The potential for lucrative sales during events like Double 11 often presents brand participants with a multitude of dilemmas encompassing branding, profitability, channel management, customer loyalty, and more, writes Fang Ming, who is pursuing a Hospitality EMBA at CEIBS (China Europe International Business School).

The prisoner's dilemma is a notable concept in modern game theory, prevalent in many economic facets. 

"Amazing Offers 3", a variety show by Austin Li, a top live-streamer in China, acts as the kick-off for this year's Double 11 campaign, triggering a price war for every participant tasked with offering their best deal on top-selling products. 

Austin Li‘s Variety Show - Amazing Offers Season 3

During one session of "Amazing Offers" Season 3, the general manager of a high-end beauty brand was put on the spot by Austin to further slash prices, beyond the buy-one-get-one-free standard scheme. Austin stated, "Your rival brands have already confirmed similar offers for a new product, will you follow suit?" Under tremendous pressure and being watched by millions of Austin’s followers, the GM, unwilling to risk losing substantial sales and market share to competitors, consented. 

The latest Double 11 event in 2023 has wrapped up, leaving behind a trail of both triumphs and setbacks for different brands. Austin's live-streaming sessions alone pulled in an impressive RMB 9.5 billion in Gross Merchandise Volume (GMV) during the first wave, though this was a drop from the previous year's staggering RMB 21.5 billion. Despite the fluctuation, Key Opinion Leader (KOL) live-streaming continues to be an essential sales driver within China's e-commerce landscape, evolving into a powerhouse platform where influencers like Austin wield significant sway. 

Premium beauty brands sold with heavy discounts

Initially introduced as a means to enhance online shopping with interactive, real-time product demonstrations, KOL live-streaming has since morphed into a collective bargaining force, with influencers tapping into their vast follower networks to negotiate steep discounts from brands. During events like Double 11, these discounts and offers can exceed 50%, with KOL live-streaming contributing to more than 90% of e-commerce transactions for some brands. 

The potential for such lucrative sales often presents participants with a multitude of dilemmas.

Branding Dilemmas

Awareness vs Equity: Top KOL live-streaming unquestionably builds massive awareness for brands due to their extensive fanbase and social influence. However, maintaining control over brand interpretation, particularly with top-tier KOLs, is challenging. This lack of control resulted in crises for YSL Beauty & Florasis this year. Unprofessional performances were surprisingly common, even among top-ranked live-streamers on platforms like Tmall & Douyin. 

Xiao Yang Ge's livestream for YSL was too 'crazy' for the brand's high-end and elegant image

Desirability vs Low Price Perception: A brand's identity is defined by unique features distinguishing it from its competitors. Brands tirelessly strive to build a desirable image, offering unique propositions, superior service, compelling consumer experiences, and high-quality products. Yet, these elements are difficult to convey during a KOL live-streaming session, often reducing price to the primary factor enticing consumers to purchase.

Besides, brands are often described as overpriced and associated with 'evil capitalists'. Top live-streamers, playing the role of heroes on behalf of consumers, aim to defeat these perceived 'evil capitalists' and attempt to reduce their profit margins. However, ironically, those very live-streamers are the ones earning the most from these supposedly 'evil' sources of capital.

Profitability Dilemmas

Profit vs Volume: KOL live-streaming could generate substantial profits for brands, even with discounts of 50%. This is due to the significant volume of sales. Many brands opt to sacrifice profit ratio for volume, ensuring total profit remains positive. Retailers may also experience profit loss alongside the brand when a product is discounted. 

On the other hand, livestreamers secure their profits based on Gross Merchandise Volume (GMV), regardless of any discounts applied.

Austin Li's live-streaming room during 2023 D11

Discounted Product vs New Product: Normally, retailers discount certain products, such as off-season or discontinued items, to alleviate stock issues. However, top KOLs pressure brands to discount top-selling products or even new products, which can further undermine profitability. 

Short Term vs Long Term: While KOL live-streaming can aid in meeting short-term targets, aggressive discounting can potentially result in chain effects across all channels for the longer term.

Customer Dilemmas

Price-sensitive vs Traditional demographics: Live-streaming platforms often attract a significant number of price-sensitive customers. Customers on live-streaming platforms tend to be more impulsive when it comes to seeking lower prices, resulting in a high degree of price elasticity. Overemphasis on discounting to attract price-sensitive customers risks alienating brands' loyal, premium clientele.

