Unable to afford traffic, entrepreneurs face life and death every day!

Buying traffic has become a game that is no longer affordable. Every once in a while, the price of online traffic jumps up a number - whether it comes from display advertising, pay-per-click or pay-per-click advertising. When Haiwan.com, an overseas travel app, was first established in 2013, the cost of acquiring a paying user was around 230 yuan. A year later, when Haiwan started to place advertisements, the price rose to 300 yuan. At that time, the company already felt that this was a "game that was too expensive to play". In 2015, the market price rose to 400 yuan, and Haiwan decided to reduce its investment. After that, it simply transformed itself into doing business with corporate clients.

Haiwan.com's COO Gong Jiele told reporters that traffic prices have risen by another 30% this year. Now when he sees his peers still fighting fiercely in the battle for traffic, he feels "a bit sad."

The price of traffic has become too expensive for entrepreneurs to afford. "In the first half of this year, we spent up to 5 to 6 million yuan a month on purchasing traffic," the founder of another travel company told reporters. "If a company only gets a few million yuan in angel round funding, the money they raise is not enough for advertising."

At both ends of the ever-increasing traffic prices stand two parties in the game.

On one side are the many entrepreneurs who regard traffic as their lifeline. Huang Xiaonan, CEO of programmatic buying DSP platform iPinyou Interactive, found that 80% of the marketing expenses of the startups they worked with were used to acquire online traffic. "ToC companies usually spend 10% of their sales to get online traffic advertising. If they use investors ' money, it will be much more than that."

On the other side, there are a few giants who control the traffic. They have to deal with the stock market and investors' expectations for their performance growth and strive to produce good financial figures every quarter.

The two sides are by no means evenly matched. In order to snatch an advertising space from Qihoo 360, a senior marketing executive of a medium-to-large Internet company once went to the other company to block it and demand that it agree to sell the advertising space to itself at a higher price instead of to its competitor. The fight for traffic is the key to life and death in competition.

Under heavy pressure, start-ups are in the most difficult situation. In order to discuss how to deal with the increasingly expensive online traffic, investor Zhang Ming invited the founders of the five companies he invested in to meet in his office two months ago. Zhang Ming suggested that instead of spending huge amounts of money on buying traffic, one could expand the user base offline.

But one of the entrepreneurs of a personal care brand asked back, saying that the offline market had already been divided up by giants such as Procter & Gamble, “Is there still room for me to survive in convenience stores and physical stores? If I don’t do online business, am I going to die?” The conversation came to a deadlock. Several entrepreneurs full of doubts and investors who were always good at answering questions sat and smoked in silence.

"For startups that rely on traffic to survive, every day is a matter of life and death," said Zhang Ming.

Painful buyer

It has become a consensus that traffic is expensive.

"The results of my peers' online purchase of traffic are very ineffective." Turtle, the founder of Niuniujia, a vertical e-commerce company for mothers and infants , told reporters that they had conducted monitoring because " Baidu's paid ranking must have continuous investment to be effective, and ranking manipulation in the application market cannot be solved by tens of thousands of dollars." Therefore, Nainiujia decided not to buy online traffic and instead develop WeChat business.

E-commerce entrepreneur Liu Qiang now spends nearly one million yuan every month to buy traffic. He feels that this is like "throwing investors' money into the water." He calculated that the cost of downloading an app is more than 40 yuan, but 70% of people do not consume it after downloading. "For every 10 people who download our app, nearly 300 yuan is wasted."

Due to the high unit price of travel, travel e-commerce is an area in e-commerce where the cost of acquiring customers is particularly high. Miaoji Travel CEO Zhang Fan recently heard that a competitor now charges up to 8,000 to 9,000 RMB to acquire a paying customer online. "I was shocked. This is too crazy. I might as well just give it away for free."

Zhang Fan decided that he couldn't do that. This high-end customized travel company, which claims to have received US$20 million in Series B funding, has gradually stopped purchasing advertising traffic online and turned to offline user acquisition since July this year.

The turning point came from the careful calculation of Zhang Fan, a science and engineering man. Since the beginning of this year, "Miaoji Travel" has tried advertising on seven or eight channels, including Baidu, Toutiao, portals and WeChat official accounts. Two months later, he summarized this experimental full-scale launch and found that the unit price of acquiring customers was as high as over 30 yuan.

