat etc) and not text based.

Despite having access to the internet, why is India not shopping online?

Because traditional e-commerce platforms were simply not built for these new users. These platforms are-

1. Intent based- Traditional e-commerce has been largely designed around a search based, intent driven experience. This assumes that the shopper has a clear idea of what product they are looking for and will seek out that product, typically through typing into the search bar.
2. English first- In a country with ~10% English speaking population, e-commerce continues to cater to the English speaking audience. It hinders the users’ ability to get product information in their native language and makes such platforms intimidating.
3. Text based- The new generation of Internet users are more comfortable with a video and image-based experience. The complete text-based experience of traditional e-commerce platforms makes it unappealing to new users.
4. Unassisted- Indians love assisted shopping! All our offline shopping experience, especially in local mom and pop stores, remains assisted contrary to the largely unassisted online shopping platforms.
5. Lack a Community- Not all buyers are motivated or rewarded to share thoughts on their purchase.

We believe the emerging new platforms need to build for this new generation of Internet users. They are averse to English (but are aspirational) and prefer a more visual experience than textual. Platforms need to solve for three emotions- Lack of awareness, confidence, and trust.

• Lack of Awareness- Consumers aren’t aware about product’s existence. This is due to sole focus on intent-based shopping in the current commerce ecosystem. There is no room for product discovery, despite them being inherently aspirational.
• Lack of Confidence- They don’t know which brand to trust and aren’t confident about transacting online. They are scared of a possible fraudulent online experience.
• Lack of Trust- They are comfortable with online payments and delivery but don’t trust online products. They’re unsure what brand might work well for them and are in need of a nudge or affirmation from someone. 

Characteristics of Social Commerce
Source: WPP Social Commerce Report

Different forms of Social Commerce

To address this glaring whitespace, we have observed a wide diversity of successful business models have risen to meet these broader human needs. There are 4 major business models which exist in this space, all trying to solve different problems (emotions) of the users.

Different Social Commerce models

Before we dive deeper into each of these models, here’s a quick overview of the businesses. Despite having different approaches to Social Commerce, all of them displayed some similar characteristics and were prone to be plagued with the same problems. Most of the companies here are mobile-first/ mobile-only and sell unbranded goods to a customer base from Tier 2+ cities. To differentiate, the 2 major factors to focus on are sourcing and logistics.

1) Since everyone ends up selling unbranded products, the only way to differentiate is to have superior quality sourcing, which will help the transition to private labeling. The collection of items showcased to the user will also become more exclusive, thus it won’t be reduced to merely a ‘discoverability’ platform.

2) Logistics in India is simply not as developed and mature as China or US- they still remain a huge source of expense. Moreover, return logistics are almost always more expensive than forward logistics making high returns (due to unbranded products) another big expense. Unbranded products have high relative margins, but low absolute margins which in turn accentuate the logistics cost, affecting the bottom line.

Reselling Platforms

90% of retail in India is unorganized and within fashion, 85% of goods sold by volume are unbranded. Traditionally, these are sold through suppliers at your local mom-and-pop stores or resellers selling to their local network through word-of-mouth. When the digital wave hit, some of these stores managed to have an online presence, with the shopping experience remaining largely similar. Adoption of online shopping through WhatsApp and Facebook also further aided these reseller entrepreneurs.

What attracts customers to these local stores/resellers? Trust, Convenience, and Proximity.
Most products sold are unbranded, so trust and product discovery resides with the store owner. The stores provide convenient payment options in the form of monthly credit and help customers avoid online payments. The sheer proximity of the store or your local neighborhood aunty selling you stuff makes it a no-brainer. They have managed to solve for all of Bharat’s emotions- Awareness, Confidence and Trust.

While this works well for the customers, the need for Working Capital constrains the growth of small retailers who have the benefit of this trust. Pilferage is also a persistent problem- there are massive amounts of products which go unsold and occupy shop floor space that eventually need to be dumped. Resellers also have to constantly worry about sourcing, logistics, and payments. This is where reselling platforms like Meesho, Shop 101 step in- they promise to alleviate all these ancillary problems, so resellers can focus on selling.

Let’s take a closer look at how these platforms work.

All reselling platforms have 3 major pillars- Suppliers, Resellers, and Buyers. 

Source: Socializing Indian commerce: the soonicorn Meesho

Suppliers- For suppliers, social remains an untapped distribution channel which helps reach an audience that might not otherwise have discovered their products. Maintaining a strong supply remains a moat in this business and helps build a private label. Currently, we don’t see any exclusivity in the supply amongst these platforms.

