Is Social Commerce the next eCommerce?

There are signs that the answer is yes.

80% of social media marketers think customers will purchase goods more often directly from social apps than from the platform of brands or third-party e-commerce portals in 2023. 

State of Social Media

Social Commerce vs. eCommerce

Trust is a massive factor in the purchasing decision, especially for certain segments of the population.

What is Social Commerce?

social commerce definition

Social commerce lies at the intersection of inspiration and monetization, that moment where an emotion gets converted into a credit card or cash transaction.

The phenomena dates back to the beginning of commerce, with some of the more modern examples being companies like Avon.

The inception of social media and, in particular, video networks like Instragram and Tiktok, has created a new type of social commerce where creators and influencers can leverage their brand (or social capital) to sell 3rd party goods and services to their followers/fans.

Social commerce is NOT:

  • Building a Shopify store and announcing it on social media (ie. typical eCommerce model)
  • Traditional social media marketing by a brand or small business
  • Search and procurement through traditional online marketing channels like Search

Social commerce is:

Social commerce components

  • Leveraging relationships around individuals or brands via actions like referrals (Ambassadors)
  • Live, video-based engagement on platforms like Tiktok for actions like ‘live shopping’ (Live Video)
  • Purchasing ‘in app’ on social channels right where a post or video is viewed (Social Shopping)

Avon > Direct-to-Consumer > Social Commerce

The Avon reference above alludes to the fact that most of what Avon sold at its peak was via a distribution model where Avon Reps would purchase items from Avon directly and then sell those items to their ‘network’ out of their home.

Distribution Model - Retail vs. Direct Selling

This type of ‘Direct Selling’ model meant that the brand didn’t need to setup their own retail operations, but instead could push the product through their Reps and sacrifice a bit of margin in the process (Reps take a % commission per sale).

Social commerce is an iteration on this model given that we are living in the era of the D2C (Direct-to-Consumer) eCommerce brand that – in many cases – has no physical retail presence.

One major problem with the average eCommerce-D2C business model in the last few years has been that CAC (Customer Acquisition Costs) have gone up significantly, thus denting margins and causing many brands to go under.

eCommerce Customer Acquisition Costs (CAC)

The typical marketing channels for the average eCommerce/D2C brand are:

  • Digital Ads such as Facebook CPM (Cost per Mille) or Google PPC (Pay Per Click)
  • Email Marketing, where email addresses are captured at POS (point of sale) or on a website
  • Influencer Marketing where influencers are paid to push products to their large social media followings

As competition has increased and CAC has gone up, it has become more and more difficult to generate exceptional ROAS (Return on Average Spend) and ROI (Return on Investment) for most campaigns.

Furthermore, with inflation has come higher costs to house inventory (rent space) and pay employees (salaries), meaning the whole business model has been under pressure.

What problem can social commerce solve for brands and small businesses?

Given the above context and the role that CAC plays in the health of the business model as a whole, social commerce is a new ‘channel’ to market to consumers, one that potentially provides the backbone for lower CAC and better LTV (Lifetime Value).

We can see in the diagram above, that the relationship between CAC (Customer Acquisition Costs), ARPU (Average Revenue Per User), and Retention (how long a customer stays) will – in all likelihood – determine how successful the business is.

Much will depend on the stage in the consumer lifecycle and market capitalization of the business, but ‘social commerce’ will not simply be a hyped term meant to help brands capture Gen Z commerce. It will extend into all layers of the market.

Word-of-Mouth > Trust > Increased $

From previous research, we know that consumers are exponentially more likely to purchase something when the source of information comes from a trusted member of their network. They are also more likely to spend more on their initial purchase and become repeat customers.

Retention Analytics - Word-of-Mouth Multiple

Trust’ is a massive factor in the purchasing decision, especially for certain segments of the population. The advent of social networks, particularly video networks, has created a new layer of ‘trust’ in the economy.

But trust is relative to the relationship:

Consumers are twice as likely to trust family members (77%) and friends (75%) than any other source for shopping recommendations.”

Oracle

This is why Influencers/Creators is not a silver-bullet strategy.

Relative to family members (77%), friends (75%), and colleagues (38%), influencers/bloggers command only about 14% degree of trustability for shopping recommendations.

Proximity of Trust - Social Selling

One caveat with the above data is that it is 2019 data, so some dimensions of the specific %s may have shifted slightly in one direction or another in the last several years, especially among certain younger segments; nevertheless, the general trend holds true.

How does social commerce drive higher transaction volumes?

Based on an increased sense of trust and a higher probability of purchasing, brands and small businesses that push products across ‘social commerce channels’ are highly likely to see: a) higher engagement; b) higher conversion rates, when compared to other marketing channels.

It’s not just platforms like Instagram, Tiktok, or even Klarna that capture the enthusiasm around this model, but the explosion of pureplay ‘social commerce marketplaces’ like NTWRK and Whatnot who capture the Craigslist-type dynamic on a video-based platform.

The *asterisk around any platform is linked to its community dynamics and whether or not that can help improve CAC and/or Retention. If the dynamics are more favorable for any organization to gain more interest, engagement, and ultimately conversion – relative to traditional channels – then social commerce will work to enhance the business model.

Social Commerce Market Growth

Asia (in particular China) is the epicenter of a lot of the original growth for social commerce marketplaces, and now (similar to Tiktok) that momentum has reached European and North American markets.

Recently, India has gained momentum around social commerce and is experiencing explosive growth, in-line with the Chinese market years earlier.

As per industry analysts, the social commerce market in India is presently pegged at $2 billion. In the next five years, this is anticipated to expand at a CAGR of around 50 to 60%. 

Times of India

We can see in the graphic below how double-digit CAGRs (Cumulative Annual Growth Rates) in markets around the world create enough momentum to see the market go parabolic over the next 5 – 7 years.

Statista - social commerce global growth

In China, social commerce represented double digit %s of eCommerce sales several years back, while in the US market it represented only a small % of total eCommerce sales in that same time period.

Now as social commerce scales even more in the Asian markets, it is beginning to gain similar momentum in Western markets. Market growth is expected to reach 25% and 33% of total eCommerce sales in the European and American markets, respectively, by 2025.

A few of the major reasons for this are:

  • the rise of GenZ in relation to purchasing power
  • growth of ‘social-commerce first’ technology platforms
  • continued payments innovations to embed payments right into the social experience

All combined, we can see that there is strong evidence that, in terms of growth rates, Social Commerce is likely to be the next eCommerce, similar in vein to what we saw in the mid 2010s.

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