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"Using low prices to gain temporary traffic does not lead to long-term healthy store development."

Text/ Ba Jiuling

Recently, major e-commerce platforms have revised their operating rules.

After the 618 promotion ended, Taotian Group held a closed-door meeting with merchants and made a decision: starting from the second half of the year, the search weight distribution system based on "five-star price power" would be weakened and changed back to distribution based on GMV (gross merchandise volume).

In early July, Douyin Group also adjusted the priority of its business objectives, no longer putting "price power" first, but focusing on pursuing GMV growth.

According to LatePost, Pinduoduo has also adjusted its business focus from pursuing commercialization and "absolute low prices" to making GMV growth its first goal.

This means that the GMV concept, which was once forgotten, has returned to the center of the e-commerce stage.The fierce e-commerce price war seems to have shown signs of easing, which is of great significance to the 70 million e-commerce practitioners and 900 million e-commerce users.

01 The Origin of Price War

This round of e-commerce price war can be regarded as a "make-up lesson" for the e-commerce industry.

Around 2018, China's economy was booming, and everyone's consumption expectations were relatively high. E-commerce platforms such as Taobao, Tmall, and JD.com all focused on consumers within the "fifth ring road" and ignored the consumer demand in the sinking market.

As a result, Pinduoduo, which focuses on the concept of "the lowest price on the entire network", seized this market gap and achieved leapfrog development. Its revenue exceeded 100 billion yuan in just seven years after its establishment.

Pinduoduo's success has aroused the vigilance of other traditional e-commerce companies.

Liu Qiangdong asked JD.com executives to think about issues in a way that returns to the essence of business, the key of which lies in price advantage. He said, "Low price is the most important weapon for our success in the past, and it will also be the only basic weapon in the future."

Then, JD.com adopted price-reduction measures such as paying double compensation for overpriced products, lowering the threshold for free shipping for self-operated businesses, and conducting live broadcasts on purchasing and sales.

Following JD.com, platforms such as Taobao, Douyin, and Kuaishou also joined the price war.

In March 2023, Taobao launched a business tool called "Five-Star Price Power" on the merchant backend. The "Five-Star Price Power" tool can provide merchants with price power ratings of the products sold in their stores, which are divided into 5 price power star levels.

Taobao will recommend different search traffic to products based on their ratings. Products that are close to or reach the "lowest price on the Internet" will receive additional exposure rewards. The lower the price, the higher the exposure.

Starting from January 2024, Douyin e-commerce will only have three price levels for products, namely "lowest price on the entire network", "same product at low price" and "same product at high price". As the price power of products gradually weakens, the traffic exposure given by the platform will also decrease, including search, guess what you like, live broadcast, short video and other global scenarios.

In the merchant backend, the Douyin platform will also list the "suggested price" based on the algorithm. In daily operations, if merchants do not change prices in time, the product exposure traffic will decrease. During promotional activities, if the promotional products are not changed in time, they may be withdrawn.

JD.com, Taobao, Douyin and other platforms originally hoped to attract more traffic and increase user orders through the "absolutely low price" strategy. However, while making up for the shortfall, they also underestimated the backlash brought by low prices.

02 The backlash of price war

The crazy price war has caused damage to the entire e-commerce industry.

During the 618 shopping festival this year, the cumulative sales of comprehensive e-commerce platforms reached 742.8 billion yuan, compared with 798.7 billion yuan last year, a year-on-year decrease of nearly 7%.

This year, the 618 promotion period was extended from more than ten days to nearly a month, but it saw the first negative growth in 16 years. Such a dramatic result has poured cold water on all e-commerce practitioners.

Major e-commerce platforms have also begun to review their gains and losses over the past year. In the fourth quarter of 2023, Taotian Group's revenue was 129.07 billion yuan, a year-on-year increase of only 2%. It is really sad that such a small increase was achieved after so much effort.

The situation of Douyin is not much better. Last year, the average customer price of Douyin e-commerce mall and search reached 100-120 yuan, but it has now dropped to more than 80 yuan, a decline of 30%-40%. As a content e-commerce platform, Douyin platform also has the cost of short video production and anchor labor costs, making it difficult to achieve the goal of "the lowest price on the entire network".

