Owning the funnel

A framing to think about Chinese tech product roadmaps

Since I started writing Chinese Characteristics, I've been puzzled by a few observations: why is there a fanatic fixation on internet traffic? Why do firms distinguish between private and public traffic? Why did every consumer app become a super-app? And why are B2B offerings are going the same way? Why is every player worth their salt is moving into payments now? Finally, why do Alibaba's acquisitions tend to languish while Tencent's investments tend to thrive?

My current framing for Chinese tech's underlying logic is that every player is always working on owning the awareness-to-fulfilment funnel (or customer journey). This is a descriptive product strategy that builds on a foundational ethos of owning the user. It outlines the offerings that a tech platform needs to provide to achieve that goal. It looks like Western players are converging in the same direction, Shopify and Google's move into payments and Facebook's store fronts are all part of the trend.

Origins of the pattern

This behaviour pattern is stark in Chinese tech is for two reasons. The first is that a defined geographical market constrains Chinese tech. It's no secret that Chinese companies tend to struggle with internationalisation. Unlike their western counterparts, who can build sizable companies being the best-of-breed for different geographies, Chinese tech companies have to focus on owning the user (and funnel) to grow. As I mentioned in my Bilibili piece:

Relative to western consumer tech companies, who tend to focus on “serving a function” as their core mission, Chinese companies tend to focus on “owning the user” as their core mission (though the initial wedge into the consumer is always through a function - Meituan through food delivery, Ofo through bike-sharing, etc.). Owning the end-user and their attention is what led to the rise of the super apps and Bilibili is no different….Put another way; they want to own the Chinese Gen Z population's attention through providing a comprehensive entertainment service rather than be the platform that caters for all Chinese UGC video needs. 

In an ecosystem where hundreds of competitors spring up overnight, functions and features get commoditised as soon as they are made. Owning the user by providing the whole monetisation funnel is the closest thing to a moat.

The second reason is Tencent. Tencent is the default operating system for the Chinese population, and it has a particular trait. It doesn't rely on advertising to monetise. What started as a shrewd product decision to prioritise the user experience has had a lasting impact on the nature of internet traffic in China. Inventory on WeChat is scarce, and it commands a premium from advertisers. In chat, links are earned, Tencent's anointed portfolio can share links, while the associates of arch-nemesis Alibaba and Bytedance get blocked for spam. Baidu has been stagnating in their ad revenue strategy from lacklustre search (owning the funnel means a walled garden approach). When traffic hegemons are capricious, everyone suffers.

Regardless of the origins, once some tech players have started the game of owning their proprietary funnel (or user), everyone has to move in the same direction just to keep up.

The funnel framework

Nothing revolutionary to the marketing students, the funnel framework has been historically used to illustrate an online consumer’s buying journey. However, given the user fatigue with monetising through advertising, every consumer tech company is slowly but surely becoming an e-commerce company. The user journey reflects the core capabilities they need to capture at every stage; thus, it has become a defacto product roadmap and monetisation strategy.

This framework also extends to Chinese B2B companies. As I've noted before, Chinese businesses are reluctant to pay for software. In their eyes, they don't want to increase efficiency as much as they want to increase revenue. In a trend that mirrors the western fintech-enabled SaaS, Chinese software companies (the most prominent example being Youzan) have moved into modules that help their merchant customers across the entire stack.

Let's go through the role and direction of travel for each funnel layer:

Awareness - The top of funnel generates interest and understanding of the services or goods offered.

Internet traffic has always been the most contested space. Given WeChat’s relative inaccessibility and lack of serial consolidation in the space, the Chinese internet traffic landscape is relatively fragmented.

The direction of travel: Customer acquisition costs have been on the rise as downstream platforms have to duplicate spend across the public traffic platforms such as Weibo, Douyin, Xiaohongshu and Bilibili (to name a few) to reach users. In 2020, users come for the content and stay for the community. This has seen the rise of private traffic (私域流量) cultivation strategies (see examples in Perfect Diary and Kuaishou (paywalled)) for players. B2B platforms that double as customer service and prospecting tooling in private Wechat groups and communities have also been on the rise.

Consideration - Comparisons of goods and service on platform and across platforms, and the process will seek to turn a visitor into a prospective buyer. Most e-commerce platforms start here, and the main losers in this realm are the offline players who are seeing their businesses digitalised.

The direction of travel: Evolved from having many SKUs (and therefore supply-side liquidity on the platform) to focusing on algorithm-enabled personal curation as customers struggle with choice overload. B2B platforms are helping merchants with rules-based purchasing suggestions and upsell opportunities.

Conversion - Completion of action on a platform, converting prospects into customers and entails payment. The biggest drop-off tier and typically platforms have a variety of gamified subsidies with artificial time constraints to hasten checkouts.

Direction of travel: I believe tech players have zoned in one frictionless transaction as the key facilitator of conversion. With the predominant payment players of Tenpay and Alipay the checkout process is still relatively stilted. To finalise payment, a consumer is led out of their payment app into either Wechat or Alipay app to complete the transaction. There's no one-click embedded checkout similar to what Shopify or Amazon currently offers for most platforms. Embedded native payment will improve customer experience and reduce friction at the last hurdle. There’s also compliance and holding risk for the platform as a transaction completes through another platform and there is a lag for the merchants to get paid. Another factor is the data that will be available to firms. As I mentioned in the Ant piece, digital payment is not the Ant financial cash cow, but the data it generates is. Owning payment data will provide a platform to fine-tune their future recommendation algorithms. Given the new entrants will have to undercut Alipay and Tenpay’s low merchant transaction fees (0.55% and 0.6% per transactions respectively), payment wouldn't be a money-spinner for tech firms until it reaches substantial scale (just like in the West).

Fulfilment - Fulfillment of purchase with a focus on customer satisfaction. Logistics and customer service are the enablers for this segment. It completes the entire shopping experience and will impact the customer’s choice to repurchase.

Direction of travel: building up physical infrastructure becomes a tangential moat since it is proprietary and highly customisable, and controllable. This has become the unique selling point for most retailers (such as JD, XiaoHongShu and Miss Fresh). Owning fulfilment capabilities allows these firms to have more robust quality control, a crucial differentiator for low-trust Chinese customers.

Customer service has been heating up in B2B software as Chinese tech (and retailing at large) move from efficiency improvements (which is commoditised) to concentrate on providing superior customer experience (which is more intangible and therefore harder to commoditise)

Funnel theory in action

Chinese consumer tech giants are pursuing owning the funnel through a combination of buy, build or partnerships (investments). Each of them starts from their domain of expertise (Tencent's WeChat is traffic, Alibaba's Taobao is conversion, and Bytedance is also traffic), before moving either up or down the funnel. Once you consider the pieces they need to acquire, their next move is no longer a surprise.

Generally, it is easier to move down the funnel than up since traffic players already control the users’ attention. Users move from low intent browsing to high intent buying rather than the other way round. This is also why Alibaba's acquisitions tend to struggle. Aside from the difficulties of integration, Alibaba is more often than not trying to obtain traffic from its acquisitions, whereas Tencent is giving traffic to their partners. The differing dynamic is stark.

Looking towards the future, this pattern is playing out across the new generation of short-video platforms. As the war for the user’s attention and wallet rages, the funnel will be a good predictor of the capabilities each player will be looking to build in the coming years.

Premium subscribers will get a deep-dive of Youzan (the Shopify and Square hybrid of China - their own description, not mine) to look forward to next week.