Resellers- These are the key players in the reselling business. A lot of these resellers are often first-time entrepreneurs earning Rs 5,000 to Rs 10,000 per month and leveraging the power of their existing social networks to sell to friends and family. Meesho especially focuses on housewives as resellers. India had 2MM housewife resellers in 2017, projected to grow to 20MM in 2022. While a huge market, we observed that most of these resellers have no prior experience in selling and aggregation of demand remains directly proportional to this ability.

Buyers- 650MM Indians have access to the internet, 450MM use WhatsApp and only 110MM shop online. This gap is being filled by this new generation of internet users. These buyers are the people who lack trust, confidence, and awareness about e-commerce.

All resellers

For these new consumers, reseller platforms becomes the natural first stop to solve for lack of awareness (increased product discovery) and lack of confidence in online transactions. Resellers sold within their social circles: more than 80% of sales to close friends and family/relatives, primarily through WhatsApp. These platforms inturn earn through commissions from resellers and shipping revenues. Rohit has done a brilliant job of deep diving into Meesho’s numbers and business model. We’d highly recommend reading his piece here. These were our observations of the space-

• Most of the resellers have no prior experience in selling. Thus, aggregation of demand and growth of topline remains directly proportional to the reseller’s ability to sell.
• Due to prevalence of unbranded products, return rates remain high. On top of this, backward logistics is way more expensive than forward logistics, leading to an increased cost. Some reports claim up to a 40% return rate.
• Reseller retention is a key metric to focus on. No reseller has any real incentive to remain loyal to a platform. Retention remains directly proportional to the quality of supply (catalogue) they get access to and their commission and bonus incentives for performance.
• Focus on quality over quantity. While amassing resellers is important, number of active resellers is the metric to focus on here. For these reselling platforms, less than 10% drive 60-70% of the revenue.
• Leaky Bucket problem- As more and more people get digitally literate, they’ll eliminate the middleman (resellers) and become more comfortable with transacting online themselves.

We believe that in the reselling model, the major moats a business can establish include having good reseller retention, being well capitalized, having exclusivity of products via Private Labelling, low return rates, or having cheaper logistics.

Meesho enjoys a comfortable lead over its competitors currently due to it being the first mover, being well capitalized (raised >$200MM), and the sheer number of resellers it has amassed and better reseller retention it enjoys versus its competitors.

Video and Live Streaming Commerce

If there’s one thing that’s been bountiful in 2020, it’s video content. The future of commerce belongs to brands and creators who bring commerce and content closer together in a seamless, engaging, and interactive viewing environment. These shoppable video experiences meet the viewers where they are, have the potential to unlock valuable user data, and empower brands to connect with consumers through more meaningful interactions. Video commerce has been around for a while. Taobao pioneered ecommerce livestreaming in late 2016, but it wasn’t until 2019 that livestreaming ecommerce really started to take off in China. Coupled with retail stores shutting down due to COVID, live commerce exploded. China still remains the gold standard for live streaming commerce numbers. Of course, their GDP/capita is also 5x ours, but these make for a great reference point for how big the industry truly is.

Taobao is truly a giant in the video and live commerce industry
Source: McKinsey

Reseller platforms help solve for lack of confidence and awareness. By now, the customer has transacted enough to be aware of products and is confident enough to transact online. Live and video streaming commerce helps solve for the final emotion- trust in the quality of online products. To understand these better, let's look at HomeShop18. HomeShop18 is a brand synonymous with late-night TV, with the overly enthusiastic hosts trying to sell you the most random stuff. In its prime, it was valued at $360MM in 2013. Their tag line was ‘Always Live, Always Interactive’. But if you take a moment to think about it, nothing about the entire experience was ‘live’. You could stop it, you could start it, you could move through the stream. There was no way to interact with the host, it was always a one-way communication. It was solely optimized for TV (or desktop) with the hosts most definitely targeting middle-aged people. Moreover, they sold a limited collection of products and the show would go on for hours. No one has the patience or the attention span for that right now.

Now that we have set some context, one interesting way to think about the new world video and live streaming platforms is QVC/HomeShop 18 on steroids. Plus, since they’re optimized for mobile, it feels like you’re scrolling through any other entertainment app.

