Social commerce business models are designed to take advantage of social commerce, a relatively new phenomenon where eCommerce transactions take place on social media. Examples of this comrpise companies like SHEIN, Wish, WeChat.
Aspect
Explanation
Definition
The Social Commerce Business Model is a digital retail strategy that integrates social media and e-commerce, allowing consumers to make purchases directly within social platforms. It leverages social networks as both a marketing and sales channel, enabling users to discover, share, and buy products seamlessly. This model blurs the lines between social interactions and online shopping, creating a more interactive and personalized shopping experience. Social commerce relies on user-generated content, peer recommendations, and social proof to influence purchasing decisions, making it a significant evolution in the world of e-commerce.
Key Concepts
– Integration of Social Media: The model revolves around the integration of social media platforms and e-commerce functionalities. – User-Generated Content: User-generated reviews, photos, and videos play a crucial role in influencing consumer decisions. – Social Recommendations: Peer recommendations and endorsements contribute to the success of social commerce. – Seamless Shopping: The goal is to offer a seamless shopping experience within the social media environment. – Personalization: Social commerce leverages user data to personalize product recommendations and advertisements.
Characteristics
– In-Platform Shopping: Users can browse, select, and purchase products without leaving the social media platform. – Social Sharing: Products are shared among friends and followers, amplifying their reach. – Interactive Shopping: Features like live streaming, chat, and polls enhance the interactive shopping experience. – User Reviews and Ratings: Shoppers rely on user-generated reviews and ratings to make informed choices. – Targeted Advertising: Advertisements are highly targeted based on user behavior and preferences.
Implications
– Marketing Effectiveness: Social media platforms become effective marketing channels and generate revenue through advertisements and commissions. – Data Privacy: Handling user data and privacy concerns is a critical consideration. – Consumer Engagement: User engagement and brand loyalty are key to success. – Platform Monetization: Social platforms monetize by allowing businesses to promote products and services. – Competition: The social commerce landscape is highly competitive, with numerous players vying for consumer attention.
Advantages
– Direct Sales: Enabling users to make purchases directly within the social platform streamlines the buying process. – Enhanced Customer Engagement: Interactive features foster deeper customer engagement and brand loyalty. – Targeted Marketing: Precise targeting based on user data increases the effectiveness of advertising campaigns. – User-Generated Content: User-generated content serves as authentic product endorsements. – Revenue Streams: Social media platforms generate revenue through advertisements and commissions on sales.
Drawbacks
– Privacy Concerns: Handling user data and addressing privacy concerns can be challenging. – Data Security: Ensuring the security of customer data is a top priority. – Platform Dependency: Businesses relying solely on social commerce are vulnerable to changes in platform policies. – Consumer Trust: Building and maintaining consumer trust is essential for social commerce success. – Intense Competition: High competition among businesses within social commerce platforms.
Applications
Social commerce is prevalent in various industries, including fashion, beauty, electronics, and lifestyle products. It is commonly associated with platforms like Facebook, Instagram, Pinterest, and TikTok.
Use Cases
– Influencer Recommendations: An influencer shares product recommendations and provides direct purchase links on their social media profile. – Shoppable Posts: Brands create shoppable posts that allow users to click on products and make purchases without leaving the platform. – Live Streaming Sales: Brands and influencers conduct live streaming sessions where viewers can buy products in real-time. – User Reviews: Shoppers rely on user-generated reviews and ratings to make informed decisions about product purchases. – Personalized Recommendations: Social platforms use algorithms to provide personalized product recommendations based on user interests and behavior.
Table of Contents
Understanding social commerce
Before we delve into social commerce business models, it is worth spending a bit of time explaining social commerce.
Social commerce describes the buying and selling of goods and services on a social media platform such as Facebook, Snapchat, Instagram, and WeChat. This process allows consumers to complete transactions without ever having to leave their favorite apps.
The shift toward social commerce has been driven, like many trends, by the COVID-19 pandemic. Many platforms revamped their social commerce during this time to help retailers streamline their eCommerce experiences. Retailers can now open virtual storefronts that can be found organically or via paid advertising. To a lesser extent, the shift has been helped by consumers making more purchases on their smartphones and demanding a more seamless checkout process.
As it stands, three different social commerce business models are starting to emerge.
These are discussed below in more detail.
1 – Social commerce via social media platforms
This is a B2C model where platforms such as Facebook and Instagram offer eCommerce functionality to merchants such as an online storefront and smart product discovery. Facebook Shops, for example, are customizable storefronts where sellers can choose featured products in addition to adapting various fonts, images, and colors to match their brand.
