Source | Bohu Finance (bohuFN)

According to 36Kr, Douyin's e-commerce GMV is projected to hit approximately 3.5 trillion yuan by 2024, marking a 30% year-on-year growth and propelling it to the third position in the industry. Amidst this backdrop, Xiaohongshu has opted to collaborate with Alibaba, announcing the commencement of strategic cooperation. This partnership signifies Xiaohongshu's first foray into opening up traffic channels to external e-commerce platforms, enabling its advertising posts to directly link to relevant Taobao stores, thereby streamlining the path from discovery to purchase.

Xiaohongshu asserts that this move aims to foster more efficient business growth for brands and merchants. However, it also subtly reveals the platform's anxiety over its commercialization progress, which has fallen short of expectations.

In 2024, Xiaohongshu's overall business scale reached 100 billion yuan, a seemingly respectable figure. However, when juxtaposed against the trillion-yuan measurements often employed by mainstream platforms, Xiaohongshu's urgency to accelerate its growth becomes evident.

01 Why the Shift to Cross-Platform Traffic Diversion?

Xiaohongshu has grappled with the decision of whether to open external links on multiple occasions.

As early as August 2020, Xiaohongshu granted Taobao external link permissions, allowing some influencers' live streams and posts to embed Taobao product links. This collaboration was short-lived, lasting less than a year before Xiaohongshu implemented the "account-store integration" mechanism and closed shopping post links to Taobao.

Subsequently, as the e-commerce business ascended to a more pivotal position, Xiaohongshu became increasingly exclusive. In May 2022, it launched the "Community Business Convention," mandating that transactions be completed within the platform, prohibiting off-platform transactions in personal pages, comments, private messages, and other scenarios.

Since then, Xiaohongshu has explicitly banned off-site transaction diversion and imposed strict restrictions on directing traffic to external platforms like WeChat.

The rationale is straightforward: inspired by Douyin's impressive performance, Xiaohongshu naturally harbors aspirations for a closed-loop "seeding + purchasing" ecosystem within its platform.

After all, Xiaohongshu has emerged victorious from the competition amidst giants, with Dong Jie and Zhang Xiaohui gaining popularity through their "narrating and sincerely sharing" style, instilling confidence in the platform's e-commerce potential. Additionally, Xiaohongshu boasts a monthly active user base exceeding 300 million, exuding robust vitality.

However, from Welfare Society and Little Oasis to brand accounts, mall self-operations, and ultimately the buyer's e-commerce platform highlighted in 2023, Xiaohongshu has consistently attempted to establish its closed loop. The result, according to third-party data, is that in 2023, the transaction volume of Xiaohongshu's self-operated mall accounted for less than 5% of the platform's total GMV, significantly underperforming industry expectations. In essence, despite investing substantial traffic and resources in constructing a "closed loop," users continue to jump to other platforms to complete their purchases.

At the end of 2024, Xiaohongshu shut down its self-operated mall and embarked on collaborations with major e-commerce platforms like Taobao and JD.com. This shift is driven by the disparity in e-commerce scale between Xiaohongshu and mainstream platforms, coupled with slowing growth rates, necessitating the alleviation of anxiety. Additionally, it aims to enhance advertising monetization efficiency through external link cooperation.

Advertising has consistently been the cornerstone of revenue for content communities. According to GF Securities' research report in February 2024, advertising and marketing contributed approximately 70%-80% of Xiaohongshu's revenue in 2023, with the remainder primarily derived from e-commerce operations.

Nevertheless, the current advertising business faces growth pressures. Brands now demand measurable and controllable advertising outcomes, and access to e-commerce transaction data can more effectively demonstrate the value of Xiaohongshu's advertising.

Xiaohongshu's "traffic equity" mechanism, which employs a dual-column information stream allowing users to actively select content and allocates over 50% of traffic to ordinary users, inherently renders blogger exposure somewhat "enigmatic." Moreover, despite Xiaohongshu's efforts to cultivate a closed business loop, the seeding content generated on the platform often culminates in final conversions on other e-commerce platforms.

This leads to the abstraction of Xiaohongshu's advertising effects and the unpredictability of blogger exposure. Brand merchants can observe front-end data such as post views and likes but cannot accurately track where users ultimately place orders, the actual conversion rates, or whether advertising fees are being wasted.

The difficulty in quantifying the impact of seeding has eroded advertisers' confidence in placing ads.

In response, Xiaohongshu has commenced leveraging external sales data and engaging in data cooperation with major e-commerce platforms, forming Xiaohongxing, Xiaohongmeng, and Xiaohonglian with Taobao Union, JD.com, and VIPShop, respectively. This endeavor aims to clearly measure the seeding effectiveness of merchants on Xiaohongshu.

Consequently, this cooperation emphasizes data sharing between the parties: Xiaohongshu opens up front-end link data, including reads, comments, likes, etc., while Taobao and Tmall provide back-end conversion data, such as store visits, searches, and transactions. In essence, data sharing between the two entities is now more transparent compared to the past.

