Selling the Future
E-commerce is becoming an increasingly important part of lives around the world and the adoption of online shopping is particularly apparent in China. The country boasts the largest e-commerce penetration rate in the world but even then it only constitutes around a quarter of all goods sold, meaning that there is still a lot of room to grow.
In this interview, author and investor David Bell discuss the importance of digital payment systems to the creation of e-commerce infrastructure, the differences between goods with digital and non-digital attributes, and the future of hybrid online-offline future for commerce.
Q. How important are digital payment systems to the creation of all-encompassing e-commerce platforms?
A. It’s a really critical part, but one of a wider number of things. If you think about what you need for full-blown e-commerce adoption, the main thing is that you need consumers to trust the system. This means they need to know that the things they order both exist and are of good quality, as well as that they will arrive when you order them.
You can have various sellers and platforms offering a massive range of products, but in order for that to gain momentum and take off, you also need to connect everyone, which requires fast internet access proliferated throughout the country. And then you need to overcome the other impediments. You have to know that the thing is going to show up, so you need reliable delivery infrastructure. You also have to know that if you give your information to the platforms, the payments are safe and secure. There needs to be some level of trust.
This lack of trust is why you originally saw cash-on-delivery across many markets, including China, early on—people didn’t want to pay for things they couldn’t see or feel, with no guarantee of a safe transaction. But with high-quality digital payment systems in place, consumers are much more willing to buy online.
And China is at the very forefront of these technologies. It’s also a two-sided thing, all of the infrastructure is there to use, and you have a young, digitally-native Gen Z and Millennial group of customers to use it.
Q. To what degree is the push by China’s e-commerce platforms into other regions such as Southeast Asia proving successful? Do you think China benefits from cultural closeness compared to, say, Amazon, especially going into places like Southeast Asia?
A. I had an academic friend that looked at the proclivity for people to consume products, services and information from other countries. If you think about physical trade, there’s work by Paul Krugman that, in very crude terms, shows there are two main factors, geographical proximity and similarity of the economy. An easy example is US-Canadian trade where they share a border and are both developed economies. Meanwhile, for New Zealand, that trade would be harder, it’s further away and significantly smaller.
The question my friend posed was whether this held true for purely information goods. Would people access websites or online services from further away given there were no barriers to doing so? Interestingly, what he found was that people still preferred to access stuff from countries that were “close” to them, and this was especially true for products that have cultural nuances like games and music. So, there is definitely something about cultural affinity that affects consumption.
Having said that, I think that looking at Southeast Asia, as well as some failures here and there, there have been Chinese successes, local successes, and successes by Amazon, and I think that in general there is room for all three.
Q. To what degree can e-commerce still be considered a new phenomenon and how would you categorize the industry’s situation today?
A. There is an important delineation in terms of products when it comes to e-commerce that means that we’re still seeing it evolve, and that is digital versus non-digital attributes.
Every product has some digital attributes and some non-digital. Take a book, for example. Basically, everything in it can be conferred to the target audience either online or offline, there is no concern when you buy an economics book online, that it will turn up as a different product on a different subject or with a different number of pages. You’re happy to buy a book online because it is filled with reliable digital attributes.
But for something like clothes or food, there are a number of non-digital attributes that make this harder. They might not fit, you might not like the look of it or it might not taste quite right, and this might mean that you’re less likely to buy these more tactile things. When e-commerce first kicked off, the easiest stuff to sell was stuff that only has digital attributes, which is partly why Jeff Bezos started with books. What accelerates the development of e-commerce is the ability of companies to figure out how to effectively assuage concerns about non-digital attributes.
Shoe delivery company Zappos is a good example of success here. Shoes have non-digital attributes, but they decided to offer the ability to order five pairs and just keep the one you want and send four back. They solved the problem of a product having non-digital attributes by offering totally free two-way shipping—they have to be sure this will be frictionless, though. The process is probably a bit more difficult with a product like an avocado, but there are already companies that will sell you a week’s worth of avocados, each at a different stage of ripeness to ensure they won’t all go off at once. These innovations are what are accelerating e-commerce penetration and keeping it new and interesting.
