Xiaohongshu, Source of Lifestyle Inspiration for Chinese Youth, Is Walking Fine Line between Commercial Success and Sense of Community

At a Lady M boutique in the eastern city of Nanjing, Ingrid Liang stared at a stunning array of the globally renowned patisserie’s signature cakes comprised of mille crêpes – a stack of 20 paper-thin handmade French crepes slathered with soft cream – and hesitated between three newly-launched seasonal flavors – marron, osmanthus and pumpkin. As a birthday gift for her Mother, Liang wanted to buy a taste of the glamorous lifestyle symbolized by the luxury dessert, a slice of which could cost as much as 75 yuan ($12).

Considering her limited budget, the 23-year-old graduate student struggled a little with which flavor to pick. While deciding, she took out her phone and opened Xiaohongshu, or “Little Red Book” in Chinese, a popular app among the country’s Gen Z-ers and millennials known for its authentic and diverse user-generated review content. Liang searched for “Lady M new products” and hundreds of reviews about the upscale bakery’s seasonal pastries popped up instantly. “One review read that the osmanthus mille crêpes cake topped with a layer of osmanthus jelly and dried osmanthus flowers can please your palate with an amazing fragrance,” Liang recalled. “So I decided to buy a slice of the flower-infused cake and bring it home. To my delight, my mom really liked it.”

Just like Liang, more and more young Chinese shoppers turn to Xiaohongshu to decide what goods and services to consume, making the platform a hot place to “plant grass”, a buzzword coined for the act of adding items to your shopping list based on word-of-mouth recommendations. As of October 2021, Xiaohongshu surpassed 200 million monthly active users and securing a seat in China’s cutthroat Internet sector, which, until recently, has been overwhelmingly dominated by major players such as ByteDance, Kuaishou and three other tech giants collectively dubbed BAT – Baidu, Alibaba and Tencent.

Finding no equivalents in Silicon Valley, Xiaohongshu is a blend of user-generated content, reviews, live-streaming and e-commerce, and represents an organic community for Chinese youth who have a bit of disposable income. As one of the country’s fastest-growing social shopping platforms, Xiaohongshu is trying to develop a sustainable business model which realizes genuine profits while maintaining the authenticity of its content as well as users’ desire to engage and share.

Kissing goodbye to cross-border e-commerce wave

Founded by Charlwin Mao, a Stanford-educated former Bain consultant, and Miranda Qu in 2013, a year when Chinese tourists overtook their German counterparts to become the world’s biggest holiday spenders with $72.6 billion in annual international tourism expenditures, Xiaohongshu was initially an app for the country’s newly affluent citizens to review products when they shopped abroad. Adopting “Finding Good Stuff Overseas” as its slogan, the company in 2014 launched its cross-border e-commerce platform “Fulishe” to source the merchandise – mainly cosmetics, nutritional items and fashion – for its users to buy directly without traveling abroad, in an attempt to make a bucket of gold from China’s then-emerging overseas shopping frenzy. In June 2016, Xiaohongshu began allowing third-party vendors to open stores on its e-commerce site.

This was Xiaohongshu’s first big monetization effort.

Co-founder Ms. Qu remarked on the move that, “Our e-commerce business is responsible for putting bread on the table, while our content remains as beautiful as flowers.” However, the e-commerce-driven model didn’t really work.

With Chinese shoppers’ demand for foreign goods surging and the government imposing policies to encourage cross-border consumption, big firms, including Alibaba, JD.com, NetEase and Vipshop, also joined the melee, fiercely competing with Xiaohongshu for a larger share of the lucrative market. Despite the fact that Xiaohongshu boasted a community of loyal users with a willingness to spend, the company’s lack of retail experience still posed obstacles for it to capitalize the business which required a reliable supply chain system, an efficient logistics network, and quality customer service. According to data compiled by China E-Commerce Complaints and Rights Protection Public Service Platform, the country’s largest third-party mediator dedicated to resolving online consumer disputes, around 27% of consumer complaints it received during the Double 11 and Black Friday shopping festivals in 2016 were against Xiaohongshu, and the figure rose to 46.54% for Black Friday in 2017.

Chinese financial magazine Caijing reported that in 2018, Xiaohongshu’s e-commerce unit missed its annual target of $10 billion yuan in gross merchandise value and didn’t turn a profit. As of the end of the year, data from consulting firm iiMedia iResearch shows that the market share Xiaohongshu seized was 7.3%, compared with NetEase Kaola’s 27.1% and Tmall Global’s 24%.

Around the same time, Xiaohongshu embarked on a new monetization experiment. Leveraging its position as a grass-planting resort and existing e-commerce infrastructure, the company shifted its focus to providing marketing solutions for brands and helping them complete a “closed loop (闭环)” from advertising to retailing. In an internal letter issued to employees in February 2019, the company announced that it had decided to merge part of its e-commerce business into its “community brand” division. And the exploration is still going on.

