Click "Read Original" for details At the inception of Alibaba, Jack Ma proposed the inspiring mission "Make it easy to do business." As of early 2020, over 250,000 brands and merchants had joined Tmall. From international brands to local farmers, all can leverage Alibaba's e-commerce platform to do business. Alibaba is becoming the infrastructure of Chinese commerce. But since 2016, companies that originally thrived on e-commerce platforms have gradually shifted towards unprofitable prosperity, where they gain sales but lose money. Why has internet traffic, the driver of the digital economy, wrapped in technological concepts like big data and AI, made business increasingly difficult? This article will uncover the truth about internet traffic commerce by addressing the following four questions: 1. What is the essence of internet traffic and dividends? 2. What is the trap of traffic precision? 3. What is the trap of traffic timeliness? 4. What are the differences between traffic-driven and brand-driven growth models? -01- For Whom the Bell Tolls for Internet Traffic Dividends Internet traffic has become a business focus not only because companies need traffic for customer acquisition and sales, but also because traffic is the primary profit method for internet companies. Internet traffic is content-based user attention. Why do most internet products emphasize essential needs and high frequency? Essential needs mean strong user attention; users care more about basic necessities (not interests) than leisure and entertainment. High frequency means abundant user attention; users engage more with social and entertainment content than with healthcare. Only strong and abundant user attention can generate high-quality traffic, allowing internet companies to sell traffic at a good price. The business models of internet companies almost all revolve around traffic acquisition and monetization. Alibaba has always had a social dream; products like Laiwang, Real Me, and Alipay's social features have failed. But why is Alibaba not satisfied with e-commerce? As the e-commerce leader, Alibaba has the strongest traffic monetization capability, but traffic acquisition is a prerequisite for monetization. The essential, high-frequency traffic generated by social products is exactly what Alibaba needs. Alibaba's business ecosystem, which includes video, music, food delivery, browsers, movies, travel, and literature, is precisely about acquiring a continuous stream of traffic for its e-commerce monetization. Alibaba Business Ecosystem, Source: Orient Securities Tencent, as China's largest content group, holds the largest traffic pool. But Tencent has been striving to build e-commerce, investing in Paipai, Yixun, and QQ Buy, with poor results. So Tencent turned to become a core shareholder of JD, Pinduoduo, and Vipshop. It can be said that e-commerce is the last piece of the puzzle for Tencent's traffic monetization. Tencent Business Ecosystem, Source: Orient Securities Traffic acquisition requires content capability, while traffic monetization requires e-commerce capability. In recent years, the internet industry has seen new concepts like content e-commerce and e-commerce content. In essence, content e-commerce means "I have traffic, need to sell it," and e-commerce content means "I can sell, need traffic." As traffic costs rise, you may be impacted before you even understand traffic dividends. Customer Acquisition Costs for Major Chinese E-commerce Platforms, 2017Q1-2020Q1 In fact, dividends are profit opportunities arising from short-term supply-demand imbalances. At the onset of the pandemic, masks nationwide sold out overnight, the mask industry raised prices, and related companies profited handsomely. That was the mask dividend. Later, a large number of companies shifted to mask production, inventory soared, and prices plummeted. These latecomers couldn't even cover the cost of manufacturing equipment with their mask profits. That is the inevitable result of the mask dividend disappearing. According to the level of growth drivers, internet traffic dividends can be divided into four types: 1) Macroeconomic growth dividend: Population internetization: the first Taobao brands, the first WeChat public account authors, Pinduoduo tapping into lower-tier market users 2) Industry growth dividend: Competition and evolution of internet companies: Toutiao as a latecomer provides traffic support to quality authors and advertisers; Taobao Special Edition heavily subsidizes users and merchants to counter Pinduoduo 3) Model growth dividend: Emergence of new business forms and models: Toutiao's recommendation algorithm replacing Baidu's search algorithm; Taobao's resources shifting towards livestream e-commerce 4) Operational growth dividend: Application of new operational tools and methods: ByteDance's Ocean Engine and other traffic analysis and operation platforms empowering advertisers Those who wait by a tree stump for rabbits eventually starve; they cannot complain that the rabbit didn't come, but should complain about being trapped by the rabbit dividend mindset. The fundamental reason companies fall into traffic difficulties is not the disappearance of traffic dividends, but that internet traffic itself has flaws, and companies and marketing experts brainwashed by traffic are unaware. -02- Traffic