Not Waving but Drowning? China's Internet Mavericks Face a Deluge of Data

Ever since Mecox Lane added an Internet shopping site to its three-year-old catalogue mail order apparel business back in 1999, the Shanghai-based firm has been meticulously gathering information about customers visiting its website -- from their age and gender to buying patterns and likes and dislikes. Now, thanks to a database of five million online customers, who generate RMB 3 million (US$440,000) of revenue a day for the company, Mecox Lane has a wealth of information at its fingertips.

But having that information is one thing; exploiting it is another, says Benjamin Lo, a search-engine marketing manager at the firm. For example, when its records show that customers haven't made a purchase for at least 18 months, "we do want to step up our efforts to get them back, but we don't exactly know how yet," he notes. "We have all this data about them and we send marketing material to them every now and then related to previous purchases. We don't know what more we can do without pestering them."

This sort of conundrum is just the tip of the iceberg at most e-commerce companies in China. With more and more Chinese flocking to the Internet, there's no shortage of data about them that companies like Mecox Lane have access to. Yet precious few firms know how to use that data to improve the return on investment of their online businesses by, say, devising new marketing and sales channels or launching different products that take all the new interactive, web-based media into consideration. "There's so much that could be done with the data," Lo notes.

Part of the problem, says Wharton marketing professor Peter Fader, is there is no sense of urgency to address this gap. "Because the economy is growing so rapidly, the need to squeeze insight out of the data is not nearly as high of a priority in China as it is in the West where it's a more competitive market," he says. "As a market matures, data-driven insights become more of a competitive necessity instead of a nice-to-know."

So Far, So Good

China's love affair with the Internet certainly is no secret. With more than 400 million Internet users, according to China's State Council Information Office (out of a worldwide total of 1.8 billion), the country accounts for more than half of Asia's online population. Meanwhile, 233 million Chinese have mobile devices accessing the Internet -- twice as many as last year -- and with 346 million wired up with broadband, total Internet penetration in China is 29%, notes the latest statistical report on Internet development in the country published in January by the China Internet Network Information Center (CNNIC), a national research organization.

All this means that the Internet is a boon for thousands of businesses in China, from high-tech start-ups to the local greengrocer, who uses MSN to take orders from customers. Online leaders include Alibaba Group in e-commerce; CTrip in travel; search engines Baidu, Sohu and Sina; Youku and Tudou for video sites; gamers Perfect World, Tencent and NetEase; and RenRen, Qzone and Kaixin leading social networking.

But experts predict that in the not-too-distant future, their markets will begin saturating, forcing them -- as has been the case elsewhere -- to scrutinize their investments more carefully and embark on what Fader calls the Internet's Holy Grail: “The net present value of customer behavior.”

When it comes to "squeezing insight out of data," however, China should not "blindly emulate" the U.S. and other more developed markets, notes Fader, who has been analyzing the Internet in China as part of his role as co-director of Wharton Interactive Media Initiative (WIMI), a research initiative launched last summer. Among the main reasons why: China's "netizens" use the Internet differently than their counterparts in other countries do and seem less concerned about having online privacy laws to protect them.

“China has one of the highest levels of engagement in social media,” says Thomas Crampton, head of Asia-Pacific social media at advertising agency Ogilvy. He says this is partly a consequence of families being physically separated through mass rural-to-urban migration and the loneliness resulting from the one-child-per-family policy. Citing a study by MTV, Crampton notes that China was the only Asia-Pacific country whose respondents described themselves as having more friends online than in the physical world. “People are really involved in social media at a fundamental level," he says. "It becomes a public commons in a way that it is not yet in other countries, even those that are more developed than China.”

And though under the watchful eye of the government, China's netizens turn to the Internet primarily for entertainment rather than work, playing games, downloading music and movies, shopping, and chatting away on social media sites. The average amount of leisure time spent online by residents of China’s 60 largest cities is 70% and around 50% in smaller towns, noted McKinsey consultants Yuval Atsmon and Max Magni in a recent article published in The McKinsey Quarterly titled, "China's Internet Obsession."

What's more, "Chinese consumers are becoming increasingly smart about research," says Atsmon. He cites research that found 25% of consumers in China -- more than double the percentage two years ago -- say they won't buy a product (ranging from big-ticket goods to food staples) unless they have read what other consumers and companies have to say about it online, which adds a whole new complexity to word-of-mouth strategies.

