Opportunities and Challenges of Starting up an Online Business in China - Essay Example

Opportunities and challenges of starting up an online business in China BY YOU YOUR SCHOOL INFO HERE HERE Introduction The Taobao e-commerce platform provides new opportunities for businesses in China, and across the world, to showcase their products to a variety of growing markets in Asia. It has recently experienced considerable growth levels due to its sophisticated technology platform and the ability of customers, both business and C2C, to conduct transactions in a secure e-commerce environment. It has experienced such growth with the rise in Chinese adoption of Internet technologies, increasing from 68 million to 123 million from 2003 to 2006 (Keegan & Green 2008). These figures are expected to continue to grow with the advent of telecommunications infrastructure improvements as well as portable, mobile devices equipped with Internet applications. For businesses looking to start-up a new organisation in the Taobao environment, there are certain risks and advantages related to known consumer behaviour patterns, understood consumer shopping behaviour as well as innovation and speed of technological advances. This paper describes the opportunities and challenges in this effort. Online shopping behaviour Taobao has become so popular that it is quickly becoming the foremost leader in online product sales in China; and abroad. Built into the many technological support technologies on this platform is the ability of consumers and business leaders to use social media to connect with one another at the relationship and marketing levels. Referred to as the social media revolution, applications that allow for blog entries, discussion platforms and video-sharing capabilities have given the Internet a new presence that is readily accepted by multiple target markets (Smith 2009). Familiarity with sites such as YouTube, Twitter and Facebook are now moving into mainstream consciousness and TaoBao has actively pursued inclusion of social media platforms to enhance communications between buyers and sellers. In terms of specific shopping behaviour in the e-commerce environment, a recent survey identified that 73.8 percent of Chinese consumers prefer to pay online using their debit and credit cards (Li & Suomi 2009). Only 28.1 percent of those surveyed still valued traditional cash purchases in the physical retail environment. Growth in the availability of credit services in China has made Taobao ideal for new businesses that are well-equipped with high quality distribution networks that can supply consumers after making an e-commerce transaction. However, there is a disadvantage to this growth in credit card usage. Consumers in China are very price sensitive today (mckinsey.com 2008). This means that their elasticity is higher for certain products and will actively scan the competitive environment to find the best deals available on various merchandise offerings. A recent survey identified that these Chinese consumers would absolutely shift their loyalty to a different brand is the price was noticeably higher by a margin of only five percent (mckinsey.com). This does not give a start-up company much flexibility in establishing their pricing structures, making it very crucial to conduct an environmental analysis (such as the PESTLE diagram) to uncover the pricing of similar products on the Taobao network. Under most e-commerce consumer behavioural models, there are five specific steps that a customer undertakes during their purchasing experiences. One model, proposed by Turban, King, Viehland & Lee (2006) describes the consumers’ tendencies to first identify their needs through a recognition process. This could include being exposed to different online advertising to identify their latent needs or simply scanning their own personal environment to realise a need for a specific product. After recognition, the consumer will conduct extensive information searches, which Taobao currently provides with its multiple business-related channels and price comparison applications. After this process, the consumer will select a product, based on various factors including pricing or quality and make the final purchase. After receiving the product, the consumer will conduct a post-purchase evaluation that either rejects or accepts the branded product and will determine whether future purchases are made. How consumers go about their process of identifying and analysing purchases is very important in a vast network like Taobao since it provides a highly competitive environment where social media applications allow for criticisms about a particular company’s product offerings. A risk to a start-up business is Taobao’s ability to cross-connect unrelated consumers over a wide demographic environment which can add negative word-of-mouth about a product or its service capabilities. According to Dahlen & Lange (2006) negative publicity can create a brand crisis that requires heavier concentration in advertising or positioning strategies that can be unfavourable to a company’s marketing budget. Businesses looking to start-up a company on the Taobao network should be aware that negative publicity is definitely a reality and work it into their risk management models. There is also another risk to using Taobao to launch a new product for the start-up company. Companies that understand marketing principles will actively segment different related or unrelated consumer groups in order to create advertising that is targeted directly at these identified groups. There are some companies that have run physical retail outlets in China that are familiar, only, with