Precision: The Trap of Sacrificing Market Penetration Internet companies mainly monetize traffic through advertising. Internet technology can record consumers' identity information and behavioral data. Companies use this data to analyze who are consumers and who are not, and then push ads precisely to consumers. This type of internet advertising, which can precisely calculate delivery effects and charge based on results, is called performance advertising. Delivering performance ads is commonly known as buying traffic. The counterpart to performance advertising is brand advertising, which uses media like TV, elevators, and posters to display content and shape public awareness of the brand. However, brand advertising is difficult to track and quantify in terms of display effects and audience behavior, so it is considered "imprecise." 1. Performance Ads Miss Potential Consumers The precision of performance ads relies on internet user data. If the data covers all consumers in the market, then 100% precision delivery would be ideal. But this ideal situation will likely never happen: 1) Consumer privacy concerns: Baidu founder Robin Li claimed at the 2018 China Development Forum that "Chinese people are willing to trade privacy for convenience," which drew widespread criticism. 2) Legal protection of data privacy: People's Daily has repeatedly criticized internet apps for illegally collecting and misusing user data. 3) Changing needs and lagging data: How much of today's consumption data can prove tomorrow's purchase decisions? The internet can only collect data from a portion of consumers in the target market, and the data collected is only what consumers are willing to "trade privacy for convenience." More precisely, performance ads are not ads but narrow ads. If brand advertising is imprecise, like using a cannon to shoot sparrows, wasting expensive firepower, then performance advertising is too narrow, like using a sniper to shoot sparrows, ignoring hidden targets. 2. Performance Ads Ignore Influencers A market includes four types of people: decision-makers, buyers, experiencers, and disseminators. Performance ads only target users with data support, ignoring other types and their interactions. Therefore, performance ads limit brand influence to a small circle, losing many sales opportunities. In 2019, Adidas' global media director said that performance ads accounted for 77% of their investment in the past year, leading to performance damage, precisely for this reason. When Shi Yuzhu founded Nao Baijin, he found that elderly people needed supplements for sleep, but they were reluctant to spend money. So he proposed the slogan "This year, don't accept gifts; if you do, only Nao Baijin," reminding young people to buy Nao Baijin for their parents. This is the mismatch between demand and purchase. If you applied the precise logic of performance ads, without data on elderly people's supplement purchases, you would assume they have no demand. This is survivorship bias: The returning fighter planes had the most bullet holes in the wings, so you decide to reinforce the wings, but can you imagine that the planes with engine hits never made it back? A batch of high-end residences is intended for executives, government officials, and other elites, but these high-end people value time efficiency and usually don't watch ads. Would you deliver performance ads to them? Probably various VIPs block ad pushes. On the contrary, wealthy housewives with ample time and attention to life are the disseminators worth focusing on. The limitations of performance ads are numerous, as such examples abound. 3. Performance Ads Can't Reach the Tipping Point Philip Kotler, the "father of modern marketing," proposed the STP theory, emphasizing market segmentation and targeting, then occupying customer minds in the segment through clear brand positioning. Philip Kotler, the "father of modern marketing" STP emphasizes market segmentation, even placing it before brand positioning, because consumers in the market are dispersed, and broad market expansion is inefficient. You need to focus on a key segment, cover consumers with high density, and when market penetration reaches a critical point, the entire market will automatically ignite, achieving exponential growth. In short, 1% penetration in 10 markets is not as good as 10% penetration in 1 market. Because 10% of consumers in one market will ignite the remaining 90%, and even other related markets. This principle is universal: Michael Porter's focus strategy, Malcolm Gladwell's tipping point, Geoffrey Moore's crossing the chasm, Vilfredo Pareto's power law, Huawei's saturation attack, Chairman Mao's "a single spark can start a prairie fire," teachers making talkative students sit apart... Performance ads, based on limited user data, ignore potential consumers and influencers, making it difficult for market penetration to reach the critical point for market ignition. In contrast, brand advertising can achieve high-density coverage in target regional markets, ensuring that decision-makers, buyers, experiencers, and disseminators all receive brand information. Is brand advertising a cannon shooting sparrows? No, brand advertising doesn't even spare the nest or eggs. -03- Traffic Timeliness: The Trap of Sacrificing Brand Autonomy 1. Performance