Not only e-commerce platforms, but also merchants, factories and consumers are losers in price wars.Under the crazy price war, merchants have to reduce product quality to balance costs, which ultimately damages brand image and consumer trust, forming a vicious circle.

03 “Involutionary Vicious Competition”

The e-commerce price war, like the automobile price war and photovoltaic price war, is a form of "involutionary vicious competition."

Xue Qinghe, president of Zhibenshe, believes that "involutionary vicious competition" is destroying market rules and suppressing competitors in the competition for existing stocks, which will infringe on consumer interests and hinder market clearing and economic recovery.

At a major meeting held on July 30, senior management clearly pointed out the need to strengthen industry self-discipline and prevent vicious internal competition.

The meeting had just ended, and e-commerce platforms such as Taobao, Douyin and Pinduoduo took the initiative to withdraw from the price war. Is this a coincidence or a causal relationship?

In addition, what are the relative advantages and competitive strategies of the major e-commerce platforms?

Regarding these issues, Xiaoba consulted four experts. Let’s hear their opinions.

Big Head has something to say

The low-price strategy previously adopted by major platforms, in the final analysis, is the tone set by the Politburo meeting some time ago: "Industrial development must prevent 'involutionary' vicious competition."

So what is “involutionary” vicious competition?

First of all, involution can be understood as: the potential economic growth rate declines, labor productivity stagnates, and there is oversupply and overcapacity, but insufficient effective demand, resulting in limited incremental social wealth and fierce competition among enterprises and individuals for existing wealth.

For example, companies are cutting prices on a large scale, cutting businesses, departments, and employees, employees are working overtime and under high pressure, and the work week is extended, etc. This year, car manufacturers are cutting prices on a large scale, publishers are resisting excessive price cuts on platforms, and e-commerce platforms are cutting prices on a large scale for promotions, all of which are signs of excessive internal circulation.

Secondly, most of the internal circulation cannot be defined as vicious competition-type internal circulation. Usually, internal circulation is a normal process of price adjustment and capacity clearance.

When the price index drops rapidly, merchants' behavior of reducing overcapacity, exchanging price for volume, and recovering cash flow is a normal degree of internal circulation.

Involutionary vicious competition can be understood as: destroying market rules in the competition for existing stocks, suppressing competitors, infringing on consumer interests, causing negative externalities and bad money driving out good money, and hindering market clearing and economic recovery.

For example, many merchants, while cutting prices on a large scale, are also selling non-compliant and counterfeit goods. There are similar cases in the current price reduction competition among e-commerce platforms.

So how can we avoid vicious internal competition?

Generally, when the economy is in a downturn, the market will enter a stage of competition for existing stocks, at which time vicious competition is likely to occur. For example, in order to reduce costs, companies may cut corners, delay payments for goods, or illegally lay off employees.

The key to solving the problem lies not in competition and involution, but in viciousness.

◎ First, what the government must do is provide an appropriate level of legal management to crack down on market violations.

◎ Secondly, the government needs to make some improvements in the conditions of internal circulation.

The reasons for involution are economic downturn and insufficient demand. Therefore, the government needs to implement countercyclical adjustments during economic downturns, expand fiscal spending, reduce taxes for small and medium-sized enterprises, provide more subsidies and social security funds to ordinary households, and lower the interest rates on existing mortgages to reduce household debt burdens.

And what can companies do?

Reducing inventory by lowering prices is a market strategy and a way of survival for enterprises, but it will not improve the competitiveness of enterprises. According to Schumpeter's economic cycle theory, the most important thing for enterprises is to make breakthroughs on the supply side, improve technological innovation capabilities, and improve technological innovation to reduce prices, save consumer surplus, and create new demand.

So, in summary, in order to deal with the vicious competition of internal circulation, in addition to the rule of law,The government should stimulate on the demand side, and enterprises should make breakthroughs on the supply side.

Major e-commerce platforms have put GMV back as their top priority, which is indeed related to the competition for GMV at present.

Shelf e-commerce has two major traffic distribution systems. One is to distribute traffic based on conversion rate, which encourages obtaining higher order volumes at low prices. For example, on Pinduoduo, prices are usually lower and conversion rates are higher, and low-priced products will get more exposure.

