Is subsidy really a shortcut to user growth?

This year's Spring Festival, we still enjoy the red envelope benefits distributed by various Internet companies, and the amount continues to set a record high.

In the camp of subsidizers, from giants with market capitalizations of tens of billions or hundreds of billions of US dollars to some startups in Series A and B, all take out real money from their precious cash flow and subsidize the vast number of users in the form of cash that can be withdrawn.

Why are these companies represented by Kuaishou, Toutiao, and BAT so "kind-hearted" and promote "welfare for all"?

The answer is: growth .

Behind the scenes, these companies are calculating how to make back the money they have spent in the future.

The red envelope gameplay that users see is actually the subsidy growth strategy of various companies.

The amount of red envelopes a user can receive is also related to the value of his behavior as judged by the company.

For example: Kuaishou’s invitation rewards are red envelopes that can be withdrawn when the amount reaches 66.66 yuan. Only those communicators who have both the ability and willingness can complete the task and receive rewards. Kuaishou is essentially paying these super communicators based on their results.

Not only Spring Festival red envelopes, many products are now increasing user base through subsidies.

For conventional growth data, subsidies can bring immediate results.

However, a temporary improvement in background data does not represent an increase in the value of the product itself.

From the outside to the inside, the value created by subsidized growth is reflected in:

Looking at the subsidized products on the market, the initial conversion is generally completed well, but it is superficial and short-term; future value is often overlooked, but it is core and long-term.

The reason for this phenomenon is simple - because surface work is easier to report (to the boss, to the investor).

However, looking at the long term, the teams that ultimately gain market recognition and reap rich rewards are those that plan for the long term and persist in creating value.

Formulating a subsidy program is a highly complex task. For example, the state’s support for the new energy vehicle industry must require policies that both control costs and achieve the goal of promoting the healthy development of the industry. In the process, we will always face many problems like insurance fraud by car companies. It requires a lot of energy and perseverance to gradually iterate and solve the problems.

In order to ensure the future value of subsidy growth, product solutions must answer two soul-searching questions: Who is the subsidy given to? What value can it bring?

First, understand your target users.

When making subsidy plans, ROI (return on investment) must be considered. Apart from the relatively generous Spring Festival red envelopes from large companies, daily subsidies are often not high in amount and have relatively harsh conditions, such as playing number games with exchange rates and setting minimum withdrawal amounts. After passing certain withdrawal points, users' experience and motivation to continue completing tasks will be greatly reduced, resulting in large-scale loss.

It is human nature to be greedy for small gains, and people of all income levels will participate in it (referring to the general group with relatively high incomes, not the rich).

However, high-net-worth individuals will hardly stay for long because of the benefits as they have to compete with the platform for workload and profits. Most of them come from money-making advertisements and leave when the returns do not meet their expectations. Those who stay for a long time are likely to have lower spending power or willingness.

When a restaurant owner chooses a location to open a restaurant, the first thing he does is to investigate the flow of people and spending power in the candidate area. Meeting these two aspects is the most basic prerequisite.

Internet people should also take note: remember not to build opera houses in rural towns.

Since this is the case for users affected by subsidies, how can we maximize the growth value brought by subsidies?

There are three conditions:

From the standpoint of a product or growth team, ensuring the maturity of the core business is of utmost importance as it is a fundamental prerequisite for effective growth.

1. Mature core business

In the Internet industry, transaction-based products such as Uber and Airbnb have long begun using the subsidy growth approach in the United States.

However, the current Chinese market has the infrastructure of online payment, and subsidies for content-based products can be directly distributed to users’ WeChat balances (transactional products are usually coupons). Therefore, content-based products can also effectively achieve subsidized growth, which has never happened overseas and cannot be replicated.

The business of transactional products such as Uber mostly belongs to operating a two-sided market, and the platform mainly plays the role of matching demand and supply.

Their common practice is to negotiate cooperation to secure the supply side at the start, and then have the platform pay to subsidize the demand side.

Of course, companies like Didi, which have financial backers, can also pay more money for two-way subsidies.

It should be noted that the core scenario processes of these products have been completed at this time, and subsidies are only a means to serve the ecosystem, not an end.