Commercialization V.S. Community

Besides banner ads which occupy a spot within the app’s layout, Xiaohongshu also assists brands in more sophisticated marketing campaigns, aiming to create content that fits seamlessly into the user experience without damaging the platform’s integrity.

Steven Luo, Head of Brand Marketing Solutions (Luxury& Fashion) at Xiaohongshu, said at a press event earlier this month that the company in September helped U.S. skincare giant Estée Lauder launch a campaign for its new Revitalizing Supreme+ Moisturizer through the voices of influencers on its platform. Over the years, Xiaohongshu has incubated thousands of KOLs (key opinion leaders) and KOCs (key opinion consumers) who have a solid follower base. Mr. Luo said that the campaign specifically attempted to tap into the platform’s “micro-influencers” – those who have a following that’s larger than a normal user’s but smaller than a mega-influencer’s, yet often see a closer connection with their fans. Xiaohongshu invited 97 micro-influencers to use the Estée Lauder moisturizer and upload real-time feedback to their channels – no matter if it was positive or negative. A hashtag reading “Estée Lauder Revitalizing Supreme+ Moisturizer” has so far been reviewed 54 million times on the app and users can directly purchase the brand’s products via Xiaohongshu’s e-commerce site. “We told Estée Lauder that we were not gonna filter the reviews,” Luo said, emphasizing that Xiaohongshu values its reputation as a source for trustworthy, useful content.

But challenges remain.

In October, Xiaohongshu found itself in the line of fire after multiple domestic media outlets exposed the phenomenon of brands hiring ghostwriters to post fabricated content and puff pieces about their products on the platform. The hashtag “shopping notes on Xiaohongshu are ghostwritten and shared by others for only a four yuan fee” went viral on Weibo, and has so far gathered more than 78.6 million reviews and inspired over 1,609 discussions. Under the hashtag, some netizens shared their experience of receiving invitations from merchants to post promotional materials which appeared to be real shopping reviews on their accounts.

In response to the controversy, Xiaohongshu said that it has remained strong in its resolve to crack down on the gray market for review ghostwriting and all kinds of cheating. Cindy Shen, a former Xiaohongshu employee who previously worked on the company’s corporate strategy research team, said in a recent interview with Pandaily that ghostwriting could not only undermine the app’s credibility but also cause a potential loss of advertising revenue, as it becomes excluded from the transactions between merchants and users.

In order to create a pure, authentic community environment as well as to maximize the monetization of consumer interactions on the platform, Xiaohongshu has undertaken a series of measures over the years.

In 2019, the company set up a professional team responsible for identifying and removing links for ghostwriter recruitment. According to the firm, it has established an anti-ghostwriting mechanism which blocks fake content in real time using algorithms and human checks combined with user feedback. To deal with newer cheating methods, the algorithm is continuously being upgraded by the company.

SEE ALSO: Xiaohongshu to Continue Cracking Down on Ghostwriting Content

PGY, or ”dandelion“ in Chinese, is Xiaohongshu’s official KOL advertising platform which was launched in January and has given the company a firmer grip on collaborations between influencers and brands. Frances Yu, an influencer who has 710,000 followers on Xiaohongshu, told Pandaily that all the transactions between brands and creators are required to be carried out on the PGY site and Xiaohongshu will charge a 10% commission on every deal. “PGY will automatically disclose my commercial relationships with brands by adding a hashtag to my posts,” the 24-year-old content creator said. “If I do business with the brands on my own and get caught by the platform, my posts will be taken down and even my account will be blocked.”

A price list issued by Zhaixingge, the multi-channel network agency to which Ms. Yu is affiliated, showed that one of its top-class influencers could charge the brand up to 320,000 yuan for a video-based marketing post.

Traditional advertising formats such as splash screen ads, in-feed ads and search bar ads still exist on the app, but Xiaohongshu tries to control their prominence. Ms. Shen, a former employee, said that the firm’s management stipulated that in-feed ads could only appear in the bottom right corner on the app’s two-column layout of posts and the ratio of ads to user-generated content could not exceed one to six. Ms. Yu, the influencer, also told Pandaily that for KOLs, the ratio of sponsored content to non-sponsored content could not surpass one paid post for every three non-paid posts. “Xiaohongshu evaluates our compliance performance and issues a report to us on a monthly basis. If you break the rules, you will receive a low score or even a warning,” she added.

A representative from Xiaohongshu said in a written response to Pandaily’s questions that advertising is currently the company’s main source of revenue and its other revenue streams include its in-app e-commerce arm, virtual gifting during live-streaming, management of brand-creator partnerships and sponsored content.

Xiaohongshu’s slogan has transitioned from “Finding Good Stuff Overseas” in 2014 to “Marking Your Beautiful Things” in 2021, which also marks a significant change in its brand positioning and monetization strategy.

Bloomberg reported in October that the company is weighing a Hong Kong initial public offering to raise at least $500 million, after putting its U.S. listing plans on hold, citing unnamed sources familiar with the matter. Last month, Xiaohongshu was rumored to raise $500 million from existing investors in a financing round which valued the firm at $20 billion.