Q. There has recently been a rise in the use of Virtual and Augmented Reality (VR and AR) in the e-commerce space. How do you see this affecting the digital economy?
A. I see AR, VR, and the associated technologies resolving a lot of the problems around non-digital attributes. You can now step into a virtual environment and be “touching and feeling” things. Using furniture as an example, there are now a number of companies that offer the option of AR to see how a piece looks in situ, rather than looking at it and trying to guess whether it would suit the rest of the room you want to put it in.
I think the more technology we develop, the more we can help people get over any uncertainties about whether what they’re going to buy is going to be something that they actually want or like. They also facilitate a different form of social shopping, where you can bring your friends into a virtual showroom to see what they think about a potential purchase, or when you’re virtually trying on glasses, you can get an expert to help you out with advice and comments. All of this will drive more expansion of the digital economy.
Q. How would you compare the digital marketing systems of China and the rest of the world? Where are the greatest opportunities for one to learn from the other?
A. One big difference is about how individuals, as well as regulators, think about privacy. A big thing that really hurt a lot of e-commerce brands in the US, apart from Amazon, was when Apple changed their privacy settings [limiting advertisers tracking capabilities and allowing users to opt-out of data sharing]. This made their previous digital arbitrage practices, attracting customers at a low-cost using ads spread across Google, Facebook and Apple, etc., much more difficult, especially in the US and Europe. In China, however, people tend to be less concerned about privacy issues, per se.
The ability to understand an individual’s data and to make attribution about what they’re doing is increasingly critical. This has upped the ante on things like machine learning and artificial intelligence, and now there are techniques like “probabilistic attribution,” which create tools to discern the probability of consumer data through correlations in purchasing practices, etc. Because access to data is becoming more limited, companies are trying to figure out ways to be more sophisticated with the data that they have on consumers.
Q. How does the massive increase in all things digital affect the offline marketing world?
A. China is right at the top of e-commerce penetration, but that is still only around a quarter of total sales. Different sub-sections of the market can vary in penetration levels but averaged out completely, the number is still quite low, and in other countries even lower. So, wherever you are in the world, the majority of stuff people buy is bought offline.
The real difference is that many of these sales processes are now digitally assisted. For example, grocery stores where you scan QR codes throughout the store and walk to a collection area where your shopping waits for you.
I think the most important takeaway is that 20 years or so ago, everyone was looking at the future and was certain that the digital/virtual world and the real world were in opposition, with the digital world eventually overtaking the other and everything purchased online. But that turned out to be totally wrong, and the two are actually much more complementary—the fact that there is digital actually makes the offline experience more interesting.
I think the big question is where you can introduce e-commerce or commerce in general into offline spaces that are not traditionally shops. In South Korea, for example, you can scan grocery items for delivery while waiting for your train in the subway. You spend so much of your offline time in places other than shops, the question is how to make them shoppable environments.
Q. To what degree are there concerns about digital marketing becoming less effective as it becomes increasingly pervasive in our everyday lives?
A. It’s 100% a concern. In the US, for example, especially since the iOS update changed to ensure a much greater degree of privacy, it has become obvious that things like Google paid search have become much less effective. This is thanks to people just being able to turn off data access, as well as using VPNs. Now you have to be more creative. Perhaps you need to create communities or content within which you can disseminate ads or figure out how to leverage famous people. All of those things are becoming much more in vogue and something that people are trying to catalyze.
Q. Given your experience working with companies in both China and the West, to what degree do their approaches differ and what are the benefits and drawbacks of these approaches?
A. In China, there’s more creativity around the adoption of new technologies and also rapid growth of these things when they come out. Perhaps because they’re more mobile-first among other cultural characteristics. For example, social shopping is such a big thing in China, but it still hasn’t really taken off in the US. In China, people follow others because they like their style or taste and buy the things that they recommend, but these relationships haven’t really been cracked in the US.
Where the US has always been good, though, has been around developing brands and narratives and things that really resonate with not only US consumers, but with the global audience. And maybe that’s part of the benefit of having a very culturally heterogeneous population. It makes US brands pretty nimble at exporting their stuff globally, more so than China brands.
Interview by Patrick Body
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