According to Zhang Fan's calculations, the user retention rate of "Miaoji Travel" is only about 1%, which means that the cost of acquiring an effective user is 3,000 yuan, a price that makes the company unprofitable.

Only then did Zhang Fan realize that his initial assumption that “the cost of acquiring each user is less than one yuan” was ridiculous. "If we don't get out of this situation now, we will be exhausted by purchasing traffic." Zhang Fan said.

The gaming world is even crazier.

Chang Lei, CEO of Zhuohua Network, believes that "deciding to make games is the most difficult choice in life."

Zhuohua Network, a game developer, had been cooperating with large traffic platforms to jointly distribute games before last year. Chang Lei said that at first their cost of acquiring a download user was 40 to 50 yuan. But from last year to this year, their effective customer acquisition cost has more than doubled. Chang Lei gave an example, if you advertise on a news portal app, you would make a profit as long as you could earn 20 yuan from each user last year, but this year you have to earn 27 yuan or even more than 30 yuan, "otherwise you wouldn't dare to spend money to buy (traffic)." Chang Lei said that if Zhuohua Network wants to promote a game, it must have at least a 5 million yuan traffic purchasing budget in the early stages.

"If this price is maintained for a long time, this will be a game that only the big guys can afford to play." Chang Lei said that since last year, the company has been gradually reducing the release of games, "and it is difficult to release a game every half a year."

The traffic price in the financial field is the peak of customer acquisition cost.

"I and many investors around me no longer dare to invest in Internet finance startups," said investor Zhang Ming. According to data from third-party platform Touzijia, in the field of financial entrepreneurship, the investment and customer acquisition cost of an Internet financial startup company ranged from 300 to 500 yuan in 2013, while it rose to 1,000 to 3,000 yuan in 2016.

Executives of several Internet finance platforms that have entered the B and C rounds of financing have confirmed to reporters that, overall, the customer acquisition cost of a single investment user on the Internet finance platform has exceeded 1,000 yuan, and the specific values ​​vary slightly depending on the channel.

"It costs at least 1.4 million yuan to acquire 5,000 to 20,000 new registered users from Baidu each year." An executive of an online loan platform revealed that, taking some large WeChat public accounts as an example, the price of promoting a soft article is now hundreds of thousands or even millions of yuan. "A WeChat public account that focuses on business figures starts with 500,000 or 600,000 yuan, but only has 3,000 to 5,000 readers. This kind of offer is simply a refusal to cooperate in my opinion."

"The prices in the traffic market have indeed changed a lot." Xu Lei, senior vice president of JD.com's marketing department, told reporters, "Many entrepreneurs say that they spend a lot of money to buy traffic, and then make a profit after losing money. However, according to the current price trend, it is very difficult to make a profit."

Happy Seller

Entrepreneurs may be reserved in their description of traffic prices - no one wants investors to think that their customer acquisition costs are too high. But from the perspective of traffic sellers, we can see the truth about the rising traffic prices more clearly.

Baidu's advertising revenue is reaching new highs. In 2015, its advertising revenue was 64 billion yuan, nearly three times that of 2012.

The average spending of Baidu advertisers nearly doubled in 2015 compared to 2012.

Sina Weibo, which has rebounded and is becoming a hot topic, is also a beneficiary of the increase in traffic prices.

According to Weibo's financial report, from 2012 to 2015, its daily active users doubled, but advertising revenue increased nearly eightfold.

LeTV's advertising rate this year has increased by about 25% compared to last year. A marketing staff member told the reporter, "It's rising every year. This is the market trend. As a company that needs to make profits, we need huge advertising revenue to pave the way for development and to compete for the market."

The increase in iQiyi’s advertising prices this year is on par with LeTV’s. Ge Chengzhi, director of iQiyi Data Research Institute, told reporters that the extent of the annual increase in its advertising prices is mainly determined by the changing figures of its peers, "it will not be higher than theirs, but it will not be lower either."

Since its launch in 2010, the number of advertisers cooperating with iQiyi has rapidly expanded from nearly a hundred at the beginning to thousands, and "in this process, our bargaining power has also been continuously enhanced." Ge Chengzhi said.

Advertisers’ competition for traffic associated with top content has also driven up advertising prices. Ge Chengzhi gave an example. In the hit drama "Descendants of the Sun" earlier this year, all advertising spaces were sold at high prices and accommodated dozens of customers in total.

