Tencent vs Facebook: How and Why They Monetize Differently
US Social Giants Take a “B2B First” Approach
The recent data scandal involving Facebook and Cambridge Analytics made the true business model of the American social giants painfully clear to the general public. The social platform itself (which is free) is not the monetizable product, it is the users themselves and the detailed data sets profiling them that are worth a fortune. Facebook has built one of the most sophisticated and precise advertising platforms ever created, leading to a valuation in the hundreds of billions. Google, which uses a similar model of providing free products to collect user information and then sell advertising, is also hugely successful.
The de facto deal between consumers and American social media is that: platforms provide world class free consumer software in exchange for advertising deals based on the data they collect. Products as powerful and well-made as Google Search, LinkedIn, and Twitter have to be backed by advertising revenues if the end-consumer is to receive these services for free.
If the lion’s share of revenue at these social platforms is generated from enterprise or “B2B” clients, then they are incentivized to be “B2B first” companies, providing ever more sophisticated marketing services to remain profitable. Those who have worked with advertising platforms like Google and Facebook can attest to the impressive ability to target specific demographics, to harness sophisticated analytics, and to receive support from professional services teams dedicated to their successful use of the advertising platforms. In addition, both platforms expose their data extensively through APIs to a large collection of third-party developers allowing for automation and integration of marketing activity into advertisers’ existing enterprise systems.
The Flipped Approach of the Chinese Social Giant
China, which frequently provides a foil to the American tech world with its parallel universe of similar but not quite the same tech giants, does not disappoint with the divergence in strategy of its dominant social platform, WeChat.
WeChat introduces a breadth and scale of functionalities and user coverage unseen in the US. In a single application, WeChat is able to provide the equivalent functionality of: Messenger/WhatsApp, Twitter, Venmo/PayPal, Uber, and more. It has nearly a billion monthly active user accounts, and mobile users spend a whopping 30% their total mobile app usage within the application.
With so many eyeballs active for such a large part of their day on one platform, you may be surprised to know that Tencent, the WeChat parent company, makes only a fraction of its revenues from advertising. Instead, Tencent makes its money directly from the individual consumer with 41% of revenue from online gaming, 23% from Social Networks memberships, 18% from payments and cloud, and only 17% from advertising.
When you scroll through the “Friends Circle” on WeChat, or the equivalent of the Facebook or Twitter newsfeed, you see almost none of the sponsored advertisements you would see on almost all US platforms. It is largely to the benefit of the individual consumer, as the experience is much less cluttered and commercial, and more focused on your friends’ actual social sharing.
Tencent itself offers few of the earlier mentioned enterprise services of sophisticated user demographics and analytics or integrations with other enterprise platforms. With revenue coming from consumers and not businesses, there is little incentive to invest into complex enterprise tools, or more importantly, give up its monopoly on user data to other businesses. WeChat does now offer ads in the newsfeed, banner ads, and ads through KOLs (key opinion leaders or influencers), but they are relatively pricey and used predominantly by large established brands.
Despite these platform limitations, marketing on WeChat is still a serious business. However, it is carried out in a relatively guerilla style compared to US counterparts. Outside of the official paid ads channels businesses reach customers through “public accounts”, essentially blog article subscription feeds. If articles are popular enough they get read and shared allowing for new subscriber acquisition. For customer conversion, advertisements can then be embedded in the articles or you can invite customers within the article to “consult” with a sales rep by adding their personal WeChat for follow up conversations.
There are also additional more “guerilla” marketing tactics used over WeChat including sharing commercial content through dozens of personal accounts’ “Friends Circle” (the newsfeed equivalent), or by organizing large group chats of users with common interests and sharing advertisements in the group chat. It’s a highly manual and time consuming marketing approach compared to US-style automated digital marketing, but with relatively lower labor cost for operational staff it’s a sustainable approach for the time being for rapidly growing Chinese firms.
Market Demands Drive US Social Giant’s B2B Focus
US ad company’s continued B2B focus is driven by the need to service two major customer demands: the ability for advertisers to reach a relatively more varied audience, and the higher labor costs incurred by marketing operations teams outside of China.