The other is to distribute traffic according to GMV, while taking the average order value into consideration. For example, products with high sales on Taobao and JD.com will be ranked higher.

Taotian Group has two major considerations for weakening the absolutely low-price traffic distribution system. On the one hand, consumers still have the consumption mentality of "you get what you pay for", and products with high quality and price ratio are more attractive to consumers than simply low-priced products.

On the other hand, one of Taobao's advantageous categories is clothing, and it is difficult to compare prices of clothing brand products. Allocating traffic solely based on price will reduce the richness of products. Moreover, well-known clothing brands with comparable prices on Tmall generally have stronger price control capabilities. The distribution traffic obtained by low prices will not be that meaningful to well-known brands.

The reasons for Douyin's adjustment are similar to those of Taobao.

When Douyin e-commerce was caught up in a price competition with low average order value, the results showed that it not only lowered the overall average order value of the platform, but also had limited help on GMV growth. Instead, it began to cause more and more high-quality merchants to switch to offline or other emerging e-commerce platforms, such as Xiaohongshu e-commerce and Video Account e-commerce.

The reason for Pinduoduo's cancellation has a lot to do with competition, that is, to compete for a larger stock market. Although low-price competition has always been the norm in the retail e-commerce industry, excessive and vicious low-price competition has great harm to consumers, merchants and platforms.

And I have always been thinking, if low-price competition makes merchants unprofitable, and after a few years all merchants withdraw because of low-price competition, will we not be able to buy any products on the e-commerce platform?

In other words, merchant retention is the key to e-commerce platforms' comprehensive and sustained low-price competition.

Price wars can only be limited and local competitions. Major e-commerce platforms need to re-examine their category advantages, experience and service differences, increase investment in a focused manner, and form differentiated competitive advantages beyond price.

Major e-commerce platforms have once again put GMV sales as the top priority as the basis for traffic push and judging high-quality merchants. This is actually a signal of e-commerce's "anti-involution" and in a sense also represents the requirements and attitudes of regulators.

According to data released by the Ministry of Commerce at the beginning of 2024, there are already 70 million people engaged in e-commerce in China. If the e-commerce price war intensifies and continues to involuntarily, it will inevitably force some companies to take risks in terms of taxation and product quality, which will cause e-commerce to become a deformed ecosystem.

People often think that the price war was initiated by Pinduoduo. In the past two years, content platforms represented by Douyin, Kuaishou, and Video Account have also had to follow suit. However, the short video production costs and anchor labor costs of content e-commerce platforms are much higher than those of traditional shelf platforms. This leads to the fact that under the same price power mechanism, the profit margins of Douyin and Kuaishou Video Account merchants are bound to be lower than Pinduoduo. Using low prices to exchange for temporary traffic cannot bring about long-term healthy development of stores.

Content is both the key to success and failure. The Douyin and Kuaishou platforms must give a premium to their products through IP-based content. In the standard product sales environment, the brand premium goes to the lowest bidder, and all Douyin and Kuaishou have are their short video and live broadcast personalities. Therefore, content platforms must build a moat through content personalities. In the future, content personalities will surpass brand power to become the strongest premium point. This is also the underlying reason why the entire society and all bosses want to do IP.

This result shows that the strategy of major e-commerce platforms to rush to cut prices and offer low prices is unsuccessful, and it is ultimately reflected in their performance, that is, the growth rate of order volumes on major platforms has slowed down.

The original strategic purpose of the platform's low prices was to attract users by offering low prices and to increase the order volume by attracting more users to place orders.

But in terms of results, although the price dropped, the order volume did not increase significantly to match the price drop, and both transaction volume and profits declined.

If we also take into account the decline in consumer experience and the increase in return rate caused by low-priced and low-quality products, it is likely to bring even more terrible results. At that time, not only will the total transaction amount decrease, but the actual user transaction volume may also decrease.

Based on the above, I think the statement that major platforms are adjusting their low-price strategies is more of an excuse. The purpose of low-price competition cannot be achieved, and merchants are also seriously hurt. The platforms can only find a reason to gradually weaken and withdraw from the low-price competition strategy.

Author of this article | Rao Zufen | Mei Haoyu | responsibilityEditor | He Mengfei

Editor-in-Chief | He Mengfei | Image source |VCG