Online-to-Offline (O2O) and the Future of e-Commerce
Imagine a day in your life:
You started the day off reading some in-app news before you got off bed, you liked an article on trends in pet grooming business, it reminds you of your dirty corgi that needs a shower. You booked an appointment with the app for a local pet cleaner to come to your house later. The cleaner showed up in an hour, washed and styled your corgis and you are satisfied with the service. You paid him through the app, reviewed his service and shared it to your profile page on the app. Your friend Jamie saw your post and sent you a quick voice message through the app, also asking you out for lunch. You then looked up nearby restaurant from the app, made reservation, browsed online menu and ordered dishes using the app. You requested a ride share via the app, met Jamie at the restaurant, both of you had already ordered through the app, so you two scanned the QR code at the restaurant table, and waited for food to be brought to your table…
Now, imagine doing everything above with one single app.
Concerning or not that more and more Chinese live their life without the need to leave THE app–exactly what the tech giant Tencent marching towards with WeChat, its one stop shop social platform app.
The O2O Business Model in world of digitization
Commonly seen in developing countries, more and more people are connected to internet through mobile phones than PCs. A report by CNNIC indicates that 71.5% of the 688m Chinese internet users accessed the internet via their mobile phones at end-2015, while those using PCs declined from 51.6% to 39.2% for desktop, from 13.2% to 7.5% for laptop, respectively . The growing mobile internet users have boosted rapid development of mobile platform applications. Wechat, with over 700 million monthly active users developed by Tencent in China, is growing with the upward trend and tapping into new grounds of O2O e-commerce.
E-commerce business models are categorized as B2B, B2C, C2C and C2B by the parties involved in the transaction. With digitization diffusing into offline businesses , studies have explored a new set of categories that differentiate business models not only by “who is involved in the transaction” but “how business is done”– transaction behavior and process. By doing so, a new business model — online to offline (O2O) is becoming a growing segment, in addition to traditional online or offline only models.
What drives the growth of O2O model is the increasing in demand in connecting software platform to physical brick and mortar businesses that are providing actual services. In an offline only business model, customers discover goods and services in physical storefront, where they make subsequent purchase decision and complete actual transactions. While an O2O model moves the discovery process online, providing consumers with a much wider selection pool that is often limited in physical world, often expose them to new purchasing intent. Following the online discovery process, it then use “software bridge” to connect consumer with physical service providers.
Besides providing customers with more flexibility and choices, there is additional value O2O model brings to the Chinese market. The lack of credit system, for example, most Chinese don’t have credit cards, and O2O model allowing them to pay on delivery of goods or services. With everyone on their smartphone all the time and with mobile payment system connecting directly to personal bank accounts, it basically leapfrogged credit cards, as indicated by percent internet users who has made mobile payments online.
Operating Model of WeChat
Wechat is taking the lead in coming up with new ways to bridge online and offline. Its operating model is shaped by the goal of creating a single app that serves as many functions as possible, which is very different from what tech firms in the United States adopts that emphasize simplicity in their apps. To achieve its goal, Tencent has opened up WeChat to other companies, allowing them to create apps nested within WeChat. Ebaoyang — a start-up that enables people to order oil changes for their cars directly on smartphones — was at first almost totally reliant on WeChat to attract business.［3］A list of such “in-app” app span across all aspects of daily life of a consumer. To build trust between customers and merchants and facilitate purchase deal selection and closing process, WeChat utilized its core function–voice based instant messenger. For example, before booking an appointment with a doctor, people can text or voice chat with the office staff to have any pre-visit questions answered. Most businesses such as banks and insurance companies have WeChat account to interact with customers, more frequently and more closely, in order to improve on service.
With digitization enabling more and better ways to create values to both businesses and consumers. WeChat has become a game-changer in China: it has evolved into a multi-platform tool for marketing/eCommerce use, and it’s proved to be an effective way for business to build an O2O model and pull the customers closer.