The companies served by US ad platforms target audiences with a smaller convergence of consumer tastes by absolute population given geographic, lifestyle, and consumer need variance. Clients using Google or Facebook ad platforms may be reaching users across North America, Europe, Africa, and Asia in both urban and rural areas — bringing with it the challenge of language and cultural variance. This makes highly customizable demographic targeting a major part of the value proposition to client businesses.
While there is certainly variance among the Chinese population, especially from tier 1 down to tier 3, 4, and 5 cities, the relative need for precise demographic targeting is less than it is for non-Chinese counterparts. The Chinese market has 1.3 billion users that speak the same language, and have more of a common cultural experience. Even bridging the gap from big Chinese coastal city to rural areas (admittedly a large gap) is less distant than the gap between urban Americans and rural Eastern Europeans.
Furthermore, labor is relatively more expensive in the US and other Western markets that make up the bulk of US ad platform’s paying customers, making the labor intensive approach of Chinese social media marketing less feasible. The sophisticated platforms provided by Facebook and Google along with the accompanying ecosystem of third party applications make a single skilled digital marketer quite powerful in terms of their potential reach. Purchasing software or paying for automated ads that can replace expensive headcount becomes an easy decision for many US companies. The proliferation of enterprise SaaS products over the past 20 years is illustrative of a general trend to pay for tools rather than add headcount to address labor-intensive tasks.
Why There is Less Demand on Tencent to Take a B2B Focus
There are two major reasons there is a reduced demand from businesses on platforms like Tencent to produce sophisticated marketing tools: perfect automation is valued less than speed to market in China, and any issues of dealing with varied customer groups can be dealt with by large operational workforces.
China has more urgency than the US to capture less mature markets leaving less time for process optimization. China only recently had large efficiencies to be gained by digitizing almost any transaction that not long ago would have been done with cash — from food delivery to bike rentals. This leads to some truly seemingly overnight sensations that balloon to hundreds of millions of users in only a few years, Pinduoduo is an excellent recent example. The feeling of urgency to acquire users as quickly as possible in a massive winner-takes-all market justifies foregoing more complex systems deployments that save operations costs when the speed to grabbing market share is so much more important.
Furthermore, once these large marketing operations workforces are established to acquire users, Chinese firms can deal effectively with variance between customer segments. Customers can be funneled into different WeChat groups by segment, or dealt with through several different specialized WeChat public account blog feeds. It may mean a content marketing team two to three times the size of a similar US company, but the economics still works out given lower labor costs and the flexibility to be gained by having a team you can pivot much faster than any automated system.
As Markets Mature China Will See a Shift in B2B Services Demand
Two major shifts likely to occur in China will lead to a change in the services Chinese advertisers will look for from social platforms. The labor force in China has steadily become more expensive, meaning the solution of increasing headcount in place of implementing automated marketing systems may eventually prove uneconomical. Average salaries for white collar workers in in Beijing rose to RMB 10,310 average (about $1,500 USD per month, or $18,000 per year) comparable to average salaries in Poland and Hungary.
Second, maturing markets in China will mean tougher battles over smaller slices of the pie as entrenched brands yield ground less easily to new entrants looking to acquire market share. As users become less attracted by novelty and are more set in their favorite brands and products, new entrants will have to truly be the best-in-class solution not just the first solution to arrive to market. This will require more specialization among Chinese product teams and outsourcing of tasks outside the core business rather than the current approach of keeping many functions in-house — including large marketing operations teams.
Looking beyond just marketing services, these shifts spell big opportunities for the early wave of SaaS providers in China that can relieve labor cost issues, and allow next generation Chinese companies to focus more on product when land-grab acquisition becomes less urgent or simply less possible. Tencent has already made efforts with the “mini-program” services that promise more sophisticated user analytics to enterprise customers looking to better segment and automate their marketing messages.
In the current transitionary period in which securing market share and top-line revenue remains more important than just reducing operational costs, SaaS providers that can show direct impact to sales increase will likely be the early leaders in providing more enterprise services to Chinese businesses. However, once the trend towards use of outsourced enterprise services starts it could lead to a larger trend of in-house specialization, and less focus on large operations-team execution. This shift towards more enterprise services in increasingly mature markets could be a big opportunity for the next wave of both Chinese entrepreneurs and investors ready to act on those new demands.
Originally published on The ZMTD
