The Future of Social Commerce Lies With Gen-Z
Three major trends are shaping today’s e-commerce market. First and foremost, Gen-Z is quickly becoming the most influential shopper in America. More importantly, this consumer has spurred a new approach to traditional e-commerce- one that revolves around community. Yet, the current social media giants are failing to meet the needs of this generation. At this intersection, sits tomorrow’s most promising market opportunity: Social Commerce.
Gen-Z currently accounts for 40% of consumers and holds nearly $600B in indirect spending power in the US alone, with income expected to grow 400% in the next decade. As this generation becomes increasingly more influential, so too do their unique purchasing preferences, particularly those of serendipitous discovery, peer-to-peer recommendations and reviews, and social sharing. Yet, none of the key players are tapping into this new mode of commerce, leaving room for new social commerce startups to disrupt industry incumbents and better serve this growing demographic.
In order to better understand this enigmatic generations’ social media and shopping habits, FFF conducted a survey with 1K+ Gen-Z respondents — the results of which have informed our ultimate thesis:
The majority of start-ups in social commerce today are too narrowly focused on the shortcomings of their incumbents, creating band-aid solutions versus building platforms that incorporate the young consumers’ content and shopping behaviors.
Instead, the long term winners will be those that build entirely new standalone platforms where social is at the core of commerce and not just an afterthought.
Not Just Millennials Who Know How to Use TikTok
While it may be tempting to lump Gen-Z and Millennials in the same bucket of youth, in truth they have distinct identities and shopping behaviours. What is considered crucial in the shopping experience for Millennials, has simply become table stakes for Gen-Z, who expect much more.
Millennials focus on when the product is being purchased — from rapid shipping, to BOPIS and other retail conveniences. For Gen-Z, the shopping experience revolves around how the product is discovered in the first place.
The peer-to-peer component of product discovery and purchase is the key to the future of social commerce.
Specifically, the Gen-Z shopping journey consists of three main components: product discovery, peer-to-peer referrals and reviews, and post-purchase product sharing.
Serendipitous Product Discovery: The process of discovery is a critical stage in a young consumers’ shopping journey, with more than 82% of Gen-Z in the US making purchasing decisions during the ‘inspiration stage’ of their shopping experience, according to a 2020 report by BCG. Importantly, this discovery process occurs largely on social media platforms such as Instagram and Tiktok, as Gen-Z seeks to discover products used by those they trust — whether they be creators or close friends. In fact, 70% of our survey respondents listed “Product Discovery” as the most enjoyable part of the social shopping experience. Furthermore, when asked which platforms they used to discover products, Instagram and then TikTok were listed as the first and second most important platforms 91% of the time. It comes as no surprise, then, that Instagram itself reports that 70% of consumers use the platform for product discovery. The problem lies in the fact that these platforms were not originally built for purchasing functionality (more to come on this later).
Peer-to-Peer: Throughout the shopping journey, Gen-Z relies on peers for the single most important purchasing factor: Trust. Once a product has been discovered by referral from a peer, these savvy consumers seek out reviews and product tutorials on Instagram, TikTok, and Youtube to inform their purchasing decisions. Our survey indicated that the top two purchase decision factors were the ability to shop from any person or brand (not just those with 10K+ followers, ie. peers, not just creators) and watching product tutorials/reviews.
Post-Purchase Product Sharing: Upon purchase, Gen-Z enjoys sharing their new product with friends through images, tutorials, written reviews, and more. More often than not, however, these posts become crowded out on today’s social media platforms, leaving young shoppers combing through promoted content to find that of their peers. Gen-Z is looking for a place to be able to share post-purchase reviews and recommendations with their close friends and wider community.
The Social Commerce Market Opportunity
Gen-Z wants serendipitous discovery, peer-to-peer recommendations and reviews, and social sharing. In short, Gen-Z wants social commerce.
Social commerce is still in its nascency in the US, but huge growth is expected. Growth was so massive in 2020 that forecasters increased their previous predictions of 20% growth to 30% in 2021, with sales expected to reach $36B. This 30% growth is expected to last through 2027, reaching $128B in sales.
Gen-Z is the driving force behind social commerce expansion. Since Covid began, 30% of Gen-Z said they are more likely to shop online for all purchases, and 33% have increased spending online. In confluence with their uniquely social shopping habits, it is no surprise that this market is growing so rapidly.