demographic segmentation as a marketing strategy, based on the volume of homogenous groups of consumers that are likely to frequent the retail outlet. However, Trinh, Dawes & Lockshin (2009) identify that demographic segmentation is not usually an effective base especially when dealing with high volume markets with varying socio-economic backgrounds. Instead, it is proposed that psychographic segmentation would be most appropriate in order to uncover different values, cultural tendencies, or personal lifestyles over a broad market so that one product can appear superior to competing products in a similar industry. The Taobao network encompasses many different types of consumers, definitely not limited to geographics, therefore a start-up business must understand the different types of segmentation strategies in order to identify and target those consumer groups most likely to purchase their products. A company with little budget availability in relation to marketing and advertising might have to conduct considerable market research in order to make sales a success over this broad shopping platform and should be considered a risk if they lack the cash or expertise for these efforts. However, there is recognition that consumers in China have become both familiar and accepting of the e-commerce shopping, with growth rates of over 1,000 percent since 2001 (researchinchina.com 2010). This means that there is extensive market opportunity and the ability to procure, literally, millions of potential customers if they understand how to market their products successfully over this environment. Consumer behaviour Advertising is one very effective method of gaining the attention of desired market groups and is just as important in the e-commerce sales environment. Hsu & Mo (2009) identify that print advertising, in relation to apparel products, is more important than the actual information (content) included in the advertisements. Essentially, elements of design and colour are likely to be the highest factor in why consumers will choose one apparel product over another in Taobao. This poses both an opportunity and a risk to the start-up company. First, it gives creative businesses an opportunity to showcase their products in a technological environment that is built for customised advertising and product visualisation. Second, this is a risk to a company that does not have the information technology support to build customised visualisations of their apparel selections and could be budget-sensitive for the smaller enterprise. Even though Taobao has the ability to project multiple advertising messages to consumers, there are some start-up organisations that do not have the labour or resources to fully utilise this opportunity. Social media is also youth-based, therefore companies that sell items such as fashion merchandise, technology or cosmetics are going to need the approval of different youth markets in Taobao. “The youth market is considered to be one of the most cynical that brand owners can hope to crack” (Forsey 2009, 21). Youths in China, and abroad, have much more buying power today than in previous years and access to credit, therefore they are ideal markets to target for the start-up enterprise. Youths, today, are fashion-oriented and trend-oriented, with somewhat unpredictable shopping behaviours; a fragmented social subculture (Forsey). Companies that offer products geared toward the youth user will need to be flexible and adaptable to changing trends and be aware of their cynicism when it comes to making online purchases. This might mean having a higher devotion to constantly changing advertising schemes or building a customer relationship management system into their e-commerce models to improve their brand image. Because of their previously mentioned price sensitivity, there is also a business risk associated with this aspect of buying behaviour. One cosmetics company, Niu’er, created by a well-known Chinese celebrity, has been offering their product at less than half of the traditional market price that is added per bottle in the traditional retail outlet. The market price is 660 yuan, but is offered at a steep discount of 320 yuan on Taobao (Tianyu 2009). This is a promotional price, however it is fitting with the consumer tendency to conduct considerable information and comparison searches on Taobao to meet with their current price sensitivity. A business that does not have adequate resources for steep discounting, especially on products such as cosmetics and beauty-related merchandise, might find their profit models unacceptable and be unable to compete with larger businesses. Consumers, and their tendency to compare pricing and alternatives on Taobao, will likely make a final purchase decision based on their ability to receive high-level discounted merchandise. A company that cannot afford to offer their prices at these discounted levels should reconsider Taobao, at least until consumer behaviour indicates a trend where pricing is not a primary purchasing decision-maker. There is also growth in consumers wanting extended values and discounting when buying products online. Because of this, popularity in discount cards and member cards for Taobao is increasing (Chen, Zhang, Yuan & Huang 2009). The extensive reach of Taobao makes this a highly competitive environment for all businesses and the price sensitivity of this group of consumers makes pricing wars a reality for the start-up enterprise. If consumers are already familiar with and appreciate their current loyalty and membership programmes, new businesses that cannot afford discounting in this fashion might wish to reconsider