The convergence of 5G and blockchain technologies are facilitating the dawn of a new economic era. The disruption will start in the ecommerce industry and from there expand to all areas of retail, advertising and affect tech companies around the world.
China, having by far the largest ecommerce sector in the world and being at the forefront of 5G technology is in a position to incubate the trend and then export the new business models to the world.
The transformation of China’s retail economy will recruit and train hordes of talent that will drive traffic from their social media channels to the brands’ stores. The 5 As Marketing Model presents a unique opportunity to solve the unemployment problem for millions of people — a problem that has been exacerbated globally by the ongoing COVID-19 pandemic. Direct-to-Consumer sales will accelerate commerce in poor areas; and the creation of millions of 5G, ecommerce employment opportunities will support the last-mile in the fight against poverty in the decade ahead.
I have identified certain trends and defined a number of strategies that will allow China to enter the new economy era swiftly. The 5 As Marketing Model is based on the principles of fractional economy, and deploys a new traffic acquisition mechanism to drive sales. The new economy operates through a decentralised ecommerce Sales Acceleration Network (SAN) and three innovative business models: K2C (Key Opinion Consumer-to-Consumers), D2C (Direct-to-Consumers) and C2S (Consumer-to-Supply Chain).
There are three major problems for businesses in the traditional Internet ecommerce of the current 4G era:
— Traffic is expensive: platforms monopolise traffic and resell it to vendors.
— Vicious competition: fake products and poor-quality items flood the market.
— Large accumulation of inventory: up to 60% return rate during promotional events makes the cost of innovation or launching new products much higher than required.
The premise of the strategies I will explain below is that our goals are to achieve zero traffic costs, zero inventory cost and to eradicate counterfeiting once and for all.
The 5 As Marketing Model
In the past decades, the Internet and mobile technologies have been the major forces shaping commerce. Their impact goes beyond ecommerce as now brick-and-mortar retail is intertwined with ecommerce. These technologies have disrupted whole industries (e.g. bookshops), changed advertising (they practically killed TV commercials) and changed the shopping experience (even in physical shops, consumers use their phones to check prices in a competing store). Let’s take a look at the trajectory leading to the 5A Marketing Era.
The 4 Ps Model in the Offline Era
The 4 Ps Marketing was first introduced by E. Jerome McCarthy in 1960, and it refers to the set of marketing tools that a brand uses to pursue its objectives. The 4 Ps are:
— Place (distribution channel)
This model takes the product as king, while pricing strategy, distribution channels and promotion strategies orbit around it. It promotes traditional offline retail, brand franchises and department store-based sales. The 4 Ps model assumes people just buy products because they are available. It promotes a “manufacture it and they will buy it” approach.
The 4 Cs Model in the Internet Era
In the 1990s, Lauterborn’s introduced the 4 Cs model, a customer-driven replacement of the 4 Ps. The 4 Cs are:
In this model the consumer is king. Brands must optimise costs on a large scale and accelerate transaction efficiency through information technology. Having the potential to reach consumers globally, brands focus on sales volume more than product excellence. This is best exemplified by the emergence of fast fashion.
This period coincided with the Internet entering the public domain. The birth of ecommerce was characterised by traffic-based transactions; and a global market where the product offer is so overwhelming that goods themselves are not that important anymore, information display is.
During the 4 Ps era, China’s economic development was in overdrive, surpassing the USA in the size of the Internet, mobile and ecommerce markets.
The 5 As Marketing Model in the Mobile 5G Era
This theory is first being proposed by the New Traffic Economy Research Institute of China. Our research has led us to conclude that we are entering an era of fractional economy (powered by blockchain) and 5 As marketing (powered by 5G). We believe that China will lead this transformation, which will reshape the world in the next 20 years. The 5 As are:
— Attention: the consumer’s focus in the age of infinite content in the palm of your hand. We have come along way from the time when people enjoyed watching TV commercials because there were only a few channels with fixed a broadcast schedule. Today, people use ad-blocks whenever possible and they look the other way when they are forced to watch even 5 second ads.