The same is true for content-based products.

For example, the fast versions of Kuaishou and Toutiao, their businesses are essentially two-sided markets, except that one party is the producer of content and the other party is the consumer of content; although there is no direct transaction involved on the surface, based on the extremely high coverage and stickiness of the content, their subsequent monetization potential is huge.

Obviously, when Kuaishou Toutiao was growing through subsidies, its ecosystem was already very mature.

The above two types of products, while meeting the needs of users, also satisfy the users' desire to "get a small bargain", that is, they operate two user groups with different goals, namely the demand line and the subsidy line.

In addition to users who originally used the product based on demand, the subsidy line effectively increased the number of users who originally did not have enough motivation to try the experience, and retained some users who would have otherwise lost.

This is the initial conversion, and the focus is on the second step: if users on the subsidy line cannot be converted to the demand line, then their future value to the product is zero, and the money spent on subsidies will really be wasted.

There are many products on the market that allow you to get red envelopes by reading information or watching short videos. They neither have a healthy creator ecosystem to continuously produce original, high-quality content, nor do they have competitiveness in data and recommendation algorithm capabilities to ensure the user experience when consuming content. They even use a large amount of data (content, comments, user information, etc.) crawled from other platforms, which further destroys the ecology of their own platform.

They can only rely on unreasonable ROI to maintain the growth of superficial data, but the core retention rate based on content demand is extremely low. When the subsidies return to a reasonable level, a large number of users will be lost directly.

There are many small games that involve giving out red envelopes, such as raising pigs, planting flowers, and guessing idioms. They usually use video ads with better effects and a very high advertising frequency; but because users' advertising willingness and value are both low, the revenue generated in the few withdrawal cycles with very few subsidy lines is not enough to support the operation of the product.

Apart from the different gimmicks, other routines of this type of products are highly similar; the biggest common point is that the products promoted in advertisements rarely go beyond the circle.

After the advertisement for the pig farming app recommended the cattle farming app, it promoted the app for making money by watching videos, and even recommended another pig farming app next.

Those users who are greedy for small profits are laundered back and forth, and subsidies and advertising fees are circulated among these companies, playing a negative-sum game of funds. Unless the company deletes its database and runs away to deny the remaining subsidy, there is no possibility of these products making a full profit.

Of course, those despicable practices are extremely undesirable and are another topic.

In short, subsidy growth must be based on the product’s mature core business.

The value of the subsidy growth will be determined by the extent to which the growth plan can convert users in the subsidy line into the demand line.

2. Identify potential users

The express version effectively helped Kuaishou and Douyin complete the task of market penetration. Thanks to this, the penetration rate of the short video market has increased rapidly.

But their successful growth is conditional, because netizens with fast internet speed and low fees need excellent short video products, so new additions and retention can support two Internet products with more than 100 million daily active users.

Of course, if we only look at the scientific nature and completeness of the subsidy growth plan, there are few products on the market that can reach the same level.

The situation of short videos is very special, and most products still belong to the niche market.

Kuaishou, which “records the world”, and Meituan, which “provides food, drink and fun”, both have extremely broad product boundaries.

However, the vast majority of products are in vertical and segmented fields. Not only is not everyone a potential user of the product, but even some of the team’s decision makers are non-potential users.

This is dangerous, but also normal. The key is to see whether the final growth plan is reasonable in the scenario of potential users.

The subsidies should focus on potential users, while also trying to avoid involving non-potential users.

People tend to seek benefits and avoid harm, and this is especially true for hardcore users (i.e., the "wool party") in the subsidy line.

Amateur wool-gathering parties are not very efficient, and they can only make a small profit by manually searching for patterns to make quick profits, but they are numerous and still represent low value and high expenditure to the platform.

There are also professional wool-pulling parties who use technical means to make a living by "fleecing wool". They are very good at finding loopholes in various subsidy policies on the market and profiting from them. This is a zero-value and high-expenditure existence for the platform.

There is another situation. Since users can enter the demand line from the subsidy line, it is also possible to enter the subsidy line from the demand line.

