The rebirth of Xiaohongshu
Please note: the first chapter of this article is available to all subscribers. The exclusive information in chapters 2 and 3 is only available to paying subscribers.
Key takeaways:
Xiaohongshu has been able to change its average user profile and doubled the monthly active users it had in mid-2020.
Its monetization through e-commerce has been limited, but it has implemented new advertising formats to grow its business with brands and merchants.
Xiaohongshu has made it easier for content creators to monetize their accounts by lowering various barriers to entry for brand promotion and e-commerce.
Xiaohongshu continues to have to balance commercialization and user experience.
Chapter 1: An introduction to Xiaohongshu
Chapter 2: Changing course (paid content)
Chapter 3: Other recent developments (paid content)
Note: If you are still getting familiar with the history of Xiaohongshu, please read the background information in Chapter 1. If you are well-informed about the company's background and want to save time, proceed to Chapter 2. You can also listen to Tech Buzz China's 2018 episode on XHS and read Rui’s 2021 thread on Tech Buzz China Insider here.
Sources: The chapter 'Introduction to Xiaohongshu' is based on an earlier (Dutch) article Ed wrote about XHS. Chapter 2 is sourced from exclusive expert interviews in the Six Degrees Intelligence database unless other sources are mentioned in annotations between brackets. Chapter 3 includes noteworthy recent news on Xiaohongshu from (Chinese) media.
Chapter 1: An introduction to Xiaohongshu
Xiao Hong Shu (小红书) was founded in Shanghai in 2013. The platform's name means 'little red book' in Chinese and, according to the founders, has nothing to do with the famous booklet of Mao Zedong's quotations. In English, they simply call their platform RED. For this article, we'll stick with 'XHS.'
Initially, the social platform was a community where consumers, especially young females, shared their experiences with foreign (luxury) products and tourist destinations. Users, who call themselves 'Little Sweet Potatoes' (a homophone of 'Little Red Book' in Chinese), post photos and reviews of products, give each other tips, and share comments. In a society where peer reviews on social media and social networks inspire more trust than other forms of product information, XHS quickly became a highly regarded platform.
The platform feels like a cross between Pinterest and Instagram but with buying options and longer, blog-like content. In XHS, a post can have up to 9 pictures and 1,000 characters. Considering that in written Chinese most words consist of just 1 or 2 Chinese characters, you can tell quite a story within those limits. Readers can 'like' posts, post comments, and share content with others on other platforms (e.g., Weibo and WeChat). XHS does not want users to 'spam' each other on its platform and lets its algorithm determine which content is of interest to individual users. Also noteworthy is the feature that enables users to collect others' posts and save them for future use, comparable to Pinterest's 'boards.'
From shopping guide to online store
Originally, XHS was mainly a 'shopping guide,' first as a set of downloadable PDFs and later as a forum. Users on XHS could compile a shopping list of products they wanted to buy when going abroad. Once they arrived in another country, XHS would point them toward interesting shops and locations through the 'Nearby' function in the app. If the clothing sizes in that country were different, the app would provide conversion tables, and if you didn't know how to ask if you could try something on in the local language, the app had the proper translation for you.
Products that appear in users' newsfeeds could often be bought directly on the platform. Initially, these sales were primarily made by so-called daigou, mostly Chinese students who buy products abroad and send them to consumers in China. The products reviewed on XHS were sought after but often unavailable in China. At the end of 2014, when the cross-border e-commerce market was growing, and the founders of XHS realized that some products were very popular, they decided to cut out the daigou and turn the platform into a cross-border e-commerce platform.
XHS partnered with prominent foreign brands in popular product categories such as cosmetics, health, food, and household goods. XHS began to source these items and sell them on the platform. In contrast to Alibaba's marketplaces (Taobao and Tmall), this self-operated e-commerce model meant that XHS had products in stock that it shipped to customers. They thus guaranteed product quality in a country where counterfeiting remains a persistent problem when shopping online.
Users regularly visit XHS to see what interesting new content can be found in the accounts they follow. The app's homepage is personalized by the algorithms based on previously visited content. In another user scenario, users are actually looking for information about a specific product. In the online shopping section of the app and website, some products can be purchased in XHS's own shop or third-party shops hosted by XHS. In 2017, the division between XHS and third-party sales was approximately 50-50. Shoppers could chat with store owners and pay with WeChat Pay or Alipay. However, many users would research XHS and then purchase the product elsewhere.