For Xiaohongshu, access to external transaction data is paramount—if advertising effects can be quantified and visualized, brand merchants will naturally increase their advertising budgets, thereby augmenting the platform's advertising revenue.

However, this increased openness seems to deviate from Xiaohongshu's initial goal of establishing a closed e-commerce loop.

02 The Unwavering Commitment to E-commerce

Has Xiaohongshu diminished its focus on the e-commerce business? Absolutely not.

Currently, the categories open to external links are biased towards standardized products and industries with numerous KA merchants, which are Taobao's strong suits. Xiaohongshu primarily generates commercial revenue through traffic advertising. This suggests that Xiaohongshu remains cautious about this collaboration.

Moreover, while opening up external links, Xiaohongshu is accelerating the construction of its own e-commerce ecosystem.

In July 2024, Xiaohongshu clearly positioned itself as a "lifestyle e-commerce" platform, aiming to carve out a niche in the e-commerce market through differentiation. In 2024, the number of new merchants joining Xiaohongshu surged 8.1 times, while the number of merchants with annual sales exceeding 100 million yuan increased by 3.3 times, and those with annual sales of 50 million yuan grew by 4.6 times.

Simultaneously, Xiaohongshu is continually upgrading its in-platform transaction tools. For instance, this year, it introduced the "Blue Link in Comments" function, enabling users and merchants to post product links in any post's comment section, which can be clicked to directly navigate to Xiaohongshu's store for purchasing. Data indicates that there are over 60,000 blue links in comments daily on average.

Some have observed that "external links cater to standardized products, while internal links serve personalized ones," each with distinct customer bases and inventories. However, overall, the prospects for Xiaohongshu's e-commerce development remain subdued.

It must be acknowledged that Xiaohongshu's e-commerce has indeed carved out its own niche.

One notable example is Xiaohongshu's emphasis on non-standardized product categories such as clothing, beauty, and home furnishings, leveraging the community content ecosystem's strengths to nurture unique products. Through a differentiated product selection strategy, it avoids direct competition with large e-commerce platforms in the standardized product market and low-price strategies. For instance, a merchant from Chengdu on Xiaohongshu sold a product dubbed "Silent and Comfortable Leather Shoes," tailored for office workers seeking both comfort and silence. This product precisely met the demand and sold nearly 500,000 pairs within 10 days on Xiaohongshu.

Another instance is the relative scarcity of loud sales pitches and promotional scripts in Xiaohongshu's live streams, as evidenced by the live streaming styles of Zhang Xiaohui and Dong Jie.

These strategies are closely tied to Xiaohongshu's "traffic equity" philosophy. It deliberately downplays the head effect, supports small and medium-sized brands that align with the community's tone, and connects segmented market demands through high-quality bloggers. This approach is also compelled by competitive pressures. Compared to mainstream short video platforms and traditional shelf e-commerce platforms, Xiaohongshu lacks significant traffic and inventory advantages, necessitating differentiated strategies to stand out.

As Xiaohongshu's COO Conan puts it, "Today, there are merchants engaged in price competition, while others aspire to produce, create, and operate their businesses based on more personalized demands. These merchants convey the impression that everyone is willing to run a successful business catering to segmented and personalized demands."

It is precisely these merchants that Xiaohongshu values.

However, while this approach preserves the community's uniqueness and avoids the competitive red ocean, it also slows down the pace of e-commerce development. Currently, compared to established e-commerce platforms, Xiaohongshu suffers from an inadequate number of merchants, limited product diversity, and an imperfect supply chain system.

Although collaboration with Taobao can fill gaps in Xiaohongshu's product categories, it also poses new challenges.

When Xiaohongshu's products are displayed alongside Taobao's, the convenience of in-platform price comparison and selection may further erode Xiaohongshu's competitive edge in e-commerce. Additionally, the opening of external links may exacerbate the consumer habit of "seeding on Xiaohongshu, ordering on other platforms."

What is even more concerning is that the brand exposure stemming from this collaboration with Taobao prompts many merchants to utilize blue links for traffic diversion, converting the cooperation momentum into their growth opportunities. However, the impact of the proliferation of traffic diversion links on the community atmosphere remains uncertain, and the community atmosphere or tone is Xiaohongshu's most valuable asset.

While opening external links can broaden business horizons, it also harbors the risk of diluting competitiveness. Simultaneously, while the community's seeding capability can generate substantial advertising revenue, cultivating its own e-commerce business is not an overnight endeavor.

This is why Xiaohongshu often vacillates—it desires to maintain the community's uniqueness while also aiming for the goal of 300 million daily active users; it aspires to uphold its individuality while also scaling its business operations.

For now, however, it has opted to prioritize monetization.

Reference Sources:

1. LatePost: A Dialogue Between Xiaohongshu's COO Conan and Xue Zhaofeng: There Is No Standard Answer to Life, Nor to E-commerce

2. Insight Time: Is There Still a Play for Xiaohongshu's E-commerce After Opening External Links to Taobao and JD.com?

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