                          Characteristics of a live streaming and video commerce platform

The fabric of social selling is vast and nuanced. Video commerce can be done through hiring hosts/anchors, micro-influencers, freelancers with a network to sell, or simply the brand’s sales associate. Different platforms choose any of these options to do the ‘selling’. On paper, they are successful in solving all problems of the users. But they are unable to do it sustainably. For these platforms to actually be viable, they need to figure out their unit economics. Here’s the problem- they sell low ASP products (unbranded goods) to low income customers (Tier 2+ cities) who don’t frequently purchase. A bad experience with quality could ensure a user, who is already lacking trust, never returns.

Unit Economics of Video Commerce platforms
Source: The Ken

Typically, these companies spend $1-$2 on customer acquisition and $2-$2.5 to ship an order. As ticket prices are low ($3-5), companies find it difficult to recover their costs. Add to this the commissions taken by hosts/influencers (10-30%) and the inability to drive repeat purchases due to the lower incomes of their target audience, the Math doesn’t work out.

Simply hiring influencers doesn’t ensure transactions either. If the right kind is not chosen, the traffic attracted is unsustainable – akin to attracting customers via discounts. For live commerce to work well, the hosts need to have the right kind of skill sets to sell enthusiastically. Moreover, creating Platform Generated Content (PGC) is expensive as compared to User Generated Content (UGC). To attract customers to use the app, it needs to have a well-defined use case. We have discovered no real hook for consumers to engage with the app too often, hampering product discoverability and a lower CAC.

We find content driven commerce to be an interesting but ‘yet to be proven’ strategy in India. Most of the companies in this space are trying to replicate the success obtained in China without the necessary infrastructure present here. The most pressing problem in this space is to make the unit economics work. One workable strategy could be to be vertically focused, sell branded goods to Tier 1 customers, and ensure high AoV and frequent purchases.

Commerce layer on top of Content

Social Commerce is an often-used buzzword in the short-form video space. It’s the true messiah for their monetization strategy and all apps want to jump on the bandwagon. You can read our last blog on the rise short-form video apps here. These apps can be monetized as discovery platforms for other commerce websites (brand ads) or can be used to direct traffic directly to the commerce platform on their app.

Platforms like Trell and TikTok have in-app commerce

These video content platforms truly alleviate a lot of the major issues we mentioned in the previous section-

1) An already present robust content layer makes for a strong, well-defined use case attracting millions of users to the app
2) Due to the massive number of users, CAC is almost negligible, solving one of the key growth levers
3) User Generated Content is much cheaper than Platform Generated Content

The problem with this business model is more fundamental- we have found it difficult to gain comfort around a single short-form video platform. We haven’t been able to find solid differentiation amongst them and hence believe it is too early to pick a winner. Moreover, all of them plan to sell branded products. After all, selling branded products is a double-edged sword- you can end up as a mere discovery platform, which we fear.

Group Buying

There is perhaps no one company whose philosophy, growth story, and impact is more tightly intertwined with social commerce than Pinduoduo (PDD). A lot has been said and written about Colin, its founder, and his journey towards building a $100BN company in 5 years. This is a staggering number- it took Microsoft 25 years, Google and Facebook more than 12 years, and even for their closest competitor—Alibaba—it took 14 years. Moreover, all of its growth happened at the expense of Alibaba- PDD’s share in the ecommerce market went from 4% to 14%, Alibaba’s went down from 72% to 63%. The PDD story is important and special because in only 5 years, they made Group Buying “special” and a unique feature.

 Their S-1 prospectus called them a mixture of “Costco” and “Disneyland”. This defines social commerce perfectly! “Disney” as it provides an entertaining, engaging, and socially connected user experience. “Costco” in that it can leverage insights drawn from users and direct relationships with manufacturers to achieve efficient economies of scale, and thus superior value for money. No wonder PDD has been the poster child for this industry- they were setting up the stage to combine the power of Social and Commerce even back in 2015. If you don’t believe us, believe the numbers- they did $70MM of revenue in Year 1.

Colin wanted to start an ecommerce company to capitalize on the rising incomes, the emergence of the middle class in China, and the rising consumption. It helped manufacturers cut out middlemen by selling discounted items directly to low-income consumers and monetized largely with advertising. PDD’s initial business model consisted of buying fruit in bulk from farmers and then selling it directly to consumers. China’s fresh fruit market was growing fast in 2015, but less than 3% was sold online. On top of this, they added social features unique to PDD when they were introduced- Price Chop, Group Buying, and in app games incentivized by purchases.

Pinduoduo’s C2M model
  Source: Defining Interactive E-Commerce Report

We believe PDD has built its business on 5 strong pillars- Cultural, Social, Logistical, Technical, and Financial. They could create this mammoth of a business because China’s infrastructure allowed all these pillars to exist simultaneously. PDD’s business model is as ‘social’ as social commerce gets. For a similar ‘Group Buying’ business to exist in India and be as smooth in its execution, these pillars don’t just need to exist, they need to exist simultaneously.

