Consumer trust key for success of online coupon sites

By Yoon Ja-young

The PR specialists in the country would agree that those who on the hardest time among them last year were those representing social commerce companies. The new businesses were in the news headline a number of times last year, mostly for bad headlines involving words like “cheat” and “fraud.”

It seems that they have a long way to go until they gain the consumer trust, which is the key for success of the new retail business model.

In the most recent case, Korea Communications Commission levied penalty and fine on 13 social commerce companies for violating private information protection act. According to the regulator, the companies violated the law by collecting private information without consent from users and neglecting its protection. Some of them didn’t get consent from parents for subscription by those aged less than 14. Some didn’t encrypt the passwords, and others provided the information to the third party without consent from subscribers.

The industry’s top four players, Ticket Monster, Coupang, Groupon Korea, and Wemakeprice, were also among them.
The news threw a wet blanket on a series of pledges by social commerce businesses that they will take measures to gain consumer trust.

Dark side of the growth

Debuted here in 2010 March, the number of social commerce companies increased to around 500 only in a year, growing into a 1 trillion won market. Major players of the industry topped the keyword list of the country’s major portals last year. Offering hot products and introducing local services like restaurants and nail art shops at lower prices, it changed the way consumers shop and opened new sales channel especially for the small and medium sized companies that had quality products but lacked marketing tool.

However, the growth is eclipsed by distrust of consumers. According to Seoul Electronics Commerce Center, the damages filed by social commerce users increased by nearly 50 folds to 1,761 in 2011 from mere 35 of 2010.

The distrust built up on diverse cases, which include refusal for refund, exaggeration of discount rates or sales, and selling fake luxury brand goods. In the worst case, some disappeared with money but without sending the goods.

Low entry barrier overheats market

Industry analysts point out that the low entry barrier, overheated market, and lack of proper regulation are behind the ugly scenes of the industry.

“Too many players entered the industry as the barrier seemed low. But it isn’t that is to satisfy consumers,” said a spokesperson for one of the top players. She said her company was concerned that the whole social commerce industry was being blamed as one.
Industry analysts point out that social commerce companies focused too much on growth. As it means much to be the top player in a nascent market, social commerce companies concentrated too much on attracting consumers and increasing transaction. They also spent huge on advertising, signing up with top stars for advertisement and spending more on online advertising than Samsung Electronics here, the global IT giant.

The effort paid them with unprecedented steep growth, but it wasn’t accompanied by proper regulation and the consumer satisfaction measures. “As we are in the initial stage of the industry, there have been trials and errors. We tried to cope with problems, but the damage increased amid accelerated growth,” a spokesperson for another social commerce company said. An industry source admitted that they lacked knowhow in distinguishing fake luxury goods from genuine, but they continued with deals to increase the sales.

Social commerce at crossroad

Kim In-sook, a head researcher of Korea Consumer Agency, said that the lack of regulation added to the problems in the beginning. The Fair Trade Commission recently set up a guideline for consumer protection, where the top five major players signed up. It includes 110 percent refund on consumers for fake goods, 70 percent refund on coupons that go unused until the expiration date, and ban on exaggeration of discount rate. It also defined the social commerce companies as online sellers, not online sales brokerages like open market operators. It means they shoulder bigger legal responsibilities in transactions.

Some also point out that social commerce here evolved in an eccentric way, leaving social aspect behind. Social commerce originally aimed at viral marketing through social networking services. There are thousands of the similar products in the market, and too much information, mostly advertisement, doesn’t really help consumers in making a choice. The information provided by their friends, or friend’s friend on the social networking service, meanwhile, would be meaningful, especially with the penetration of smart devices.

The social commerce in the country, however, seems more like an open market or a TV home shopping channel. According to analysis on a social commerce site by Metrix Research, 26.5 percent of its traffic was made through keyword search on portals, which is higher than the ratio of such traffic for open markets like Auction or Gmarket. It means people aren’t being led to social commerce sites through social networking services. There is no viral marketing working here. There exists only one-way promotion by the business.

“As social commerce companies focused on excessive competition and external growth, they are spending huge marketing expenses through advertisement instead of viral marketing using social networking services,” said Andrew Kim, a researcher at KT Economic and Business Institute, in a report.

He said that gaining trust from consumers determines the success or failure of social commerce. “They should actively pursue the social factor. The information of purchases and opinion by consumers should be voluntarily shared through social networking service.”

Kim at the Korea Consumer Agency also said it is crucial for the businesses to gain consumer trust. “There are innovative business models emerging around the world _ totally new businesses are replacing old models. Social commerce should be chosen by consumers in the market to secure its footing as a new business model,” she said.

“You can’t get consumer trust in a day or two. The social commerce industry was in explosive growth so far, but now it is in the crossroad of becoming a stable industry based on trust or withering out.”