Current Social Media Platforms Aren’t Addressing Gen-Z Needs
1. Today’s Functionality is Clunky and Incomplete
At present, Gen-Z is unlikely to complete the entire shopping journey on a singular social media platform. When surveyed, only 3% of respondents said they purchased products they had discovered on social media through those same platforms. Instead, 80% of respondents said they left the social media platforms to purchase the product directly from brand websites once a month, and 54% of respondents did so weekly. Of those who engaged in this ‘discover now, buy later’ approach, 40% said they simply did not like the shopping experience on social media platforms, while another 48% said that they hope to seek further information online in the form of reviews, prices, tutorials, and vintage alternatives.
Simply put, today’s social media platforms lack the shopping functionality Gen-Z requires. Platforms such as Instagram and TikTok do not yet have tap-to-shop in-video. Swipe-up is only available to those with greater than 10K followers, limiting the ability of ‘micro-creators’ to share, recommend or sell. The ‘link-in-bio’ experience is inefficient, with no substitute available for personalized creator storefronts, linked posts, or more. Instagram shops are only available to some, not all, and for the products one actually can shop on these platforms, the checkout process remains clunky and lacks trust. In fact, 95% of respondents ranked the checkout process as the least enjoyable aspect of shopping on social media platforms.
Today’s platforms simply aren’t meeting user needs.
2. Tomorrow’s Functionality is Slow to Roll Out
As previously mentioned, present social media platforms were not built to be commerce engines. New functionality must be deployed meticulously to avoid overwhelming current users. Gen-Z already complains that Instagram has become too commoditized, with feeds full of creators and advertisements rather than friends and peers. For that reason (among others), commerce functionality has been and will likely continue to be slow to roll out. The functionality requires time to build from a tech standpoint, but it must also be deployed slowly and strategically to avoid overwhelming users who expect a different experience.
While these platforms work to build shopping features internally, startups are racing ahead to build outside solutions to missing functionality. Across the board, however, too narrow a focus is being placed on solving short-term problems by bridging gaps on pre-existing platforms rather than building stand-alone solutions in their entirety.
There’s a [Startup] For That
For every missing functionality, whether it be the link-in-bio, affiliate programs & revenue share, personalized creator storefronts, there is a startup seeking to solve the problem.
These startups are making two misplaced bets, the latter riskier than the former: First that these social media giants remain the market leaders, and second that these incumbents will not build this functionality in-house and turn off external add-on access, thereby squashing their startup competition.
PayPal was originally built as an online payment system that adopted eBay as its key platform, that is, until eBay built its own internal payment system, Billpoint, and shut off access for PayPal, nearly cutting off the entire business. PayPal was forced to spin-off and become its own standalone product that could function across all platforms, which ultimately led to them outcompeting Billpoint and even being acquired by eBay. Building a company as an accessory to another is risky.
PayPal serves as an example of both the challenge emerging accessory startups may face and the upside in serving as a standalone product.
So What Will the Future Standalone Solutions Be?
The successful social commerce business of the future is not an accessory product built as a bandaid or a bridge for an already-existing social media platform. So what, then, will the unicorns of the future look like?
The successful social commerce business of the future will be standalone platforms that do one of the following:
- Encompass the Entire Social Shopping Journey From Start to Finish: From product discovery to peer referrals and reviews, purchase, product-share, revenue-share and beyond.
Or:
2. Cross-Platform Solutions That Out-Compete In-House Solutions: Including creator FinTech solutions, cashback and loyalty programs, back-end enablement services and more. Effectively the ‘PayPals of social commerce’.
While we do not believe this to be a winner-takes-all market, we do believe the biggest winners will fall into the following buckets:
Creator-Enablement Platforms: The creator-enablement platforms of the future will focus on allowing creators to manage their own businesses cross-platform. Such enablement services could include banks and financial services for creators, cross-platform cashback and rewards programs for peer recommendations and referral revenue, and peer referral enablers.
Social FinTech Platforms: The FinTech platforms of the future will not only build in the same peer-referrals and social sharing as that of the e-commerce platforms but will also plug-in to the other social commerce platforms yet-to-be built. Whether it is sharing recommendations of portfolio investments such as Cheres, creating a digital asset-management platform, or providing payment solutions that allow for post-purchase sharing, the future of FinTech is social.
Peer-to-Peer Marketplaces: Your future seller is your closest friend. Your most trusted referrals, your favorite products, your next purchase, will come referred, reviewed, shared, or even made and sold by those closest to you. Influencers and micro-influencers will become concepts of the past as regular individuals become sellers and influencers, a status that was once the domain of commercial brands and celebrities. This is what we’re seeing on today’s P2P marketplaces such as DePop, Poshmark and ThredUp. Peer-to-peer selling will also be prevalent across all social media and social commerce platforms.
