Xiaohongshu: How a China’s local e-commerce platform build up its UGC community to develop rapidly

"Xiaohongshu" by Visual China, CC BY-SA 4.0

Xiaohongshu “This is us, this is Xiaohongshu. Join us in sharing your daily lifestyles. Welcome to the family!” Source: Xiaohongshu (standard YouTube license)

With the massive growth of mobile phone users, digital device applications have become an essential part of the social media internet ecosystem in recent years. In 2019, the total number of mobile app downloads had exceeded 126 million (Clement, 2020). The types of digital applications are becoming more and more abundant; many of them can achieve the basic demands of most users in their daily life. China, the country with the largest population and the fastest-growing consumer market in the world, is one of the most important target areas for many digital companies (Tang, Wu, Huang, & Liu, 2017). Xiaohongshu has stood out from the competition on social media platforms in recent years and has become one of the most popular communities in China. The success of Xiaohongshu is mostly derived from the creation of new social community system, which enabled them to defeat many opponents in the industry and keep a stable online society. However, this unique business social model has also triggered a discussion on new regulatory procedures due to the fake information and illegal content. The first part of this article will analyze Xiaohongshu’s business and operation model; then, there will be further analyzation on how it innovates and changes user habits through its industry position and competitive relationship. Finally, think critically about the positive and negative effects of this kind of community change.

Figure 1

“Share of internet users of the leading social networking sites in China as of 3rd quarter 2019”. By Lai Lin Thomala, CC BY-NC-SA 2.0

Business Model

Xiaohongshu is also be interpreted as “little red book”. It is a social e-commerce shopping digital community founded in Shanghai, China, in 2013 by Miranda Qu and Charlwin Mao running as a user-generated content system (Qu, 2019). The platform encourages users to share posts about luxury, beauty, and fashion product reviews, which are called “remarkable notes.” These notes are generally presented in the form of pictures, text, and short videos. Then, users can share consumption experience online and interact with other users, which form a benign information loop to create an independent community. Xiaohongshu has established a “safe space” for like-minded consumers to discuss the quality of goods and life services (Chen, 2018).

The business model of Xiaohongshu is unique: it combines e-commerce and social media functions so that users can integrate information and purchase in the same online community. It improves the quality of their products and increases user stickiness. Xiaohongshu mainly promotes its products through social interaction by KOL to guide users to purchases and generate economic benefits (Chen, 2018). Xiaohongshu does not provide marketing strategies for display advertising services but fills product information into UGC content to build consumer trust.

The sponsored content on Little Red Book is different from the other commercial advertisements. The content should be soft and reliable, and not only introducing the product, but also relaying your real feelings.  More importantly, you have to follow Little Red Book’s rules by indicating whether posts are sponsored. — Anita (Xiaohongshu KOL)

For example, the shopping link of Xiaohongshu is usually embedded in the bottom space of the post, which makes users believe that the blogger recommends the product naturally and rarely think about the existence of advertisements. Therefore, the high user-buying desire increasing the consumption power on the platform. In other words, Xiaohongshu’s business model is based on the concept of an integrated information shopping platform and the high trust level of users.

Xiaohongshu. All rights reserved

Development History

The development of Xiaohongshu explores its own characteristic social media style while seizing opportunities to improve existing functions and develop new technologies.

2013 was the node of the rapid development of China’s import and export e-commerce. At that time, consumers began to pay attention to overseas shopping (Ma, Chai, & Zhang, 2018). In December, Xiaohongshu seized the opportunity and launched an overseas shopping sharing community. Such positioning makes them focused on connecting Chinese shoppers and international business companies. Precise user positioning provides a clear purchase purpose for consumers, which distinguishes Xiaohongshu from other mainstream Chinese social media (Chen, 2020).

Six months after the app was released, Xiaohongshu set up warehouses in China, whose primary business is the sale of Asian cosmetics, Australia nutrition products, and Europe fashion commodities. Establishing a warehouse to link the platform with commodity trading for the first time has brought economic benefits to Xiaohongshu. In December 2014, Xiaohongshu launched the “Welfare Agency” e-commerce platform and divided it from the ordinary community system. The warehouse system is also updated in the following year (Pemarathna, 2019). Xiaohongshu’s establishment of its own e-commerce system completed the closed-loop business and created a better social experience for users from reading, sharing, to purchasing.