It should not be the norm to provide subsidies to users who use products out of need. Unless you want to give out red envelopes during the Spring Festival considering factors such as market, brand, and competitive strategy, you should try to avoid it in daily life. Even in the other direction, many products on the market that we are familiar with are also using the economic pricing techniques of taking advantage of the old customers.

When measuring cost and value, you can also segment users from more dimensions and formulate appropriate policies accordingly. For example, the fast versions of Kuaishou and Douyin, on the Android platform, you can watch videos to earn coins that can be exchanged for cash withdrawals, but the iOS platform does not have a subsidy system. Because the price of the iPhone limits the target user base to a certain extent, this group of users is not the target user of the subsidy strategy.

Without finding clear potential users, there is no way to divide and conquer, and the effectiveness of solutions and policies that are universal to all users will be greatly reduced.

Cost, growth and value will become an impossible triangle; the three cannot be true at the same time.

In the first three quarters of 2019, Luckin Coffee suffered a loss of RMB 1.765 billion.

Luckin’s subsidy costs are very high. Both parties who successfully invite new users will receive a free coupon, and users who do not make purchases for a certain period of time will also receive large coupons.

If the consumer's loyalty does not meet a certain standard, they will receive large subsidy coupons by triggering Luckin's recall mechanism. Given the level of subsidies, Luckin Coffee, which has had its prices lowered, is basically losing money on every cup sold.

In this regard, it is hard to say that this is a reasonable business.

Muddy Waters, which recently shorted Luckin Coffee, also thinks so. They obtained a large amount of data through research and deduced business logic. Then they concluded that Luckin Coffee users are very sensitive to prices, and price increases will cause user loss. Luckin will not be able to increase sales while raising prices for a long time.

Muddy Waters’ bearish view on Luckin Coffee makes sense, but it may not be correct.

——Although Luckin’s costs are out of control, its growth and value enhancement are still worthy of recognition. There are weights on both ends of the valuation scale, and it will take time to prove whether it will eventually tilt towards the bulls or bears.

Muddy Waters' short-selling report also convinced some investors. Because subsidies for non-target user groups will continuously and quickly "burn" funds in the account, this is a luxury and extremely risky thing. When running a company, you should not have the gambler's mentality of going out to work in other industries if you lose.

Luckin Coffee provides subsidies to all customers regardless of whether they have demand for coffee. This is also based on the judgment that the demand for coffee in the domestic market is growing rapidly and the pursuit of speed is like the practice of rich people paying a high price for both the box and the pearls. Ignoring the subsidy growth for potential users is as unwise as the man from Zheng who bought the casket and returned the pearl.

3. Core users actively spread the word

Everyone has countless WeChat groups. Based on relationships of various dimensions, we always join various groups. In society, every individual belongs to several collectives, and the composition of collectives is the result of people being divided into groups.

Based on this background, mainstream recommendation systems will recommend items that a user's friends like to a user - because two people who use the same app and follow each other are likely to have overlapping interests and profiles.

The idea behind selecting subsidy recipients is basically the same. Users who show great demand for a product often have many friends with the same needs.

Without discussing ofo’s results and model, it does have a good growth scenario.

A college student saw the shared bike for the first time and didn’t know how to use it. But with a few words from an “experienced driver” classmate next to him, the new user was easily converted.

E-commerce distribution products such as Huasheng Diary are also based on such scenarios, except that the inviters and invitees are replaced by distributors and consumers who receive coupons. There are also many successful growth cases among this category of products.

The core users of the product, on the one hand, are customers who understand the product and its needs very well, and on the other hand, they are also a large group of excellent salesmen. It is most efficient to design subsidy growth plans based on their scenarios.

IV. Conclusion

Is the subsidy method a shortcut to user growth?

Yes and no.

Yes, because when conditions are met, a good subsidy plan can indeed achieve low-cost, high-value user growth.

The three conditions are:

No, because subsidies are the east wind in “everything is ready except the east wind”. Without a reasonable and mature core product system, subsidies are not only not a shortcut, but are also a fire that accelerates the burning of funds in the company's account but fails to bring equivalent value.

Whether the fire of subsidy growth will lead to the famous Battle of Red Cliffs or the destruction of your own company depends on your own ability.

Author: Qiaofeng World

Source: Qiaofeng World