— Accreditation: a brand’s or KOC’s reputation and credibility. KOCs are the people actually presenting the products or making the sales pitch. They can establish more intimate relationships with the consumers, so they take centre stage.
— Affection: the love or appreciation for the brand or the KOC. With so many products to choose from today, all similar in form and functionality, the only differentiator is charisma.
— Affinity: shared interests are the link between a consumer and the KOC; this goes beyond affection because a consumer may like a KOC but not necessarily share many things in common, and those are the bridges that allow a KOC to build trust with her audience.
— Autonomy: we’re moving into a decentralised economy where platforms take on a secondary role. Autonomous agents perform tasks that benefit themselves and the entire ecosystem.
In the 5 As Era, attention and trust are the two personal assets that drive commerce and reshape advertising. The focus now is on personal ecommerce where product information is delivered via short videos and live broadcast showing real-life usage of the product. The economy is undergoing a decentralisation process where blockchain technology serves as the bottom layer to track production and commercial relationships.
Today, goods no longer take centre stage because there is overproduction across the board and consumers are overwhelmed with an excess of choices. As a result, a large amount of attention assets is being wasted in traditional ecommerce: people are bombarded with ads to which they don’t react to, the platforms charging for the users’ attention are getting richer and the vendors are the suckers picking up the bill. The basis for the new 5 As marketing theory is that traffic for traffic’s sake is not a solution. Vendors understood this earlier than everyone else because they have been paying for probabilities rather than sales.
Attention is an Asset and Trust is Wealth
With the recent push of blockchain and 5G, China will be the first country in the world to fully enter the era of fractional attention transactions based on trust. In this era, we will close the gap between rich and poor, and distribute resources more evenly. The business ecosystem will not be monopolised by a handful of giant platforms, but rather operate in a way where everyone contributes to the growth of the ecosystem and they get rewarded for that. Even the poorest families have their own attention assets, and they can influence their relatives, so they can monetise this by participating in the new fractional economy.
The Sales Acceleration Network (SAN)
My work at the New Traffic Economy Research Institute of China goes beyond academic research; our mandate is to define viable strategies that can have a quick impact on the economy. To solve the unsustainable conditions that traffic oligopolies have implanted in the ecommerce industry, I am proposing three solutions that together can be orchestrated through a Sales Acceleration Network — which is a network of KOCs and brands/vendors that together form a decentralised ecommerce ecosystem. The solutions or business models are:
— K2C: KOCs pitch products relevant to their audience, making live demonstrations and offering honest reviews.
— D2C: Direct-to-Consumers means vendors train their own KOCs to drive their own traffic home through live streaming.
— C2S: Consumer-to-Supply Chain solves the leftover inventory problem by inviting Key Opinion Consumers to become the cornerstone of the supply chain. Collectively, they purchase all the inventory from the manufacturer/brand, and the latter pushes the products through whichever channels he uses. The KOCs get fractional selling rights which guarantee they get their money back once the products are sold.
Attention, The Asset that Everyone’s Got
The fractional attention economy is bringing profound changes. The 4 Ps and 4 Cs models of traditional marketing have been rendered irrelevant, and the world is now entering the era of the 5 As marketing. China has the largest smartphone population in the world[i], their 4G penetration is in the top 5 globally[ii] and they have the largest 5G network today, with more than 26 million users[iii]. Having the largest Internet market in the world and being the largest exporter of electronic goods puts China in the pole position in the new fractional economy race.
Traditional Internet ecommerce platforms, through their traffic distribution mechanism, encourage brands and vendors to converge on one platform to compete among themselves, leading to a ruthless price war. Brands are forced to reduce production costs to meet increasingly expensive advertising costs. For example, in order to sell 100,000 items, a vendor must attract at least 2 million users to visit their shop. Let’s be extremely optimistic and say that the vendor achieves a 5% sales conversion rate and sells all his inventory. The vendor had to pay a high advertising costs to get the 2 million users traffic. While people regard this as normal, the truth is that ecommerce platforms are worth hundreds of billions of dollars while most vendors are struggling to support their families. This is true in China as well as in the West, where Amazon has monopolised traffic and has its vendors on the ropes.