So far, Xiaohongshu is not only continually improving cross-border e-commerce and social media functions, but also developing more interacting technologies. Xiaohongshu started testing the live streaming function. In June 2019, the purpose was to use real-time streaming media to increase user engagement and promote its business operations (Lee, 2019).

All in all, the e-commerce and social media integrated community created by Xiaohongshu is unusual in China, which enables it to enhance its advantages in its development continuously. At the same time, Xiaohongshu has seized the opportunity of the rise of multinational shopping and communication equipment to retain user stickiness in reform and innovation. It has been continuously developing since 2013 and has become more and more popular.


Industry Positioning

Although Xiaohongshu is not one of the top information platforms in China, such as Weibo and WeChat; however, with the help of other business partners and its own innovation, it has also reached a high position in specific user groups and e-commerce fields.

According to the data on Statista (2o2o), the number of users of Xiaohongshu has grown exponentially from 2015 to 2019. It has gained 390 million users in 2019 and ranking fourth in the number of Chinese social media users (Thomala, 2020).

Figure 2

“Number of registered users of Xiaohongshu in China from 2015 to 2019”. By Yihan Ma, CC BY-NC-SA 2.0

Figure 3

“Share of internet users of the leading social networking sites in China as of 3rd quarter 2019”, By Lai Lin Thomala. CC BY-NC-SA 2.0

In the field of e-commerce, Xiaohongshu is the platform with the highest number of active users in China in 2019, and it has a considerable advantage compared with other companies (Ma, 2020).  However, it only ranks seventh in the consumer trust of all e-commerce platforms (Ma, 2020). This is probably due to the characteristic of Xiaohongshu’s implicit placement of advertisements: some users cannot distinguish the difference between objective information and advertisements, which leads to a decrease in the trust of the product.

Figure 4

“Number of monthly active users of main cross-border e-commerce platforms in China as of March 2020, by platform”. By Yihan Ma, CC BY-NC-SA 2.0

Figure 5

“Level of trust of overseas shopping users in cross-border e-commerce platforms in China as of December 2019, by platform”. By Yihan Ma, CC BY-NC-SA 2.0

Therefore, Xiaohongshu’s popularity in the social media industry has continued to increase, which made it become the most interactive e-commerce platform. However, the user trust level still needs to be improved when compared with other companies in the same field.

Who are the commercial partners?

The significant composition of Xiaohongshu’s partners come from companies and individuals who provide the funding. Xiaohongshu completed the $300 million Series D funding led by Alibaba in 2018.

“Other backers of the investment include GSR Ventures, Tencent, GGV Capital, ZhenFund, Genesis Capital together with individual investors including K11’s Adrian Cheng. The company now stands a valuation at $3 billion after the investment, according to people familiar with the matter.”

However, after completing this funding, Xiaohongshu is seeking another US$500 million in funding from companies such as Vision Fund under Soft Bank, Sequoia Captial and Hillhouse Capital (Wang, 2019). This situation shows that Xiaohongshu does not want to limit their cooperation under Alibaba’s control.

At the same time, overseas merchants and domestic KOLs are also critical targets for the cooperation of Xiaohongshu. While establishing the “Welfare Agency”, they started to cooperate with oversea brands to have products collaboration in 2016. Recently, Xiaohongshu provides two cooperation modes—approve Xiaohongshu to pre-purchase products or open an official brand store (Wan, 2019). Individuals can also get cooperation oppotunities by becoming KOLs. Xiaohongshu has launched a new portal called Brand Partners Platform in 2019, and the official account will set prices for each commercial post and promote the products (New Policy for Influencers on Red/Xiaohongshu – SEO China Agency, 2019).

Therefore, most of the operating funds for Xiaohongshu comes from company cooperation, while the platform partnership usually focuses on KOLs and brands.

Who are the competitors?

As a convergent cross-media platform, Xiaohongshu’s competitors mainly come from traditional cross-border e-commerce companies. Figure 6 shows that Tmall Global is the biggest contestant as it has the largest market share at present. Tmall Global is a cross-border e-commerce platform under Alibaba; it mainly supplies domestic consumers with imported goods directly overseas. Up to now, more than 26,000 overseas brands from 84 countries and regions have settled in (Havinga, Hoving & Swagemakers, 2016). Such an extensive product library makes Xiaohongshu’s self-operated warehouse appear to be lacking in resources and brings commercial challenges.