While XHS' market share in the cross-border commerce market was smaller than its major competitors (see chart below), setting up an online shop on XHS was more straightforward and less costly than on major platforms such as Tmall Global and JD Worldwide. The operational costs are substantial though: brands paid XHS to host their shop ($1,250 – $7,500 per month), and at the time, the platform charged a hefty 15-20% commission on their sales.
When some prominent Chinese celebrities, such as movie star Fan Bingbing, started using the platform and XHS sponsored two popular reality TV shows in 2018, it brought the platform more brand awareness and increased user numbers.
KOLs and marketing
Brands can open their own official brand accounts and use them to build brand awareness and sell products. With a brand account, they can also respond to existing posts and discussions on the platform and thus participate in the conversations of (potential) customers.
On top of this, XHS also regularly organizes sales campaigns, flash sales with temporarily available offers, and other promotions in which brands can participate for a fee. Like most e-commerce platforms, XHS has a series of unique shopping festivals throughout the year. It also piggybacks on Alibaba's 11-11 (Singles Day) festival.
As mentioned, in its early years, users of XHS were generally young women under the age of thirty. They read fellow users' reviews or follow Key Opinion Leaders (KOLs, China's term for influencers) who promote products. These KOLs are often users who have built up a loyal following through their reviews and advice. XHS eventually started using these influencers to sell products, earning the KOLs a commission. To facilitate this, XHS opened a platform, Pugongying (蒲公英, literally 'Dandelion'), that brings together KOLs and brands.
By 2019 XHS worked with around 8,000 verified brands and 4,800 influencers, and three types of KOLs could be found on XHS:
Loyal users of the platform who shared lots of content and built a group of loyal followers.
Influencers from other platforms, such as Weibo and WeChat, who added XHS to their communication channels.
Celebrities who use the platform to build a more personal connection with their fans.
Depending on the reach of a KOL, costs could range from a few hundred to more than $10,000 per post.
Because of this commercialization, many users of XHS became skeptical of the platform and the objectivity of KOLs. Soon the platform suffered from fake product reviews and fraudulent content scandals. The government also accused it of illegally harvesting data. As a result, XHS was removed from Apple and Android app stores for more than three months in 2019.
Initially, XHS tried to uphold its reputation as a reliable content-driven platform by not allowing brands to place banners and other advertisements. As we will see in Chapter 2, this strategy has drastically changed.
These limitations made using KOLs and sponsored posts by brands the best marketing method through the platform. XHS did however limit the share of sponsored posts that a KOL could send to about 20%. KOLs with more than 5,000 followers also had to register sponsored posts with the platform, and the post itself had to show that it contained sponsored content. The administrators of the platform also regularly remove posts that are too sales-oriented.
XHS's value lies not so much in its role as a sales platform but as a source of information for consumers who do online research before purchasing. While browsing, users regularly come across exciting products they decide to buy elsewhere. Especially for cosmetics, XHS proved a good source of information, so even if the consumer subsequently purchases another platform such as Tmall or WeChat, XHS proved a unique marketing tool for brands.
However, for XHS itself, the focus on quality content was problematic for the revenue model. Since sales mostly happened on another platform, XHS earned very little from this. In 2018, XHS therefore no longer allowed posts asking people to purchase products on other sites or the use of hyperlinks to such third parties.
Cooperation with Alibaba
In May 2018, Xiaohongshu raised $300 million from investors such as Alibaba and Tencent. The platform had grown to 100 million registered users, of which 30 million were monthly active (MAU). A year later, the counter stood at 150 million registered users, of which 84 million are active monthly.
Alibaba's Taobao is a marketplace that suffers from many fake reviews. An XHS review for a product was considered a more reliable reference (even though XHS removed more than a million paid reviews from its website in early 2019). According to Miranda Qu, one of the XHS founders, the platform had already been used as an information source by 14% of people who wanted to buy fashion items on Taobao. In addition, Alibaba has always struggled to set up and integrate a truly reliable social network into its e-commerce platforms.
At the end of 2018, Taobao started incorporating XHS product reviews into its platform, clearly marked with the XHS logo. Sellers could add XHS content to their product pages, and Taobao's algorithm would then select some of the available reviews. By the way, those could just as well be a negative reviews. The question remains what the effect has been on the quality of the reviews on XHS as they became important to sales on Taobao.