 Country Commerce Report-China, The Economist Intelligence Unit , New York, February 2016
 Wang, Chu-Ching, et all, “Trade-Off Among Online, Offline, and Online-to-Offline Business Models: A Perspective Based on the Four Ps of Product Characteristics”,International Journal of Electronics Communication and Computer Engineering, Volume 7, Issue 4, ISSN (Online): 2249–071X
 Paul Mozur, “China, Not Silicon Valley, Is Cutting Edge in Mobile Tech”, The New York Times, AUG. 2, 2016
Student comments on Online-to-Offline (O2O) and the Future of e-Commerce
Really interesting read! As players become dependent on offering and recommending multiple business services, however, I wonder how they will control the image of their company. A few questions to consider are: (1) How can companies ensure that their partners are reliable? (2) When partners do turn out unreliable, how does a brand disassociate itself so that they don’t face the customer backlash/damage to customer trust? Reliability is especially important in countries like China that have historically had fake businesses try to take advantage of the most recent trends. Additionally, if these issues prevent the rise of other O2O startups (who have a harder time gaining a foothold because of trust issues), how do we ensure a strong, competitive environment to companies like WeChat so that the recommendations provided by these large companies are balanced with consumer interests (as opposed to making recommendations simply for the greatest monetary gain)?
Great read! WeChat is wildly popular in China, and it is not hard to figure out why – it’s basically an “all in one” platform for the end user. That being said, I wonder if WeChat enough safeguards in place to protect user data. Companies like FitBit have come under fire for privacy concerns, and I would imagine WeChat to have even more consumer data points stored in their system. Especially in the Chinese market, where fake products are rampant and credit cards are not widely used, I think that it will be necessary for WeChat (if they have not done so already) to invest in the right safety mechanisms to manage customer information. The platform’s main value proposition is not just its convenience factor but also its trust factor, and if end users do not trust the platform, it will be very hard for WeChat to recover.
I think this was a very smart move for WeChat to make, given its wide user base in China and negotiating power with vendors. Because WeChat has a scale, it can create additional sources of revenue by teaming up with both online and offline companies in virtually any sectors and bring the products to users via the messenger platform. At the same time, I wonder how the company will ensure the quality of services offered by these different vendors and respond to any misrepresentations or accidents that could happen in the value chain. It might be difficult to trace accountability and sources of problems once too many players get involved and more consumers start to use the platform. Excessively aggressive expansion into this new business area might alienate existing users if not done properly.
Great article! I never realized that WeChat was more than just a communication application, but it also makes sense that they’ve gone into the O2O space from a business perspective. By further integrating themselves in a new way into users’ lives, they’re creating stickier customer relationships as the cost to switch applications will be substantially higher. It’s also interesting to see how certain countries are bypassing computer usage and going straight to mobile usage. Technology is advancing at such a rapid pace that we can skip products as the flow of information is so fast. Mobile also makes it extremely convenient for users to get instant gratification, but I wonder what the implications of moving towards an on-demand economy is and how much that will cost businesses.
It is remarkable that WeChat was able to combine all favorite aspects of modern mobile usage in its ecosystem. Covering the entire ecosystem is why WeChat is such a powerful application. Your article reminded me of the recent big news of Uber exiting China. It is not only because Didi Chuxing was too strong, but also because Didi partnered with WeChat. I could imagine it will be hard to go against a relatively similar app with a much more convenient payment gateway.
On a separate point, regarding O2O, I have seen this happened in Thailand as well. In fact, I wrote my article partly about this. Modern retailers are trying to leverage O2O concept to leverage its store better and at the same time capture the attention of the millennials. It will be interesting to see the which will be the better model in the long term. Pure e-commerce vs. O2O or “Click and Mortar”.
I first learned about WeChat when I shared an apartment with a Chinese girl in France back in 2011. I never knew it was so much more comprehensive than just a communication platform. They have a great first mover advantage and as the reviews and users grow, the more they consolidate their leadership positioning.
I would be interested on understanding the competitive landscape and geographical expansion plan. Are there any other major companies / start-up trying to do the same? Are they planing to grow in the US and other countries?
Very nice article, thanks for sharing.
Thanks for sharing. I also believe that blurring lines between online and offline creates new business opportunities for all retailers. In my research, I came across the fact that Walmart and Ebay invest on omnichannel strategy as number one priority. Providing customers seamless experience across all channels is a strong value proposition with a power to disrupt the current way of retailing.