Figure 6

“Market share of import cross-border B2C e-commerce retailers in China in 3rd quarter 2020”. By Yihan Ma, CC BY-NC-SA 2.0

Regulatory Authority

In China, the Internet and social media are supervised by many government departments together to ensure the personal interests of all netizens are under protection (He, 2017, p. 284). China Ministry of Industry and Information Technology (MIIT) is one of the most important departments that supervise social media, including Xiaohongshu. MIIT was established in 2008 and is a subordinate department of the State Council. It is responsible for the management of China’s industrial sector and information industry. MIIT regulates Xiaohongshu in many ways, such as supervise user privacy information and daily community content, because “maintaining China’s information security” is one of its essential responsibilities (Ministry of Industry and Information Technology, 2014).

Audience Composition

The target audience of the Little Red Book is also clear to recognize. It can be seen from figures 7 and 8 that the primary users of Xiaohongshu come from female groups under the age of 24 (Ma, 2020). Figures 9 indicate that most of these main user groups live in first-tier cities and have a middle-class income (Qian, 2017).

Figure 7

“User age distribution of Xiaohongshu in China as of March 2020”. By Yihan Ma, CC BY-NC-SA 2.0

Figure 8

“User gender distribution of Xiaohongshu in China as of March 2020”. By Yihan Ma, CC BY-NC-SA 2.0

Figure 9

It is worth mentioning that, as the reputation of Xiaohongshu continues to expand, not only ordinary users but also many celebrities have begun to share notes, such as Bingbing Fan and Yuqi Zhang. The fandom effect brought by celebrity registration has made Xiaohongshu users more substantial growth. It provides a more intimate way of celebrity fan interaction, allowing consumers to have a more relaxed shopping environment to buy products used by their favourite idols (Hutchins & Tindall, 2016).

Xiaohongshu. All rights reserved

Therefore, Xiaohongshu is successful in positioning audiences as young female customers in the middle class. It also attracts celebrity users and earns positive fandom effects.

Ecology Diagram of Xiaohongshu


Innovation and Challenge

The popularity of Xiaohongshu proves that social media has changed traditional consumer behaviour patterns. In 1906, Elmo Lewis proposed the AIDA model. AIDA stands for “consciousness, interest, desire and action”. Recent studies have proposed a new behaviour model as “Awareness, Interest, Desire, Action, Enjoy, Broadcast” (Sanni, Leemoon, Arora & Edmonds, 2018, p. 21). The post by KOLs and celebrities in Xiaohongshu for secret advertising promotion makes consumers feel empathetic and increases their purpose to search and share. This phenomenon makes the consumer behaviour transition from the most traditional shelf-style to the targeted search in the Internet age, and then into emotional resonance caused by other users. Xiaohongshu has changed the one-way concept of instillation in traditional consumption, but instead determines purchase intentions in two-way communication and ultimately selectively disseminates product information. Such a change is positive because Xiaohongshu has given full play to the benefits of social platforms for e-commerce.

However, the community model of Xiaohongshu has also aroused discussions on the supervision system of social platforms. According to statistics, 70% of Xiaohongshu’s exposure comes from the UGC lifestyle sharing community (Yang, 2019). Since the integration of e-commerce and social media is rare, the management regulations of this community are not clear enough, and the management of the regulatory agencies is not sufficient enough. Issues such as false content, the volume of orders, and sales of illegal and prohibited products frequently appear on Xiaohongshu, which makes users’ favorability lower. This phenomenon led to the subsequent removal of Xiaohongshu from major app stores in July 2019. Although the reason for the removal of Xiaohongshu has not been clearly pointed out, it is generally speculated that its removal was due to its UGC violation (Yang, 2019). Therefore, UGC-led platforms that are directly linked to consumer behaviour need stronger regulations to enhance the community environment.


Conclusion

As a unique cross-border e-commerce social media platform in China, Xiaohongshu has made practical innovations in business models, operating methods and market positioning area. However, even Xiaohongshu has developed an innovative impact on consumer behaviour patterns, it still needs to improve its management regulations to protect its community ecological environment. Xiaohongshu has positive development potential, hopes it can become one of China’s top media platforms in the future.

 


Reference

Ziqi Tang
About Ziqi Tang 5 Articles
Year2 student major in Digital Culture Music, live house and band addicted Have a 5 month Sphinx called "Maotai"