Ads Are Short-lived The purpose of performance ads is to promote immediate conversion; charges only occur when users take actions like clicks, purchases, or downloads. Therefore, the media and copy design of performance ads revolve around stimulating user action. There are two paths to trigger user action: Influencing behavior by stimulating emotions Influencing emotions and behavior by shaping cognition Performance ads are displayed on the internet for a very short time, so they typically use emotional stimulation to prompt clicks and purchases within 1-2 seconds. This has led to the prevalence of sales-oriented copywriting on the internet. This has brought unprecedented impact to 4A advertising agencies. The media and sales channels of brand advertising are usually separate, requiring the shaping of consumer cognition to strengthen memory for future purchases. For example, performance ads are like a lover, stirring your emotions and triggering your actions, but after the encounter, you lose feeling and memory. Brand ads are like a wife; the shared cognition between you and your wife is the guarantee of long-term life. However, precisely because brand ads cannot achieve the "what you see is what you get" timeliness of performance ads, the fallacy that "brand theory fails in the internet age" has become prevalent. Companies and marketing experts holding this view precisely ignore the deep problems of these two decision paths. Any emotional stimulation is only suitable for short-term impulsive consumption and does little to cultivate long-term brand preference and consumption habits. Because emotions come quickly and dissipate even faster. Performance ads can make you order within 1 second, but also make you forget within 1 second. Do you remember any brands from performance ads you saw this month? Recently, Tencent Ads released the "Light Interactive Splash Screen Ad Value White Paper," which includes two viewpoints: Consumer attention is fragmented; increasingly busy consumers find it harder to remember brands. Consumers in the digital age need stronger, fresher stimuli to form memories of marketing. Is that really the case? Most brands that consumers can't remember are precisely those that rely on immediate conversion from performance ads and neglect investment in brand cognition. According to Ipsos' "2019 China Popular Advertising Slogan Audience Research Report," in 2019, consumers' main channels for recognizing popular advertising slogans were elevator media (81%), followed by internet media (54%) and TV media (50%). In recent years, TV ratings have declined, and consumers' information and entertainment time has shifted significantly to the internet. But the new brands we remember, like Shenzhou Car Rental, Ele.me, Yuanfudao, Milkground, Xiaoxiandun, and Genki Forest, are mostly known from elevator ads we pass daily. Brands contribute to corporate profitability in three ways: Increase premium rate (increase product profit) Increase repurchase rate (increase user purchase volume) Increase recommendation rate (increase total user base) In other words, corporate profit = product profit × user purchase volume × total user base. Performance ads have almost no promotional effect in these three aspects. Performance ads often use price promotions to improve conversion rates, ultimately sacrificing brand premium capability and fostering consumer dependence on low prices. During performance ad campaigns, consumers tend to stock up at low prices and buy in advance, leading to a short-term surge in sales but long-term weak performance—an unprofitable prosperity. The role of performance ads is to improve single, precise sales conversions, but due to the lack of sustained cognitive effects, without considering product experience, performance ads themselves do little for repurchase and recommendation. Why has the term "private domain traffic" become popular? Because performance ads (commercial domain traffic) lack repurchase and recommendation effects, so private domain traffic is needed to retain customers in communities, repeatedly reach them, and encourage fission. Private domain traffic is a patch for the bugs of performance ads. Unfortunately, it's all bubbles, a fleeting spark... Emotions dissipate easily, but cognition lasts forever; this is the human nature basis of performance ads and brand ads. Without brand cognition, performance ads will only make you dependent and sink deeper. Even in the internet age, if doing traffic makes you unable to manage your life, such marketing is better abandoned. 