Nearly a year has passed since the introduction of social commerce by local operator named Ticket Monster. Triggered by Ticket Monster’s remarkable success, other local operators such as Coupang and WeMakePrice have sprouted and it is estimated that around 800 social commerce sites are in business throughout South Korea. This burgeoning market has even attracted U.S. online commerce giant Groupon recently and Korean social commerce trading volume is anticipated to reach $550 million in 2011.
Aside from this thriving appearance, however, the dark side of the industry is also detected. Including flooding in of customer complaints, problems arising due to rapid-growth of business may have significant influence over the future of social commerce. Therefore, it seems very important to know the possible results the industry may bear within Korean market and recognize the potential risks.
First and foremost, poor customer service is on the table. Most of the players in the market are likely to be at an embryonic stage of growth and tend to focus more on promoting their presence than on quality controls. Therefore, low-value deals are mass produced which in most of the times exceeding supply. Customers feel deceived when they find out voucher they purchased do not match its value promoted on web sites. Customer-related complaints include denied refunds and no unilateral customer service policy as well. This growing of customer discontent may be attributable to the industry’s low entry barrier which requires nominal start-up costs. With massive influx of unqualified players, they tend to overlook the sound relationship with customers and only seek short-term profits. They should know what is best for achieving their long-term survival of the industry as a whole. With respect to this issue, a measure has recently been taken by Fair Trade Commission to address the problems of social commerce. On May 10th, 2011, the governmental body announced that social commerce firms will also be subject to the same consumer protection codes applicable to other e-commerce sellers. This allows customer refund of vouchers within 7 days of purchase, and the use of escrow services for any purchase exceeding roughly $100 and penalties for exaggerated advertising.
Whether the market is growing or not in the long run is an important issue. It is notable that social commerce has expanded its horizon to areas that could not have been a part of traditional e-commerce market. Restaurant business is a good example. Under past circumstance, there were limited ways, such as handing out leaflets, etc., for restaurants to promote themselves. Social commerce came to their rescue by giving new opportunities of marketing. While admitting the benefits of promotion from social commerce, business owners also complain about low-profit margin or sometimes even loss. Since they have to offer a huge price-cut to be entitled to sell vouchers on the social commerce sites, and with commission fees social commerce business charges, significant opportunity costs should be endured to gain desired promotion effect. This fact leaves one question. Is this business model sustainable? It may attract short-term promotion opportunity seekers only and no one may be left in the long-run. Additionally, social commerce is ultimately a commission business. More and more competitors are entering the market and only way to out-stand among groups seems to rest in low price offers by cutting commissions from what they charge currently somewhere between 20-30% in average. Under this dog-eat-dog competition, no one is for sure who is going to smile in the end.
Last but not least, alteration in promotion strategy of social commerce sites is changing the landscape of the business. Originally, the term ‘social commerce’ was used to indicate collaborative purchasing of goods through SNS. However, from early this year, major local social commerce operators have begun relying on traditional mass media, such as TV ads, public transportation ads, rather than promoting their products through SNS. Because of this, some experts question whether operators in the market are truly performing as social commerce business since they no longer use SNS as vital ways in promoting themselves. This results in high burn rate among current market players and keeps new players from walking into the market as entry cost has got way expensive.
It is uncertain whether the ongoing criticism over social commerce is a fundamental issue or part of a trial-and-error process that all start-up businesses go through. And, of course, there is more downside of social commerce industry in South Korea not revealed in this article. But one thing seems to be clear: Korean social commerce industry just took its baby steps and is at a critical point whether it is going to generate permanent return or end as one-time business opportunity.
(This article is developed with Steve J. Min, a publicist at KingsBay Capital.)
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