In the new 5 As model, the same 100,000 items will be channelled through 10,000 KOCs. Each one of them may buy 1 or 2 pieces and sell 10 pieces to their audience using short videos and live streaming. With this model, the vendor can sell the 100,000 items rapidly and with zero spending on advertising. KOCs engaged in ecommerce pitch products to their own fans, not random users. Pitching to fans implies there is a certain level of admiration and trust, which yields much higher conversion rates than the traditional ads consumers are being bombarded with today. Consumers trust recommendations coming from people who bought the products. 5G live broadcast ecommerce enables users to see and interact in real-time, in high definition and with no lags. This is changing the consumption habits of 1.4 billion Chinese people.
D2C Means Brands Face Their Consumers, Finally
Traditional centralized Internet platforms sell the user’s attention assets. That translates into platforms using all means available to prevent brands and vendors from interacting directly with the end consumer. The platforms implement pay-for-traffic mechanisms which collect the value of the user’s click and impressions.
In the 5 As model, each brand can attract fans directly and interact with them through live video broadcasts. This allows users to participate in the brand’s new product strategy, design and testing. All this contributes to stronger brand loyalty.
D2C (Direct-to-Consumer) avoids intermediary platforms’ traffic fees, allowing brands to enjoy zero advertising sales. A brand is no longer measured by how many ads it can afford, but by the number of fans it attracts, by how much of their attention it can capture. A brand’s own KOC can interact with fans for 3 to 5 hours a day, building a strong brand trust. Fans remember products because they trust the brand! Consumers who watched Li Jiaqi’s (a renown Chinese KOC) live broadcast and bought lipsticks, did so because they trusted him and believed his assessment and affection for the brand are authentic.
C2S: Consumer-to-Supply Chain
In the era of traditional 4G ecommerce, in order to increase the competition among vendors, platforms have launched massive promotional events. The biggest example is Alibaba’s Singles’ Day, an annual online shopping event celebrated on November 11. Single’s Day results in a vicious competition among vendors. It’s a rat race to see who can offer the lowest price! The bidding mechanism implemented results in vendors paying a steep price to obtain decent real estate on the landing page. So, they have to offer lower prices and pay high advertising fees. But it gets worse.
A third culprit for the huge losses that most vendors suffer is the large inventory they have to prepare in order to participate in Single’s Day. After the event, there is a huge wave of returns and refunds for which vendors have to bear the cost. However, the huge advertising fees are non-refundable… Only a small percentage of vendors see any money from the billions of dollars in sales — in 2020, Singles’ Day GMV was USD 38.4 billion.
In ecommerce today, launching a new product as well as participating in promotional events entails a high inventory risk. This makes product innovation harder, especially for small and medium brands.
The core premise of C2S is to invite a large number of KOCs to collectively purchase the inventory, each owning a fraction of the stock’s selling rights. Then, during a three-month sales period, the inventory is put on sale through the brand’s official sales channels — the KOC who participated in the funding being one of these channels herself. Once the inventory is sold, the revenue is distributed proportionally according to each KOC’s selling rights. The leftover inventory that is not sold in the three months can be acquired at manufacturing cost by participating KOCs. These items can be used as gifts or lucky draws among the KOCs fans, therefore contributing to the growth of her channel.
Brands that provide products to the Sales Acceleration Network (SAN) can enjoy zero inventory cost through the C2S platform. When the inventory risk is zero and the advertising cost is zero, consumers will be able to enjoy high quality products at a higher price/performance ratio. Brands will not need to cut corners to reduce production costs just to meet the low-price competition strategy of traditional ecommerce platforms. Vendors will be able to focus on courting their own fans; focusing on R&D, design, quality and environmental best-practices. This will slowly create a new perception of Chinese brands, a perception of high-quality brands able to compete with the best brands in the world. For their part, consumers will get better products at better prices. And some of these consumers will become successful micro entrepreneurs in a new era of ecommerce.
This essay is a translation and adaptation from the original document written in March 2020. Peter is a founder at Gojoy and has trained over 100,000 ecommerce vendors in China.