Although iQiyi has not set a clear threshold for accepting advertisers, Ge Chengzhi said that brand advertisers "must have at least a traffic purchasing budget of two to three million yuan each year to get good service."

He took the most active used car platforms in the market as an example, "From the last two quarters of last year to the beginning of this year, each of these companies has placed no less than 20 million advertisements on iQiyi."

For sellers who have greater demands and ambitions for advertising revenue, the achievements that have been made are far from enough.

Toutiao’s advertising revenue has grown exponentially in recent years. In 2014, Toutiao launched a commercial advertising algorithm system, and its advertising revenue reached hundreds of millions of yuan that year. In 2015, its advertising revenue reached 3 billion yuan. According to media reports , Toutiao's internal revenue target for 2016 was to earn 6 billion yuan from advertising. The latest news is that Toutiao said that if nothing unexpected happens, this goal will be achieved smoothly.

Recently, Zhang Yiming, the founder of Toutiao, said in an interview with the media that he expects Toutiao to achieve a revenue of US$10 billion in 2020.

Essence: Who is hurt by high-priced traffic?

The rise in traffic prices is essentially a game of supply and demand.

"The pattern is clear. The largest companies such as BAT, Toutiao and video websites account for almost 80% of the market share. This 28 principle is also a typical feature of the Internet industry." Huang Xiaonan, CEO of iPinyou Interactive, said that the direct consequence of the monopoly of giants is that traffic suppliers can raise prices to maintain their own advertising and marketing revenue.

At the same time, a capital frenzy is sweeping China's startup market. "More and more players are entering the startup market, and supply and demand determine the direction of the market."

2013 became the watershed year when traffic prices went from "acceptable" to "unaffordable".

According to Krypton Index statistics, there were 873 investment events in China in 2012, while the number of investment events in 2015 was 6,511, a 7.5-fold increase; the investment amount increased even more, with the investment amount in 2015 increasing 36 times compared to 2012.

This has led to a large number of startups concentrating on purchasing traffic on a few platforms. Ge Chengzhi, operations director of iQiyi, said that when the company was first established in 2010, there were less than 100 companies advertising on iQiyi, "and in less than six years, this number has more than doubled tenfold."

The reporter collected the quotation sheets of Tencent Guangdiantong , Sina Fuyi, Toutiao, major portals and video websites in the past four years, and found that from 2013 to the present, the traffic prices of major platforms have generally doubled. Among them, Guangdiantong paid 0.5 yuan per click in 2013, which increased to 1.8 yuan in 2016; Toutiao paid 0.8 yuan per click in 2013, which increased to 2 yuan in 2016.

The industries that are most sensitive to the high cost of traffic today are those in which venture capital was particularly concentrated.

Take the gaming industry as an example. When mobile games first became popular in 2013, high turnover and high returns fueled industry enthusiasm, and a large number of entrepreneurs flocked into the mobile gaming industry. By 2014, the entrepreneurial wave in the mobile game industry was even more fierce. After products such as "My Name is MT" and "Dota Legend" became popular overnight, the number of mobile game users exceeded 10 million and the turnover exceeded 10 million. Capital and entrepreneurs continued to pour in. Tencent's "2015 Internet+ White Paper" shows that as of the second quarter of 2015, the number of mobile game content suppliers reached 27,700, compared with 13,000 in October 2014. Such a large team is almost 3-4 times the size of other mobile game development teams in the world.

However, corresponding to the booming development of game startups, traffic is mainly concentrated in the hands of four major channels: Tencent, 360, Baidu, and Alibaba. In addition, there is NetEase, which has both production capabilities and traffic.

Online travel, with its high traffic prices, was a hot area for entrepreneurship in 2014. According to data from IT Orange, there were 129 investments in the online travel industry in 2014. However, the booming scene two years ago has now become a thing of the past that industry insiders lament. Various venture capitals have invested a total of about US$500 million in this industry, but now this industry has not grown into any new unicorns, but instead a number of companies have gone bankrupt.

The same is true for the Internet finance sector. In 2014 and 2015, this was the sector with the most new companies and the most highly valued start-ups - investors believed that Internet finance was "close to money." Internet finance has also become one of the areas with the highest customer acquisition costs.

This year, things have gone particularly wrong.

