How to Sell Online in China

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More than 80 percent of Chinese users also download music and films, compared with 38 percent in the U.S. and just 23 percent in Japan.

The most important gateway into this world is QQ, the instant-messaging service owned by Tencent and arguably one of the world's most valuable digital franchises. There are more QQ accounts in China—523 million—than there are people in the European Union. Tencent illustrates the value of getting consumers hooked on a social networking platform and growing along with their needs. Many Chinese get free QQ accounts as teenagers to chat and continue to use it to build and maintain relationships. They then grow addicted to Tencent's gaming modules.

The new regulations, which among other things require gamers to register with their real names and limit sales of items using "virtual currency," may slow Tencent's momentum. But there's no denying the value of its franchise. Young professionals interviewed by BCG described how they log on to QQ when they wake up, play games such as QQ Farm and World of Warcraft during work breaks and when they get home, and buy "clothes" for their avatars on QQshow. Tencent earns revenue from games, online ads, and links to e-commerce sites.

China's younger digital generations are also growing at ease with e-commerce. Some 39 percent of university students and 49 percent of young professionals shop online, spending an average of $294 each in 2008. The majority go to the Internet first to get product information and compare prices. These groups are also more likely than others to pay for purchases electronically. And they are buying increasingly complex products, such as apparel and consumer electronics.

For many Chinese, there are big advantages to shopping online. The Internet has made prices highly transparent and offers products often not found in local stores, especially in smaller cities. But winning the trust of Chinese consumers requires lots of hard work.

Lessons from Homegrown Companies

Foreign marketers have much to learn from mainland trailblazers like Taobao, part of the Alibaba Group. To ease anxieties over quality, Taobao offers refunds to buyers who have felt cheated. It also encourages buyers to rate sellers, and displays those ratings on its site. This helped Taobao seize a commanding 85 percent share of the consumer-to-consumer online market.

One young Beijing professional we interviewed, Christine, 26, exemplifies this loyalty. She scours Taobao daily for deals, promotions, and special products. In 2009, she spent $905 on Taobao, 30 percent of her annual shopping budget. Purchases range from a camera and keyboard to jewelry.

Companies like Goodbaby, meanwhile, show that customer loyalty can be nurtured by offering valuable services. A market leader in baby-care products, Goodbaby has made itself a continual presence in the lives of young mothers with a Web site that hosts blogs, baby-care tips, and doctor referrals.

There is still plenty of opportunity for foreign entrants. We project business-to-consumer transactions will grow 61 percent annually for the next few years. Other big markets are still in their infancy. China has 739 million cell-phone users, for example. But only a small portion of those phones are connected to broadband. That will change as 3G networks are built out and become affordable.

What must multinationals do? To be sure, they need attractive, engaging Internet sites. But they must also master such powerful tools as mobile phones and text-messaging services that keep Chinese connected across the farthest reaches of the country. They must acquire deep understanding of how their target markets interact with the Web and continuously offer services and products that meet those markets' evolving wants and needs. One route is to work through established domestic sites. Another is to recruit experienced local marketers and empower them to run digital media campaigns with Chinese characteristics.

The time to start doing all of this is right now, while Chinese consumers are forming views on which names to trust and before the competition becomes even more entrenched.

David Michael is a Beijing-based senior partner of The Boston Consulting Group and global leader of its Global Advantage practice. He previously led BCG's Greater China practice. Yvonne Zhou is a Beijing-based principal with the firm. They are co-authors of the recent BCG report China's Digital Generations 2.0.

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