Where Content Meets Commerce: 小红书 Little Red Book

Xiaohongshu (小红书) is the world’s largest lifestyle platform which integrates community, content and commerce. The community-based platform was nominated to Fast Company “The World’s 50 Most Innovative Companies 2019” where it ranked third in the China sector.

The platform was launched in 2013 and it is headquartered in Shanghai. As of January 2019, Xiaohongshu has accumulated over 220 million users and it is valued at USD 3 billion. Its success is attributed to the platform’s unique integration of the 3 Cs — Content, Commerce and Community.

Xiaohongshu is often described as a “Instagram-meets-Pinterest-meets-Amazon” platform where anyone can share their lifestyles and stories about the products they use (through pictures or short videos). The element of discovery is at the core of Xiaohongshu. Users use the platform to discover lifestyles and to find product reviews before making a final decision to purchase the item. More oft than not, purchases happen out of serendipity.

However, commerce was only introduced on the platform in 2015. Xiaohongshu started out as the “Lonely Planet for Shopping”. Its name directly translates to Little Red Book. Red is an auspicious color in Chinese culture and a little book is reminiscent of pocket-sized travel guides. It is an apt name for a social platform centred around discovery. Co-founder Miranda Qu believes that a book is a bridge between something you know and something you do not know.

User Demography

Positioned as a lifestyle platform whose contents range from food, beauty, shopping to cute pets, it is no surprise that the app has gained traction among female audiences. Over 85% of Xiaohongshu’s users are female who are between 20–35 years old. Users tend to be concentrated in top tier cities such as Beijing, Shanghai, Shenzhen and Guanghua. They are often considered to be sophisticated, with high consumption power. They have no bias between international or domestic brands — they priority quality. This has led to the rise of high quality local brands (国货风潮).

The fact that more than half of its user base are from first tier cities reflects Xiaohongshu’s impressive traction with this demography. This post-90s generation use Xiaohongshu in their fragmented leisure time to review other users’ “notes” of their shopping experience to make better purchasing decisions. After completing their purchase, they share their own good or poor experience with the product. This creates a virtuous cycle of genuine experience sharing and deeper engagement with platform.

The User Experience

The words 种草(seeding), 长草(growing) and 拔草(weeding) best describe the process of how users interact with Xiaohongshu.

• 种草(Seeding): A person is “seeding” when he/she recommends and shares a product which makes you fall in love with it in an instance. You feel — “I like it”.

• 长草(Growing): Of course, making a purchase decision depending only on 1 post might not be enough. Thus, you continue to read related feeds under that certain post to explore others’ comments. Sometimes you will find that the product may not be the best fit for you, while sometimes your desire of having the product will gradually “grow” because of its high reputation, and finally, you tell yourself — “I want it”.

• 拔草(Weeding): After the time of “growing”, you eventually buy the product on through the app, which is coined “weeding”. Maybe the result is not as good as your expectation, or maybe it is, at least you have “weeded” the excitement for this product. If you are satisfied with the product, you can become a “seeder” yourself by sharing your experience of the product on Xiaohongshu.

The location-based feature on the platform functions as a “tour guide on the go”. Users use it to discover any newly opened shopping mall or to decide on where they should spend their weekend — which restaurant, café or attraction they should visit.

Xiaohongshu’s Growth: A Breakdown

Stage 1: Seizing the opportunity in cross-border ecommerce

Xiaohongshu first started out as a cross-border shopping guide in pdf format when founders Miranda Qu and Charlwin Mao realised that an increasing number of Chinese people were travelling overseas to shop.

They had personally written a guide about shopping in the US. Travellers could download the guide on its website. Although the guide was downloaded 500 000 times within a month, Xiaohongshu’s investor was not impressed. This was back in 2013 where ‘mobile first’ concept was becoming more prevalent and many companies were transitioning into mobile. By Christmas in 2013, Xiaohongshu launched an app and positioned itself as a User Generated Content (UGC) platform focused on sharing content related to cross border shopping. Its slogan was “find good things abroad”.

In fact, when the app was launched, it faced a conundrum over whether it should be categorised under shopping or travel in the app store. The platform prided itself on the element of discovery. Through the Xiaohongshu community, people could discover the myriad of lifestyles and products out there. It grew into a social platform where people started sharing their shopping haul, destinations and how they made the decision to buy. By the end of 2014, the platform was bombarded with complaints which went along the lines of, “We see lots of beautiful things on Xiaohongshu but we don’t know where to buy them”.

That’s when Xiaohongshu started looking at opportunities in cross-border ecommerce and opened “FuLiShe” (福利社), an online store on its platform.

Stage 2: Moving into Cross-border Ecommerce

In 2014, the cross-border ecommerce industry was worth 120 billion yuan. 1 in 5 Chinese shoppers used these “Haitao” (海淘) platforms to buy overseas goods where prices are often at least 30% cheaper than in China. This is a substantial discount when it comes to luxury items — the cross-border luxury goods market alone was estimated to be worth $12bn in 2014.