All-in-One Platforms: These are the giants of the future. These social commerce platforms will enable everything from product discovery, to peer-to-peer recommendations, social sharing, reviews, product purchasing, creator storefronts, revenue sharing, and a generally seamless shoppertainment experience.
A Glimpse Into the Future…
To look at China is to look at the future of social commerce. A stronger Gen-Z population (13% of household spending in China compared to 3% in the US) has driven a much larger social commerce market, currently valued at $363B. Social commerce in China has grown at twice the rate of the retail sector, and now accounts for over 13% of all online retail sales.
With more than 989 million internet users as of 2021, it is no secret that China is home to some of the most tech-savvy consumers in the world. This has motivated Chinese startups to bridge the gap that has long existed between commerce and social content. Four important trends have emerged in the Chinese market that both differentiate it from, and yet simultaneously project the future of, the American market.
Key Opinion Consumers (KOCs): China’s creator economy is far advanced in that every individual is considered a Key Opinion Consumer (the Chinese version of a micro-influencer) within their own community. In this way, brands and platforms monetize the longtail of influencers, allowing micro-creators to drive purchase decisions on a large scale. As brands in America begin to understand the real value of micro-influencers, we are on the cusp of doing the same.
Private Traffic: Private traffic is an increasingly important term that refers to users with whom you can directly connect without paying to reach them. Private traffic has become nearly entirely restricted on American platforms such as Instagram, yet Chinese platforms like WeChat have allowed companies to create communities of users with whom they directly interact. America is testing this strategy through the likes of blogs and newsletters, but it is only a matter of time before further alternatives come to market.
Group Buying: Pinduoduo, with more annual active users than Alibaba, has risen to success on the back of group-buying- a business model that allows consumers to access discounts by share-purchasing in bulk. This model has built-in network effects, as users must share with their peers and communities in order to partake in the discounts, a behaviour that is already natural to the Chinese consumer. Interestingly, businesses such as Costco have already proven that American consumers are willing to buy in bulk if it leads to discounts, which leads one to believe that, if executed in a seamless manner, this same consumer might be willing to split this bulk order with other consumers for further reductions in price (not to mention waste).
Live-Streaming: While a few live-streaming startups have entered the American ecosystem, including Popshop Live and Newness to name a few, China has a much more sophisticated live-streaming market. In fact, as of December 2020, the livestreaming audience in China consists of 617 million users according to a Chinese statistical report. Chinese companies leverage live-streaming to develop a direct and personal connection with the consumer, making recommendations, answering questions, and building trust — a connection which many American companies are still striving to achieve.
While American social media platforms are still trying to perfect the checkout process, Chinese companies have built entire platforms singularly dedicated to the concept of social shopping. Xiaohongshu, also known as RED, exemplifies the best of this market opportunity. This social commerce platform has built an entire ecosystem around the discovery, sharing, reviewing and referring of products from peer to peer through photos and videos. More importantly, however, users can purchase all products through the platform’s own marketplace. The business is currently valued at $10B.
Far more than just Xiaohongshu, the Chinese market holds several other social commerce players, including: Douyin (Chinese TikTok) valued at $150B, Kuaishou (Douyin’s competitor) valued at $92B, Weibo (Chinese Twitter) worth $11B, Pinduoduo at $125B, and the renowned WeChat, at $84B. It quickly becomes obvious that there is room for enormous growth and multiple winners in America.
In short, China’s social commerce market is a harbinger of America’s own, in which the winners will be those that negate the idiom and do in fact reinvent the wheel. The next unicorns will think past stop-gap solutions to short-term problems, and instead build standalone social commerce platforms for a young generation that prizes community, connection and trust above all else.
Key Takeaways
- Gen-Z currently accounts for 40% of consumers and holds nearly $600B in indirect spending power in the US alone.
- 70% of FFF Gen-Z survey respondents listed “Product Discovery” as the most important part of the social shopping journey, and rank Instagram and TikTok as the first and second most important platforms for product discovery 91% of the time.
- 90% of respondents are leaving social media platforms to make their final purchases, with 40% citing a dislike for the checkout experience and 48% leaving to seek further information in the form of reviews, price comparisons, and more.
- Our belief is that long term winners will be those that build entirely new standalone social commerce platforms that will fall into one of the following categories: Creator-Enablement Platforms, Social Fintech Platforms, Peer-to-Peer Marketplaces and All-in-One Platforms.
- These social commerce winners will either act as cross-platform solutions that out-compete in-house products or encompass the entire social shopping journey from start to finish.
- The success of the Chinese social commerce market is a harbinger for the future potential growth of America’s own.
By Aleksija Vujicic, Female Founders Fund MBA Associate