• Cultural- A rapidly growing economy and the emergence of homegrown low-cost smartphone makers led to millions of Chinese people mostly from Tier 2+ cities becoming regular internet users for the first time, often exclusively through their mobile phones. By 2015, nearly 89% of China’s internet users were online via smartphones. This phenomenon is seen in India too, with a large number of users being introduced to the internet via cheap mobile data and budget smartphones.
• Social- PDD gained massive early popularity because it utilized the already existent network of WeChat and built its platform over it. WeChat has created an abstraction layer on top of the OS where you open WeChat and then you decide what to do from inside it. PDD was built completely over WeChat Mini programs, harnessing its distribution and reducing CAC. Even now, PDD has 233MM users on the WeChat Mini App and 144MM users on their native app, which is unheard of. Building on top of an existing network at such a low CAC would not be possible currently in India (One can argue this could be built on WhatsApp in India. But unlike WeChat (Tencent), WhatsApp (Facebook) is a platform and not an aggregator. More on this here.)
• Logistical- The third-party logistics networks in China are so mature and extensive that PDD could do everything without setting up any of their own logistics. Moreover, when it’s a browse-based experience and not intent-driven (like traditional commerce), you can get away with much cheaper, much longer shipping times due to lack of urgency.
• Technical- The fourth pillar of PDD’s success was the maturation of recommendation AI. At first in a brute force way, over-time algorithmically— PDD shows you things it thinks you would be interested in, things you might be out of, and things your friends are buying and thus might influence you to buy. Basically, PDD managed to introduce a ‘news feed’ in a Shopping app. The platform learns from the behavior of its users, which reveals their preferences and facilitates personalization of the e-commerce experience.
• Financial- The unique payments ecosystem in China opened the door to e-commerce and digital retail business models that would not be feasible in other environments. The average consumer is very comfortable with making online mobile payments. This is further facilitated by AliPay and WeChatPay. Hopefully, UPI could alleviate this.

The Pull vs Push Model 

Source: Defining Interactive E-Commerce Report

It is abundantly evident through the case of Pinduoduo that humans crave more from the shopping experience than the cold and impersonal experience that is accepted as status quo. We believe through these 5 pillars, it is possible to encapsulate many of the most enjoyable aspects of shopping in the physical world onto our phones.

Conclusion

We believe Social Commerce is a rapidly evolving sector and is going to be the defining experience of commerce this decade. It is a space to look out for and we have our ears firmly to the ground, looking out for companies in the video commerce + influencer space. If you’re building something fascinating in this space, please reach out to us.

• 650MM users in India have access to internet, only 110MM people shop online. Retail Market in India is $700BN but online commerce accounts for only $60BN. This is because traditional e-commerce has catered only to the internet-first, largely English speaking audience so far. Traditional e-commerce is largely unassisted, has a lack of product discovery, a huge language barrier, and is text and static image based.
• Rising accessibility to internet propelled by Jio has given birth to a new generation of internet users who are outside the Metros and whose first interaction with the internet has happened via YouTube, TikTok, Facebook, and WhatsApp. These users are intimidated by the current commerce ecosystem. They have no awareness, confidence, and trust in digital shopping.
• Social Commerce aims to humanize the current robotic experience of shopping and make it more inclusive (by adapting to their current behavior) for this new generation of users. The major hurdles to solve here are CAC, AoV, and sourcing capabilities.
• Almost all of these companies are selling unbranded goods to customers from Tier 2+ cities and have an uphill battle against high logistics cost. All of their platforms are mobile-only or optimized for mobile.
• In the reselling model, the major moats are to have good seller retention, be well capitalized, have exclusivity of products via Private Labelling, low return rates, and having cheaper logistics. Meesho is miles ahead of the competition currently.
• Content leading to commerce is an interesting but yet to be proven strategy in India. Most of the companies in this space are trying to replicate the success obtained in China without the necessary infrastructure present here. The top problem in this space is to make the unit economics work. This has been attempted by increasing the AoV and being a vertical player rather than a horizontal one.
• To replicate the Group Buying model like PinDuoDuo’s in India, we need to have strong pillars to build the business on (Cultural, Social, Financial, Technical, Logistical), which we currently don’t. Companies have tried to replicate this but failed.

If you enjoyed this blog, we've also unbundled the short form video apps space here and what it takes to build a brilliant company.