Perhaps more important is China's netizens' willingness to divulge much more information about themselves online than their counterparts in other countries. According to joint research in 2007 by interactive conglomerate IAC and advertising agency JWT, 72% of Chinese netizens said they agreed with the statement, “I have expressed personal opinions and/or written about myself online,” versus 56% in the U.S. Social networking has been integral to China's Internet culture ever since bulletin board systems (BBSs) became popular in the early 1990s. Of China's 1.5 million commercial websites, about 80% have a BBS and about one third of Chinese netizens routinely post messages on a BBS, says the CNNIC's research.

The result is that China's Internet companies have far richer data about their customers than arguably anywhere else in the world. Alibaba, for example, considers data gathered on its site to be an integral asset which it is willing to share with those B2B clients that advertise on it. “We are already data-sharing," says Daphne Lee, head of Asia-Pacific marketing at "We are trying to share the data with our customers to get more ideas about how to sell their products.”

A Small Piece of the Pie

But thus far, experts say Chinese companies' ability to exploit that data has been rudimentary. "The paradox of data in China is that it is so plentiful and abundant and there's unlimited access to it, but there's a lack of sophistication to do anything with it," says Fader.

Nowhere is this more evident than in marketing. “Take something like 'display advertising,'" says Kaiser Kuo, international business director of Youku. "The way it is purchased in China is extremely primitive. People buy it on a time basis, [as if] it if it were in a magazine or newspaper -- by what page it will appear on, how big it is and how long it runs for. In the West, you buy it on a performance basis, or cost-per-click basis.”

There's also a lack of trust between Internet businesses and advertisers, with the latter uneasy and distrustful of the statistics used to woo them to place their ads on websites, and cases of data manipulation are frequent. “There are few truly objective third parties that you can turn to for reliable stats that all sides will recognize,” says Kuo.

The third challenge that Kuo cites is the reticence of the older generation of corporate decision makers to embrace online marketing strategies. “The people who make the final decisions on where to spend our marketing money are not the same people as the ones going out and buying the ads themselves," he says. "Twenty-something-year olds come back to their 50-something boss and see his eyes glaze over as they explain an [online] idea because he has no knowledge of the sophisticated technology to which they’re referring.”

Several time zones away in the U.S., these factors have left corporate marketing teams in a halfway house -- one that only partly embraces Internet consumers, according to David Cooperstein, an analyst at Forrester Research. Following a survey of corporate marketing executives in the U.S., Forrester found that their companies spend most of their advertising budgets on TV (a total of US$70 billion was spent on television advertising compared with US$25 billion for interactive in 2009), despite that growing use of the Internet and the fact that they are able to measure an ad's impact far more effectively on the Internet and other interactive channels than on TV, he writes in a recent paper titled, "The Future of Media Measurement." With 52% of online U.S. advertising spending going to paid search, "most of online advertising is for direct marketing purposes rather than raising awareness, increasing consideration, or other goals associated with brand campaigns," he notes.

Allocating on- and offline marketing budgets is even trickier in China, adds McKinsey's Atsmon. "The complexity of managing online spend, mostly due to great fragmentation, is probably the biggest challenge," he observes. "The millions of websites in China are even more complex than the 10,000 magazines and 3,000 TV channels that already make advertising in China a nightmare." He notes that despite the fact that some websites in China provide "very detailed information about user base, which supposedly allows marketers to 'micro-segment' consumers and even measure the conversion (that is, if they pressed a link and registered or bought further), most online spend is not easy to measure, especially in a market like China where the biggest online success stories are those when consumer created big part of the content."

Compare and Contrast

So what can Chinese companies do? "Step number one is to identify the right companies to emulate and learn from," says Wharton's Fader, who notes that Chinese companies are understandably tempted to look to companies in the West that are further up the learning curve, but might be less enlightened than expected. "That can be a problem because some Western companies are a little bit old fashioned in their approach to marketing," he says. "It's not necessarily the biggest, most market-oriented firms [that provide the best lessons]; very often it's going to be the smaller, newer, more nimble ones that have been built around the data."

The next step, he says, is to look outside the marketing department for inspiration when developing web-based strategies. "We're seeing that the best stuff is happening in information systems or supply chain management," he notes. "Those two areas have really taken the baton from marketing in so many ways, whether it's tracking customer behavior, measuring satisfaction, or looking at how the Internet interfaces with product manufacturing and delivery."

And rather than ignoring all the information the Internet is generating for them, says Fader, China's Internet firms should look at the deluge of data as a strength rather than a weakness. In other words, he says, they need to ask themselves, "What's the incremental value of having data that folks in other parts of the world don't have?"

Published : 2010.06.09


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