This is known as “daigou” (代购) which translates to “buying on behalf of someone else.” Daigou is carried out by millions of small-time business operators who shop overseas, then sell the goods over messaging app WeChat or Chinese e-commerce platforms. However, the industry is marred by counterfeits and tax evasion. In 2015, the Chinese government clamped down on daigou and introduced a new tax regime for cross-border ecommerce, making online shoppers liable for 70 per cent of a slew of VAT taxes previously applied only to wholesalers.

Amid all the regulatory uncertainty, it was an opportunity for Xiaohongshu to enter the highly competitive industry as the shakeup meant that everyone had to start from ground zero.

• A Cautious Start

As the founders had no prior ecommerce experience, they entered the cross-border market in a conservative manner. In its first trial, Xiaohongshu chose to launch only one product which sold out within ten seconds. Following that, they launched ten products and gradually increased the number of products sold each time. This validated the feasibility of cross-border ecommerce and Xiaohongshu started to stockpile inventory for bestselling products to secure supply. On January 2015, monthly GMV on the platform amounted to 1,000,000 RMB. Six months later, monthly GMV had increased hundred-fold.

• Strategic Partnership (Direct Procurement) with Foreign Brands

Instead of choosing a marketplace model, Xiaohongshu forges strategic partnerships with brands and maintains its own inventory for quality assurance and customer experience. Xiaohongshu operates two warehouses in Shenzhen and Zhengzhou. Since Xiaohongshu procures products directly from brands, customers are assured that all products are genuine. 14% of Xiaohongshu’s users use the platform to find reviews of items they have found on Taobao. Even if the product may be more expensive on Xiaohongshu, users are willing to pay for the convenience and peace of mind offered.

It was necessary for Xiaohongshu move into e-commerce to close the “Read-Like-Buy” loop. Now, users could purchase the product directly from the brand after reading reviews.

Xiaohongshu’s success, at least in the beginning, was due to word of mouth. In 2015, the platform expanded its motto to “discover good things in the world” to reflect that it was first and foremost a community. The platform recognised that the shopping guides and reviews had to be useful, but more importantly, they had to be authentic, and not sponsored posts. Sales conversion rates are as high as 15% on Xiaohongshu since it has engendered user trust. But that’s also why Xiaohongshu resolutely refused to use advertising as a business model. Even though it’s a content platform, it makes money via traditional ecommerce.

• Challenges

To expand from a cross-border ecommerce platform to an all-encompassing ecommerce platform (商城) , Xiaohongshu introduced a marketplace where only brands which fit the platform’s user profile are allowed to open a store. Brands operate their own storefront while Xiaohongshu controls the procurement process. However, the inefficient operation of its supply chain and warehousing has led to product shortages which dissuades users from making purchases on the platform. Moreover, as the number of product SKUs available is limited, users still end up buying products on other ecommerce platforms after reviewing the item on Xiaohongshu. By the end of 2017, Xiaohongshu only had a 4% market share, even lower than Amazon.

Stage 3: Organisation Restructure: Focus on Content and Engagement

Earlier this year, Xiaohongshu announced that its ecommerce department will be upgraded to brand department (品牌部). Also, The restructuring is significant as it reflects how Xiaohongshu sees ecommerce as a part of value chain and is not an end in itself. The existing online store (福利社) will be integrated into the brand department. The new unit will focus on helping brands leverage the platform’s value chain from community engagement to working with influencers to final purchase. In other words, the department will help manage all its customer touchpoints on the platform.

To promote partnerships with Key Opinion Leaders (KOLs), Xiaohongshu launched a platform (品牌合作人) for verified brands and KOLs to find and partner each other. In May 2019, Xiaohongshu increased the requirement for KOLs to join the platform — instead of 5,000 fans, only KOLs with over 10,000 fans will be allowed to partner with brands. The brand-influencer platform also incorporates multi-channel networks (MCNs), which reach out to influential content creators on behalf of brands. Companies and MCNs can now find KOLs using content tags and view statistics such as a content creators’ fan count, number of likes, average hits over the past 30 days, and average number of comments per post.

However, Xiaohongshu requires influencers to explicitly state sponsorships in their posts. This is because the platform has adopted a “content first, commerce second” strategy. The high-quality UGC (user generated content) on the app is what users are fond of. Unlike other social platforms, the content on Xiaohongshu is more informative and detailed, making it more real, authentic and useful for the audience. The quality of conversations and engagement driven by posts are much higher as well since users will ask detailed questions to explore if these products are a fit for them. The recent integration of Xiaohongshu’s product reviews into Taobao highlights two things: Firstly, high quality and objective UGC is Xiaohongshu’s unique competitive advantage. Secondly, there is an emerging trend of UGC in ecommerce, reflecting the growing influence of content on Chinese shoppers’ purchase. Against this backdrop, it is imperative for Xiaohongshu to protect the quality of its content.