2. Performance Ads Depend on Brand Cognition Some marketing experts say: In the traditional era, the consumption logic was "people find goods," where consumers remember the brand and then go to retail outlets to buy, so brands were more important. But in the internet age, e-commerce has achieved "what you see is what you get," and the consumption logic is "goods find people," so traffic is more important. Anyone holding this view basically treats consumers as unconscious vegetables. Because healthy people, even when faced with ad recommendations, use cognition to decide whether to buy or not. In fact, traditional consumption is a pursuit logic of "people find goods, goods wait for people," while internet consumption is an encounter logic of "people find goods, goods find people." After consumers recognize the brand, they receive ad recommendations on the internet, and they hit it off. If consumers don't have enough awareness of your brand, even if you run performance ads, they won't have much effect, and your performance ads might even be directing traffic to strong competitors. Research by Professor Prakash Nedungadi of the University of Toronto found that when big brands prompt consumers with ads, the proportion choosing that brand increases; when small brands prompt consumers, the proportion choosing big brands also increases. The reason is simple: when you see a street vendor selling burgers, you're more likely to turn to Burger King or McDonald's. Studies show that when running the same performance ad campaign, brands with strong cognition have higher conversion rates than those skilled in traffic operations. In the early days of e-commerce, many new brands topped the Double 11 rankings thanks to internet traffic dividends, but the 2019 Tmall Double 11 rankings were almost entirely dominated by traditional big brands. In 2020, livestream e-commerce was extremely hot, but the highest sales were still mainly traditional big brands. The success of big brands is not due to strong traffic operation capabilities, but because their brand cognition is strong enough, making traffic effects a natural result. For big brands, running performance ads is like picking ripe fruit under the big tree of brand cognition. Moreover, the way performance ads calculate effects is inherently flawed. If you see a brand ad on TV or in an elevator, become interested in the product, and then click to buy through an internet performance ad, that sale is attributed to the performance ad. The credit for brand advertising is forcibly attributed to performance ads, and brand advertising is also blamed for being "imprecise" and "ineffective." Who bears this blame? -04- Traffic Model (Performance Ads) vs. Brand Model (Brand Ads) Having understood the essence of traffic precision and timeliness, we must return to marketing reality and see the impact of performance ads and brand ads on corporate growth. 1. Traffic Model (Performance Ads): Proportional Linear Growth Three Squirrels' performance has risen year by year, with 2019 revenue of 10.173 billion yuan, but a net profit margin of only 2.35%. Three Squirrels 2014-2019 Revenue and Growth Three Squirrels 2014-2019 Net Profit Attributable to Parent and Growth Three Squirrels is a typical example of relying on the traffic model and performance ads for growth. In 2019, online sales accounted for about 87% of Three Squirrels' revenue. But as internet traffic dividends disappear, the drawbacks of Three Squirrels' growth model have begun to show. Three Squirrels' revenue growth strictly depends on increased sales expenses, forming a 20% proportional relationship, and from 2017 to 2019, sales expense growth rates were higher than revenue growth rates. Three Squirrels 2016-2019 Sales Expense Ratio This is the growth law of the traffic model: Performance ads are delivered immediately, generate orders immediately, the more you invest, the more orders, and when the investment stops, the effect stops. There is a binding proportional relationship between product sales and traffic operations. Traffic costs constrain long-term profitability. Three Squirrels is like an organ growing on the e-commerce pine tree, exchanging flesh and blood for pine cones. In summary, the revenue and costs of the traffic model (performance ads) have a proportional linear growth relationship. 2. Brand Model (Brand Ads): S-shaped Exponential Growth In 2008, the melamine incident broke out, and Chinese consumers lost confidence in domestic milk powder brands. Foreign milk powder brands took the opportunity to raise prices, and their market share increased from 48.5% to 59.3% between 2010 and 2017, pushing domestic brands to third- and fourth-tier cities and rural areas. China's old milk powder company Feihe was also severely hit, with sluggish performance growth. In 2015, Feihe began its high-end transformation, establishing the brand positioning of "more suitable for Chinese babies' constitution" and starting brand communication campaigns. Later, Feihe partnered with China's two major brand media, CCTV and Focus Media, to fully launch brand advertising. In 2016, Feihe's performance did not improve significantly, but from 2017 to 2019, it showed explosive growth. Feihe's 2019 revenue was 13.722 billion yuan, with a net profit margin as high as 28.7%. Feihe 2014-2019 Revenue and Growth Feihe 2014-2019 Net Profit Attributable to Parent and Growth According to iiMedia Research, in 2019, among the top five recognized infant milk powder brands in China, Feihe was the only domestic brand. At the same time, Feihe's market share reached 13.9%, surpassing Wyeth, making it the number one brand in China's infant milk powder industry. It is worth noting that Feihe's online sales accounted for only 11% in 2019, which is exactly opposite to Three Squirrels' communication and channel system. Moreover, thanks to the brand advertising of CCTV and Focus Media, Feihe has accumulated deep brand assets, and its sales expense ratio is gradually declining. Feihe 2016-2019 Sales Expense Ratio This is the growth law of the brand model: In the early stage of brand