Costs Of Customer Acquisition In China Continues To Rise

The brands on Tmall that enjoy the lowest CAC are the ones who have strong brand equity. Those brands get ‘free’ traffic and enjoy better and longer cLTV (customer Lifetime Value). Better brands win on both ends of the equation: lower CAC and higher LTV.

The top three players - Tmall, JD and Pinduoduo - together account for 90% of B2C ecommerce in China. Given this serious market control, the costs for brands have risen steadily AND at the same time these platforms have had to create space for a growing number of competitors in each of the categories that they host.

A lot of brands are being squeezed by rising costs (ads, search and promotions) as they try to keep pace with category competition. While Double 11 in 2019 saw category leaders start to really separate themselves from the pack.

ROI On Tmall & Jd In Question

Tmall is the leader in China’s B2C ecommerce sector with a 53% share of the market as of 2019. There are currently more than 150,000 brands on Tmall - including 18,000 international brands. And, some 80% of international brands used Tmall to initiate their market entry to China.

For top merchants with high brand awareness, Tmall and JD have proven very successful. However, as both of China’s biggest ecommerce sites have become increasingly crowded and costly, lesser known brands are feeling the pinch. Some estimates suggest that 90% of stores on Tmall make less than RMB10 million per year in sales

Insights On Cost/Benefit Calculations

The average CAC vs ARPU on Tmall has created a challenging environment for ‘average’ brands. There are a couple of important insights which flow from this;

(1) the better the brand, the lower the CAC on Tmall

(2) brands must not only consider ARPU but also LTV of customers when evaluating CAC.

Paying for traffic on Tmall is a costly affair. Its money that goes to Tmall to fill your brands ‘funnel’ but is not helpful in building your brand. Lasting equity is low if you’re paying for traffic as opposed to building your brand.

If you only consider one-time ARPU vs CAC then the metrics don’t add up. Brands who only achieve a one-time sale with customer are loosing money on each transaction. Therefore, brands must develop better LTV. This comes from improved branding.

Pinduoduo: CAC vs ARPU

There was a good deal of enthusiasm in 2018 and 2019 for Pinduoduo (PDD) due to its lower CAC. While it’s CAC is still much lower than Tmall, it’s ARPU is also much lower. That might offer some smaller, newer brands an opportunity to get a bit of traction at lower cost but its probably a bad proposition for most larger brands.

The problem with all CAC vs ARPU calculations are in the idea that each sale is a discrete, one-time occurrence with a customer. In this context, PDD has poor margins. PDD also falls short of Tmall as a quality environment for branding. PDD offers very little space for brand building - its much more about bargain hunting and group buying. One area where PDD might prove useful for larger brands is when applied to Lower Tier City strategies. PDD has until now been very strong in lower tier cities