New initiatives: live streaming, mini-programs, and New Retail
By 2019, XHS was much more than a cross-border commerce community. Instead, it had become a lifestyle platform where the cross-border aspect was no longer leading. With the explosion of short video use in China in the second half of the last decade, it was not surprising that short videos also gained a prominent role on XHS. These were often short instructional videos, such as how to cook your favorite dishes at home.
The platform already had several mini-programs on WeChat. Still, it developed a mini-program called Xiaohongdian, which gave users discounts when sharing products with friends on WeChat (suspiciously similar to Pinduoduo's early social commerce model). In 2018, XHS also launched its own design brand, REDesign. It also jumped on the new retail bandwagon by opening an offline store called REDhome in Shanghai's Joy City shopping mall, followed by a second Shanghai store and more stores in Suzhou, Hangzhou, and Ningbo. In 2020 it shut down both Shanghai stores, calling the initiative an experiment. At the time of writing, no XHS stores could be found in the mentioned cities on Dianping.
In the summer of 2019, XHS started experimenting with livestreaming, rolling it out in November of that year. It selected several KOLs based on the quality and frequency of their content and their number of followers and started testing livestream videos with them. For a platform that relied so heavily on influencer content, it was remarkable how late XHS caught on to a trend that, at the time, was already several years old in China.
According to a report by marketing agency WalktheChat, 90% of e-commerce sales on XHS are generated through live commerce. While the total GMV is very small compared to other players in the live commerce market, the average order value tends to be much higher on XHS, driven by the large share of luxury items and the supposed reliability of the livestreamers.
2019 also saw XHS spending money on customer acquisition for the first time, having previously depended on organic growth based on content. LatePost reported (link in Chinese) how the platform gained a lot of new users through advertising and pre-installments on smartphones.
At the start of 2020, XHS announced it was lowering its entry barriers for merchants to open shops. Previously only trademarked brands had been allowed to open a store on the platform, but now anyone with a business license could start selling on XHS.
At the RED for Future Conference in July 2020, XHS downplayed its e-commerce initiatives and unveiled its new strategy to enable brands to promote themselves on the platform. Platform commissions were reduced from 20% to 5% (comparable to what Tmall charges fashion and cosmetic brands). At the same time, XHS also implemented traffic funnels to promote brands and livestreamers and more ways for merchants to connect to reviews of content creators with large followings.
Since mid-2020, XHS has doubled its monthly active users to more than 200 million. It is one of the few internet platforms with a YoY user growth rate of over 30%. Other internet companies are trying to copy the XHS model (Bytedance unsuccessfully tried with apps like Xincao, Kesong, and Douyin Box).
In July 2021, XHS was among a group of internet platforms that received undisclosed fines from the Cyberspace Administration of China (CAC) for hosting content deemed "harmful to the physical and mental well-being of minors."
When we last wrote about XHS in mid-2021, it was rumored that the company's 2020 revenue was $600-$800 million in advertising income, and it had ~$1 billion e-commerce GMV. XHS had missed its revenue targets for 2018 and 2019, its self-operated e-commerce was thought to have largely failed, and it was refocusing on livestreaming.
Time for an update.
Chapter 2: Changing course
Let’s start with some key figures.
After XHS launched in 2013, it grew very slowly compared to other Chinese apps. It's only in recent years that its growth has accelerated.
By the end of 2020, Xiaohongshu had 120-130 million monthly active users (MAU) and a peak of 90 million daily active users (DAU).
In 2021 the average number of DAU grew from 44 million in 2020 to 60 million.
By September 2022, the DAU had reached 80 million, and XHS aimed to increase that number to 100 million by the end of the year.
By the end of 2022, XHS had 200 million monthly active users, including almost half a million monthly active content creators, an increase from 290,000 in November 2020.
XHS works with more than 2,000 MCNs (Multi-Channel Networks), of which 600 are certified, an increase from 368 in November 2020.
Before 2020, a monthly active user opened the XHS app 7-8 times a month, while Douyin and Kuaishou were at 12 times a month. By mid-2022, XHS's monthly open rate had also increased to 12.
Before 2020, daily users spent about 25 minutes a day on XHS, increasing to 57 minutes by mid-2022.