The growth rate of mobile Internet traffic is slowing down. Zhang Chuan, senior vice president of 58 Ganji Group, told reporters that the growth rate of Internet power in previous years could reach 60%, "but this year I guess the growth rate is only about 15%."

The growth rate of smartphone users is slowing down. According to IDC data, in 2012, the number of smartphone users in China was growing at a rate of more than 100% every quarter. The growth rate began to slow down in 2013, and by 2015, the number of smartphone users in China was growing at less than 5% every quarter, and even showed negative growth.

The capital winter that began in late 2015 cut off startups’ source of cash.

Wu Bingjian, vice president of Lenovo Star Investment, advised the founder of an online education project he invested in to reduce online traffic purchases. What he values ​​more now is the user conversion capability and money-making skills of startups. "In the past, many investors looked at GMV, and would choose to invest as long as the GMV looked good, but now investors have a more practical vision."

Under his advice, the founder raised US$10 million in the previous round of financing, and ultimately spent less than RMB 2 million on purchasing online traffic.

However, what drives up traffic prices is not only the game of supply and demand, but also desire and ambition.

Baidu is a typical example: in order to increase performance, it sells traffic to the highest bidder, including illegal and gray-area companies that can make huge profits.

According to Caixin, since 2010, in order to complete the performance tasks assigned by Baidu every quarter and obtain performance bonuses, agents across the country have increased subsidies to attract small and medium-sized customers to place advertisements across regions. Currently, the proportion of "non-enterprise (non-channel enterprise)" business in Baidu's total performance may reach more than 30%. According to conservative estimates, this business may account for 20%-30% of Baidu's revenue. Baidu's "non-enterprise" businesses include games, franchise recruitment, and even gambling, pornography, license issuance and many other illegal areas.

In May this year, Baidu, which had experienced a series of scandals including the Putian Group and Wei Zexi, announced that the proportion of commercial promotion information on each page of Baidu search was less than 30%, and the number was less than 4. But a search engine advertising agency told the media that this is equivalent to reducing the previous 16 ad slots to only 4. "In fact, the competition has become more intense. The prices of many popular keywords on Baidu have increased by 300% to 450%."

Driven by profit, traffic giants do not care about the competitive ecology among startups. Baidu's paid ranking allows competing companies to buy keywords from each other. For example, if you enter a company, the first name that pops up may be a competitor's. "It depends on which company bids the highest. We have also spent a lot of money to buy keywords to ensure that our company's name can be ranked at the top of the search engine." An employee in the O2O field said that because Baidu bidding is charged by clicks, when the competition for traffic was the craziest, they temporarily formed a small team of dozens of people, rented an Internet cafe, and continuously clicked on the Baidu entries of competing companies.

Excessive exploitation of small and medium-sized enterprises, destruction of the business environment, and distorted actions under high profit pressure will inevitably harm the giants themselves in the end. Yet in a car that's moving like crazy, no one can make changes.

The high cost of traffic has also given rise to the trend of chart manipulation. Fu Qiang, a partner of marketing optimization company Jiuzhilan, said that in the past two years, many small companies have come to them for cooperation. The other party has only a very low cost budget, and their purpose is not to acquire real users. "They hope to create good-looking data for themselves through us to deal with investors or use this data to seek financing." Fu Qiang said that in this case, they would suggest these small companies to brush the charts, such as the number of app downloads and WeChat public account readings.

In the early stage of promoting "Miaoji Travel", some people advised Zhang Fan to spend money to manipulate the rankings, but after careful consideration, he decided not to get involved in this muddy water. "The essence of manipulating the rankings is to create a false prosperity in the entire field. Some companies rank high on the list, or claim how much profit they have, but in the end they die silently."

This is an ecological environment that is very unfavorable to early entrepreneurs and innovation.

Way out: No way out

"Find a way out" is a high-frequency word mentioned by almost all startups when interviewed by reporters, but the way out is not easy to find.

E-commerce entrepreneur Liu Qiang set up his own WeChat public account with a team of three at the beginning of this year. He posted some popular hot topics on it and set up a lucky draw. As long as readers forwarded the articles to their friends, they would win hairy crabs or Australian imported milk.

Although this helped his public account gain nearly 20,000 followers within three months, the conversion rate to purchase did not increase significantly. This summer, investors began to hint that Liu Qiang should start making a profit as soon as possible, which made him distressed.