Taobao as they might be rejected by consumers with these values as uncompetitive. Regulatory influence and technology innovation Taobao charges five percent of the total transaction value to companies if they do not sell more than one million yuan per year, this is $133,333 per year in US currency (china.org.cn 2008). Only larger sellers are given larger commission discounts. The smaller start-up organisation, based on these seller regulations, would need to consider whether their profit expectations could be satisfied with a high commission rate that is imposed under this sales network. Despite this, the transaction volume of Taobao is expected to double in 2010, to 400 billion yuan (Young 2010). This means there is ample market availability and consumers willing to make purchases on Taobao that could offset these commission prices if they are able to target their customers successfully. The regulatory environment is also built so that it is favourable to the consumer rather than the business when dealing with issues of dispute resolution and refunding of their purchases. Taobao uses a secure payment service known as Alipay that actually withholds the purchase yuans offered by the buyer until the buyer has confirmed they will receive their merchandise without requesting cancellation or refund (Lixia & Xun 2009). Should the consumer choose to back out of their purchase decision, the seller must wait until they have full access to their funds, which could be highly risky to companies with a small operating budget and requires instant access to sales in order to sustain the business. Even though Alipay gives customers more security, it could cause problems for the start-up enterprise. The regulatory environment also provides consumers with a system that is also favourable to the buyer in terms of transactional disputes resolutions. Taobao allows for the buyer and the seller to communicate in this event through its social media or traditional channels of communication. However, if they are unable to negotiate a fair settlement or agreement, Taobao pays the consumer in advance until the dispute is handled effectively (pr-canada.net 2010). This, again, poses a high level of risk to the smaller start-up enterprise where they could lose funds in the event of fraudulent dispute claims or actual problems, being forced to wait until the Taobao intermediary assists in negotiating the issue properly. Governmental influence is also very high in China, with a very strong tradition of the government regulating market and economic activities in the country (Lu 2005). Regulation policies from this government are now expanded to attempts to control content (Lu), therefore start-up companies will likely have a governmental agency ensuring that their posted content fits with Chinese or international laws. This could impact buying behaviour as well as the usage of positive word-of-mouth that could come from blogging or other social media that favours the organisation and their product offerings. There are even governmental attempts being made today to regulate the online transaction, meaning there is potential risk in the future for growth in governmental oversight that could pose problems for the start-up business. Any regulatory body with the authority to impose itself on the transaction as well as the content creates an external risk to the company in areas of credit card fraud or even relationship marketing provided by the consumer themselves. Consumers are flexible in China and have certain demands for issues of security and transaction speed. To the advantage of the start-up company, Taobao utilises an award-winning software application provided by A10 Networks known as the AX Advanced Core Operating System that allows for multiprocessing and it considered revolutionary for performance (a10networks.com 2010). Speed and performance is one advantage for the start-up enterprise, already built into the architecture and is designed to satisfy consumers’ demands for security, speed and reliability. Conclusion The consumer most likely to favour Taobao is one with credit access and it was established that this market is growing year by year, providing literally millions of potential new customers in China and abroad. Risks were identified as being high tendency of consumers to comparison shop and to almost always consider pricing in their behaviours before deciding on an alternative. Further, social media poses a risk to the company’s brand reputation as it can provide negative publicity if the business fails to meet product guarantees or deliver quality customer service or refunding principles. However, despite the identified risks, Taobao opens a whole new market opportunity for the start-up business if they can support discounting and understand how to target customers using effective marketing and advertising philosophy. Whether targeting the youth market or mass market groups, content and customer relationship management appear to be the largest obstacles and opportunities of using Taobao. Growth in this marketplace shows consumers are familiar with it and favour it over other e-commerce sites. References A10networks.com. (2010) “Accelerating the user experience for China’s largest online retail site”, A10 Networks. [online] http://www.a10networks.com/resources/files/CS-Taobao.pdf (accessed August 20, 2010). Chen, J., Zhang, C., Yuan, Y. & Huang, L. (2009) “The nature of the emerging C2C electronic market in China: a case study from social network theory and CRM perspectives”. [online] http://www.ifipwg94.org.br/fullpapers/R0052-1.pdf (accessed August 20, 2010). 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