In some instances, the transaction is handled by a third party – though it is predicted that most social media sites will handle their own transactions in the future. Facebook has made moves to integrate Shopify in the U.S. market to allow sellers to complete the process via the app or in Messenger.
2 – Social commerce apps with a reseller ecosystem
Some companies are bypassing the need to spend money acquiring new customers by leveraging the power of word-of-mouth and curated products within social groups. In essence, they can determine the products users enjoy simply by listening in on their conversations.
Meesho is an Indian social commerce company that enables small businesses to sell their products to consumers. Resellers can also sell long-tail products via other channels such as WhatsApp and Instagram, among others.
Meesho allows sellers to add a margin of their choosing to the products they sell. When a sale is completed, the company handles the payment and then distributes the margin to the seller. With the above in mind, this means the second model can be either B2C or C2C.
3 – Social commerce apps without intermediaries
Chinese giant Pinduoduo is one platform that connects producers with buyers without the need for an intermediary. Consumers are encouraged to come together and make bulk purchases to reduce their costs.
Though the model was previously used by social coupon site Groupon, the so-called “farm to fork” strategy employed by Pinduoduo is seen as revolutionary and has numerous benefits. The strategy promotes more sustainable food systems that have obvious benefits for biodiversity and the environment.
However, it also increases food security and affordability for poorer consumers while also generating favorable economic returns for farmers and fostering competitiveness in the market.
Key takeaways:
Social commerce business models are designed to take advantage of social commerce, a relatively new phenomenon where eCommerce transactions take place on social media. Platforms such as Facebook and Instagram utilize a B2C social commerce business model where users can set up a customized storefront and handle payments. In some cases, the transaction is handled by a third party.
Meesha is an Indian B2C and C2C social commerce site that utilizes the inherent strengths of social media platforms. Through word-of-mouth product recommendations and curated product lists, small businesses and individual resellers can sell products across multiple platforms.
Chinese giant Pinduoduo connects producers with buyers without the need for an intermediary. Consumers pool their resources to bulk-buy and receive a discounted price without affecting a producer’s profit potential.
Key Highlights
Social Commerce: Social commerce refers to the buying and selling of goods and services on social media platforms like Facebook, Instagram, and WeChat. Consumers can complete transactions within their favorite apps without leaving the platform.
Driving Factors: The shift towards social commerce has been accelerated by the COVID-19 pandemic, as many platforms revamped their features to streamline eCommerce experiences. The increasing use of smartphones and demand for seamless checkout processes have also contributed to this trend.
Business Model Types: Three types of social commerce business models are emerging:
Social Commerce via Social Media Platforms (B2C): Platforms like Facebook and Instagram offer eCommerce functionality, such as customizable storefronts and smart product discovery, to merchants. Transactions may be handled by the platform itself or through third-party integrations like Shopify.
Social Commerce Apps with a Reseller Ecosystem (B2C/C2C): Companies leverage word-of-mouth and curated products within social groups to determine products users enjoy. Resellers can sell products to consumers via channels like WhatsApp and Instagram, setting their own margins.
Social Commerce Apps without Intermediaries: Platforms like Pinduoduo connect producers directly with buyers, promoting bulk purchases to reduce costs. This model fosters sustainability, food security, and affordability for consumers while benefiting farmers economically.
Rapid Growth: Social commerce is expected to continue growing, with around 80% of businesses projected to incorporate social media-based commerce by 2024. The industry is predicted to be worth $1948.5 billion by 2026.
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketingorganizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.
Cloud business models are all built on top of cloud computing, a concept that took over around 2006 when former Google’s CEO Eric Schmit mentioned it. Most cloud-based business models can be classified as IaaS (Infrastructure as a Service), PaaS (Platform as a Service), or SaaS (Software as a Service). While those models are primarily monetized via subscriptions, they are monetized via pay-as-you-go revenue models and hybrid models (subscriptions + pay-as-you-go).
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.
B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.
The C2C business model describes a market environment where one customer purchases from another on a third-party platform that may also handle the transaction. Under the C2C model, both the seller and the buyer are considered consumers. Customer to customer (C2C) is, therefore, a business model where consumers buy and sell directly between themselves. Consumer-to-consumer has become a prevalent business model especially as the web helped disintermediate various industries.
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.
Businesses employing the brokerage business model make money via brokerage services. This means they are involved with the facilitation, negotiation, or arbitration of a transaction between a buyer and a seller. The brokerage business model involves a business connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