Magic Cube Network, a gaming media company that has completed its Series B financing, is actively exploring overseas business and providing overseas promotion and operation services to domestic game publishers. However, recently, traffic prices in overseas markets such as Southeast Asia and India have also begun to rise, and are no longer obvious traffic depressions.

Wu Bingjian, vice president of Lenovo Star Investment, has been conducting research on startups going overseas and found that traffic prices in overseas markets have risen sharply in recent years. "Take India as an example. Traffic is now ten times more expensive than it was two or three years ago. Traffic prices in Southeast Asia are no longer that cheap." Wu Bingjian no longer recommends the companies he invested in to go overseas again. In his opinion, if the current ecology of the traffic market is not changed and they just keep looking for price troughs, once the nationwide traffic dividend is exhausted, entrepreneurs will fall into a vicious circle.

Internet e-commerce company Yigu Fresh chose to embrace the giant. Wan Degan, head of the public relations department, told reporters that after accepting investment from Alibaba in 2013, Yigu Fresh is currently the exclusive operator of Tmall Supermarket. With the traffic diversion from the Alibaba platform, "the increase in traffic prices does not cause us much trouble."

But in the eyes of many entrepreneurs, the future of this behavior of exchanging equity for traffic is unpredictable. Zhang Ying, founder of the e-commerce platform iFreshFeng, which does not want to rely on giants, believes that because giants have so many companies on hand, "they cannot have a particularly large inclination towards a particular company, and the resources of the giants are not free. When the equity of start-ups is continuously diluted and the price of traffic remains high, they will lose their voice."

Recently, Zhang Fan and his team bought hundreds of thousands of obscure travel-related words and phrases on Baidu search at a very low price, such as "flight from Beijing to Paris at 11 o'clock tomorrow." They bought all the time for 24 hours. In addition to "Beijing" and "Paris", the search locations also included non-popular areas such as Zhumadian and Puerto Rico.

"If I didn't buy keywords this way, but instead bought 'Beijing to Paris' like everyone else, the price would be too expensive to afford," said Zhang Fan. However, this engineer who worked on search engines at Sogou before starting his own business and was well versed in keyword search optimization found that even though he felt he had optimized everything to the extreme, the effect was still a drop in the bucket. "We have only reduced the cost per customer from 30 yuan to 10 yuan, which is still a very high cost."

The closures are happening all the time.

Chengdu used to be the "City of Thousands of Games" for game development, with thousands of game companies, but now bankruptcies are common. According to Chengdu media estimates, there are less than 100 game companies left.

According to media reports, in June this year, online travel startup Taozailu announced internal liquidation; earlier, McDull Travel was confirmed to have run away due to debt; Ai Travel, which once became famous for its last-minute order model, has been disbanded, and its main competitor Lailaihui is making large-scale layoffs; Woqu Travel, which once received investment from Tencent, also began to transform in the second half of last year, and its team has been reduced to less than half of its original size.

In April this year, the overseas shopping e-commerce platform MiTao went bankrupt. After receiving its Series B financing in 2014, it used subsidies to wage price wars and spent tens of millions of yuan on advertising to gain traffic and users. However, the good times did not last long. When stronger competitors entered the market, Mitao.com began to lose its momentum. To make matters worse, due to the Internet downturn in the second half of last year, Mitao.com's Series C financing was delayed and the company was ultimately defeated.

Zhang Fan of Miaoji Travel once heard that the CEO of a travel app sold his house to place advertisements, "but the company collapsed and the house was lost."

In Zhang Fan's view, the high traffic costs were the last straw that broke the camel's back. “There is no profit model because there is no user conversion. The cost of acquiring customers is too high, and the limited funds are all used to purchase traffic.”

Startups all hope that traffic prices will fall soon. "But because of the huge pressure to make profits, sellers' traffic advertising is unlikely to become cheaper." Huang Xiaonan, CEO of iPinYou Interactive, said that since last year, a large number of cooperating startups have automatically cut advertising by half. "For these companies, they are the weak in the capital market and can only passively cut spending, but are powerless to change reality."

We are sorry that we cannot give a bright ending: the high cost of traffic is an unsolvable problem, and it is inevitable that the entrepreneurial environment will be frustrated. Perhaps, only when a large number of companies die and the number of buyers decreases significantly, forcing sellers to lower prices, can the entrepreneurial ecosystem be reshaped.