The platform has cultivated itself as a “book” where people can write and read about the lifestyles and product from all over the world. This has been reflected in its new slogan “Taking notes of my life” (标记我的生活). Xiaohongshu is looking to harness its existing reputation as a lifestyle platform to build a lifestyle brand. In 2018, it launched its first offline concept store “REDHome” in Shanghai. It is also exploring

Looking to the future, the founders have always thought of the platform as an online Disneyland. While Disneyland represents fun and love, the founders are more interested in its business model. Contrary to common belief, selling tickets is not their main business model. Disneyland makes money from the restaurant and shops inside the park. The Xiaohongshu community is synonymous with Disneyland as users have fun through discovering new things on the platform. The content is the ‘attraction’ and users spend money through purchasing the items they have discovered. The founders will be looking to expand the range of “restaurants and shops” on the platform in the future.

Currently, Xiaohongshu derives revenue from the fees which brands must pay to host their stores on the app (guarantee and technical service fees), optional ad campaigns and sales from its own label. It does not collect commissions from business partnerships as it does not have a system to manage commissions. Moving forward, the platform will look to onboard more brands to increase the range of its product offerings.

Technology: Artificial Intelligence

Xiaohongshu utilises AI in three aspects:

Content Evaluation

AI supports content evaluation in two ways. Supported by big data analysis, it is used to rank posts based on the quality of their content. This ensures that users will only see high quality content. From a publisher’s perspective, tags for each post will be automatically recommended alongside standardised toolkits for content production. This kills two birds with one stone — it eases the publication process while aligning tags in the database to optimise recommendation algorithms.

Personalised Recommendation

The platform utilises recommendation algorithms to match high quality posts to its most relevant audience. The accuracy of the algorithm depends on the how well it has been trained to understand each user. Xiaohongshu uses three data points to train its algorithms: User demography characteristics, interest filter and browsing history. The algorithms are optimised to convert post reviews into purchases. The algorithm adapts to user browsing in real-time (since most people use the app with no clear objective), reflecting that purchasing behaviour is more oft than not, made in the spur of the moment. For instance, a user may be travelling to Japan and Xiaohongshu is useful for exploring travel itineraries. However, the platform may introduce Japanese snacks or clothes which may tempt the user into making a purchase.

Instead of using data from the user’s purchase history, the algorithms use data from the user’s browsing habits as purchase behavior is different from browsing behavior. For instance, a user may buy a 40 RMB lipstick but she hope to see a 300 RMB one in her feed.

Decentralisation

The recommendation engine gives equal visibility to micro KOLs at the grass roots level. This is crucial to maintaining the authenticity and objectivity of content. The algorithm ensures that popular KOLs who tend to produce more sponsored and paid posts do not dominate user feeds, ruining the platform’s reputation for veracity and as a source of real opinions.

Future Challenges

Tackling Fraudulent Reviews: Xiaohongxin Program

Xiaohongshu has been criticised for posts containing fake content or products. A recent hashtag on Weibo, #Xiaohongshu ghostwriting 50 RMB/post, caused a huge uproar among Chinese netizens. A Weibo post which revealed Xiaohongshu packages such as “8888 likes with 8888 favourites” and “50 comments on Xiaohongshu for 1388 RMB” attracted thousands of comments within a couple of hours. The top comments expressed their disappointment and many of them agreed that Xiaohongshu is no longer the Xiaohongshu it used to be. “After celebrities also opened their accounts and made recommendations on Xiaohongshu, I don’t use the app anymore.” Says one top comment.

In response, between January and March 2019, the anti-fraud team removed 1.2 million fraudulent posts and over one million rule-breaking accounts. The team utilises machine learning alongside humans to identify rule-breaking which includes behaviour such as manipulating a post in keyword search rankings.

In a bid to crack down on online sellers offering to boost views and fan counts, the platform launched the “Xiaohongxin” (小红心) program in May 2019. It is an evaluation system for users to judge content quality. These moderators will help to maintain transparency and foster a truthful content environment. The platform quantifies these moderators’ feedback to rank the trustworthiness of each post. Not every user can participate in the Xiaohongxin program, only those who have purchased the product can be selected, these users are called “Xiaohongshu Publishers” (小红书出品人). Selected users will evaluate the product they have purchased based on various criteria. So far, more than 500,000 users have been selected to join the program, and more than 3108 products have been evaluated.

Through this program, Xiaohongshu hopes to redress the harm done by fraudulent reviews and restore trust in its community.

Xiaohongshu’s success was built on its strong reputation for transparency and real opinion which has earned followers’ loyalty. This has attracted celebrities as it makes them seem more accessible. Presently, the platform is an even playground for publishers who are eager to share their purchases and travel experiences for attention and praises. However, the increasing number of celebrities on the platform will make it difficult for normal users to grow followers and garner attention in the future. This may diminish ordinary people’s enthusiasm for sharing, weakening its community and thereby its unique brand edge.

Xiaohongshu’s success will depend on how well it is able to protect its community and the transparency it represents.