In contrast, traditional retail customers value individualized service, a pleasant shopping environment, and the opportunity to trial products for quality, which makes them more inclined to pay full price and develop a strong connection with brands. 

Individualised service at premium beauty counters

Loyal customers vs Substitute seekers: Despite top live-streamers boasting personal IP and influencing power towards their followers, live-streaming customer loyalty often leans towards lower prices. If another channel offers a lower price, they may easily switch. These customers show limited loyalty towards brands if they can find a substitute at a lower price. As a result, having less loyal customers places a higher burden on brands in terms of acquiring new customers and incurring additional costs.

Bulk-purchasing vs Regular demand: Live-streaming has a profound impact on consumer purchasing patterns, particularly during e-commerce promotions. The lure of discounted prices encourages customers to buy in bulk, sometimes leading to secondary market reselling. This surge in sales during promotional events can undermine regular period sales, creating an uneven distribution of demand throughout the year.

Channel Dilemmas

Pricing Paradox: As a brand, effective management of sales channels and pricing decisions is crucial. But today's live-streaming ecosystem emboldens influencers to push for dramatic price reductions to captivate consumers. This strategy often triggers internal price conflicts among various sales channels, unsettling the market balance. 

Resource Allocation: KOL live-streaming demands significant resources, including both sales and marketing budgets. However, this allocation can potentially result in cannibalization from other channels due to limited resources. Ensuring a balanced allocation of resources for a brand's omnipresence becomes a new challenge. 

Organizational Capabilities: This is another crucial aspect. Live-streaming requires an incredibly agile system, encompassing various functions such as R&D, supply chain management, demand forecasting, shipment, and after-sales support. The sheer volume generated within a short span of time necessitates organizational transformation to fully maximize fulfilment. 

This dynamic is distinct from traditional offline businesses and day-to-day e-commerce operations that focus on routine management tasks. While it may seem feasible for these different approaches to complement each other theoretically, they often end up undermining each other.

Perspectives to Look Ahead 

Despite all the dilemmas, KOL live-streaming has remained as an indispensable sales channel that is reshaping consumer behaviours in the China market. It plays a crucial role in 'rescuing' sales during tough times such as the Covid-19 pandemic, but also is exerting pressure on existing brand value by driving down prices. 

Therefore, it's important to recognize that shortcuts may bring temporary success but are often short-lived. We have witnessed the examples of Chinese brands, such as Florasis and Austin Li, achieving remarkable sales growth from zero to RMB 4 billion within just five years. However, it's important to note that they also experienced a sudden downfall of 90% overnight. The September 2023 incident saw the popular livestreamer offering a teary apology for his tone-deaf remarks made after one of his live viewers commented a Florasis eye pencil was too expensive.

This highlights the importance of a brand's true essence, which lies in its pursuit of a longer lifecycle through consistently creating new and innovative value for the right customers. By doing so, a brand can ensure sustained profitability in the long term. 

If I were in the shoes of a brand's general manager, I would understand the temptation to dive into KOL live-streaming given the market penetration and sales target pressures, but it may seem like drinking poison to quench one's thirst. As a top manager, it is crucial to consider how to leverage KOL live-streaming to build a stronger and more sustainable brand. This involves utilizing various omni-present channels to strengthen the connection with customers, which is the core asset of any brand. Sustainable growth should be prioritized over continuous price declines, which can undermine long-term profitability and damage the brand image. Therefore, it is essential to refocus on the brand's core vision, establish a clear identity, create differentiated value for consumers without devaluing the brand, develop a healthy distribution channel foundation, and implement other necessary measures. A shortcut is only a means of survival, while strategy is the key. 

Lastly, it is worth observing the evolution of the live-streamer industry, particularly the emergence of a new type of live-streamers (like Teresa Cheung, Dong Jie and Annie Yi). Unlike those solely focused on offering the lowest prices, these new live-streamers prioritize brand storytelling, functionality and emotional engagement over price sensitivity. This shift presents an alternative avenue for brands to explore and suggests that more opportunities lie ahead. 

Top 3 livestreamers on Little Red Book (Teresa Cheung, Dong Jie and Annie Yi)

The opinions expressed above are based on my personal experiences in the premium beauty industry. The intention behind sharing these opinions is to inspire others to find solutions and promote a more sustainable development of the industry. Therefore, open discussions and different perspectives are always welcome.