advertising, growth is slow; after half a year of advertising, sales surge; after the advertising ends, the effect continues. As brand cognition and market penetration reach a critical point, revenue shows exponential growth and produces long-term effects, with advertising costs correspondingly reduced. In summary, the revenue and costs of the brand model (brand ads) have an S-shaped exponential growth relationship. Brand mind share is a precursor to long-term market share and profit share, while traffic share is only a warning of short-term market share and cost share. If your company has been in a linear growth model, you will eventually find that costs always increase faster than revenue, and the risk coefficient will rise accordingly. Only companies with exponential growth can achieve longevity. -05- Reflections on the Internet Traffic Bubble The convenience of the internet has lowered the threshold for entrepreneurship but also intensified business competition. Internet companies mainly monetize traffic through performance ads. Performance ads can be sold in units of hundreds, thousands, or tens of thousands, while brand advertising relies on TV and elevator media, which are sold in units of hundreds of thousands, millions, or tens of millions. Therefore, the vast majority of small businesses with meager budgets and unable to afford brand ads have flocked to the bidding for performance ads. The surge in demand for performance ads inevitably leads to a surge in supply prices. Thus, the bidding mechanism for performance ads in the internet industry emerged, and traffic costs rose accordingly. Recently, ByteDance launched search bidding ads, causing an uproar in the industry. People questioned whether ByteDance would become the second Baidu. In fact, the bidding mechanism is a natural law regulating market supply and demand. Internet companies all enjoy the dividends of the bidding mechanism. It's just that Baidu and ByteDance put the bidding mechanism at the forefront, while other internet companies put it in the background. Due to the bidding mechanism, the price of performance ads will eventually be maintained at a level that ensures corporate survival while maximizing the extraction of corporate profits. Therefore, the profits of those internet brands are often in a difficult position and hard to escape dependence on internet platforms. The precise and fast features touted by performance ads satisfy all fantasies of corporate growth. Those trapped in traffic, even to death, fail to see the real problem with traffic, still treating it as a miracle drug—effective but a bit expensive. Little do they know how much hallucinogen is in the miracle drug. Traffic has become a mindset for most companies and marketing experts, hoping to explain everything with traffic. For example, using communities to maintain customer lifetime value is called private domain traffic, and the effects of integrated marketing communication are called exploding traffic... If you take out the advertising and marketing research reports released by major internet companies, you will be surprised to find that no matter how many technological concepts are packaged, they all argue the same subtext: In the internet age, consumers can't remember brands, brand theory is invalid, so why not buy traffic? It's fresh, stimulating, precise, and has high conversion rates. What are you waiting for? But technology always has limitations and cannot replace the power of human nature. Traffic precision comes at the cost of market penetration; traffic timeliness comes at the cost of brand autonomy. Those who believe internet traffic can build great companies—have they ever studied how internet companies sell their traffic products to you? You almost never see internet companies push performance ads to sell traffic to you. Instead, they mainly use brand methods, such as holding conferences, showcasing technological achievements, creating new concepts, and publishing white papers, to continuously shape your perception of traffic. In other words, even the people who sell you traffic don't rely on traffic methods to sell it to you. So why do you believe traffic will make you successful? Kazuo Inamori's business philosophy was once extremely popular in China, but it may not be suitable for China at this stage. Because most Chinese companies prefer simple, quick-acting practical methods and don't like studying classic theories—"a scholar is useless"! Therefore, the saying "buying traffic is suicide, not buying traffic is waiting to die" is popular in China. What's the difference between that and "stealing is suicide, not stealing is waiting to die"? Besides buying traffic or stealing, are there no other options? In a word, they would rather passively suffer the bitterness of internet traffic than actively study the bitterness of business. When tired of buying traffic, take a moment to sit down and see what scientific and systematic business methods you've never encountered. In Saint-Exupéry's "The Little Prince," there is a famous saying: "It is only with the heart that one can see rightly; what is essential is invisible to the eye." Finally, I share a comparative analysis table of performance ads and brand ads, hoping it inspires you. Source: Zheng Guangtao Grant (ID: Grant-Insight) Author: Zheng Guangtao Grant