With the intensification of competition in the e-commerce sector, it has become a norm for significant platforms to adjust their strategies to adapt to market changes.
On January 4th, according to information sent by TikTok to American sellers, the commission rates for TikTok Shop in the United States will gradually increase in the coming months. It is anticipated that by April, the commission for most products will be raised to 6%, and by July, it will increase to 8%. This represents an overall increase in sales commissions from 2% to 8%, marking a 300% surge. Simultaneously, TikTok Shop has initiated a reduction in seller subsidies on the app, with some discounts applying only to best-selling items. This implies that only specific products will be eligible for platform subsidy support. This move may prompt sellers to reassess their product portfolios to adapt to the new subsidy structure.
However, raising commissions and reducing subsidies on TikTok Shop may increase sellers’ operating costs, leading to some sellers raising product prices. This could drive sellers to reconsider pricing strategies and sales approaches to maintain competitiveness and attract consumers. Meanwhile, consumers may face fluctuations in shopping costs, impacting their purchasing decisions. Some sellers are surprised by this change, feeling that TikTok is being too “frugal” regarding cost-cutting measures.
On December 19, 2023, according to exclusive information from 36Kr, TikTok Shop set a GMV (Gross Merchandise Volume) target of $50 billion for 2024. In pursuit of this goal, how will TikTok balance the profit margins for merchants while maintaining sales? Additionally, how will the platform ensure healthy development and eradicate counterfeit products in the competitive market landscape? These are still challenges that TikTok needs to weigh and confront.
“Commission Hike,” “Subsidy Reduction”: Is it the Season for Harvesting Traffic?
Whether on domestic or international e-commerce platforms, there are inevitably various subsidies and support policies to attract consumers and service providers during the emerging period. The goal is naturally to generate traffic and seize market share. Once the business model is established, with both traffic and merchants in place, it enters the phase of traffic harvesting, shifting the objective from market acquisition to profitability. TikTok follows this pattern as well.
When TikTok Shop was first introduced, various preferential policies attracted merchants and consumers. Now, it has dominated the top downloads on major apps, gaining popularity in both the United States and Southeast Asia. However, according to industry experts, all of this comes at the expense of TikTok’s massive losses. According to reports, until August 2023, TikTok is expected to incur a loss of over $500 million in the United States, partly due to providing subsidies to sellers.
Currently, TikTok is considering how to turn losses into profits. As e-commerce becomes another essential source of revenue for TikTok, the measures of raising commissions and reducing subsidies indicate that TikTok is more cautiously shaping its e-commerce business model and optimising its profit structure.
Li Mingtao, Chief E-commerce Expert at the China International Electronic Commerce Center, stated that the overall increase in commission rates on TikTok Shop is based on its choices in the U.S. e-commerce market environment and corporate development strategy. Raising commissions implies that TikTok Shop is transitioning from competing for sellers based on low commissions and substantial subsidies to normalised operations in the U.S. market. The platform emphasises the profitability of its e-commerce business rather than the number of sellers and product categories. Raising commissions and reducing subsidies is also beneficial for optimising the supply side, including merchants and product categories, reinforcing the platform’s market positioning.
It is reported that Douyin (TikTok’s Chinese version) achieved a merchandise transaction volume exceeding $200 billion in 2022, and ByteDance executives hope that TikTok can reach a similar level in the United States by 2028. TikTok closed its “Shops” integrated with Shopify in September 2023 to achieve this.TikTok users can only purchase products on the platform through TikTok Shop, making in-app shopping more centralised.
Potential Loss of Merchants
Increasing commissions and reducing subsidies by TikTok Shop will likely raise the operational costs for sellers, potentially resulting in some sellers increasing their product prices. For sellers on the platform, these changes mean they must reconsider their pricing strategies and sales methods to stay competitive and attract consumers. For consumers, this may result in fluctuations in shopping costs, influencing their purchasing decisions.
This unexpected move has surprised some merchants, with comments on social media suggesting that TikTok’s cost-cutting measures are overly ‘frugal’.
TikTok Shop Malaysia and Vietnam have already increased commissions in 2023. When first introduced in Vietnam in April 2022, TikTok Shop adopted a zero-rate (transaction fee) to attract sellers from other platforms, then gradually increased to 1% by October 2022. In April of the following year, it grew to 2.5%; by September, it reached 4%.
Zhang Zhouping, a prominent cross-border e-commerce expert, stated that TikTok’s decision to increase commissions and reduce subsidies is a strategic adjustment made by the company based on the current situation. This could be due to profit requirements, confidence in the high traffic value of the platform, and other performance indicators. TikTok Shop differs from other cross-border e-commerce platforms in that it initially possesses a massive user base, which is the foundation for all e-commerce platforms. With the advantage of traffic, the pathway for monetising e-commerce through online transactions, attracting buyers and sellers, has already proven effective in the domestic Douyin e-commerce sector. If sellers can maintain good sales volume, a reasonable compression of profit margins may be acceptable, depending on which aspect of the platform’s advantages they value more. However, in the fiercely competitive landscape of overseas e-commerce platforms, TikTok’s move may lead to the loss of some merchants. High-quality merchant resources are crucial platform focal points in the ongoing battle for merchants.
Difficulty & Challenge: Emerging Counterfeit and Substandard Products
With the continuous growth in the global user base, TikTok e-commerce has set a GMV target for 2024 that is more than double the goal for 2023.
In the swift expansion of the platform, it is often challenging to pct quality simultaneously. Cracking down simultaneously violations such as counterfeiting is a central focus for various e-commerce platforms, and TikTok Shop finds itself deeply entrenched in this predicament.
Despite TikTok’s claim to enforce a “zero-tolerance” policy against violative sellers, TikTok Shop still showcases many counterfeit, substandard, and illegal beauty and cosmetic products with potential hazards in the platform’s search results.
According to media reports, during the initial launch of TikTok Shop in the United States, many false advertising and counterfeit products gained popularity through short videos. For instance, at the Ulta beauty store, a COSRX snail mucin product priced at $25 had a TikTok seller offering it for $5 and reportedly selling 37,000 bottles. When consumers emailed COSRX for clarification, the response suggested that these were likely counterfeit products and actions were being taken. On the other hand, TikTok stated that it “encourages people to buy from authorised sellers” without specific naming.
Many users on TikTok Shop’s Vietnam platform have recently complained about many counterfeit and substandard products in the platform’s small shops and live broadcasts. Opening TikTok in Vietnam, you can find many livestream rooms selling luxury brand products like LV, CHANEL, and others. The prices of these products are very cheap, ranging from tens of thousands to hundreds of thousands of Vietnamese dong. Some consumers have reported receiving products entirely different from those advertised, with model variations, incorrect colours, and poor quality. Furthermore, some sellers often offer products with misspellings and unclear sources and origins of the fashion and footwear items. In response to these issues, the Vietnamese Ministry of Industry and Trade has warned that TikTok has not implemented adequate measures to prevent false advertising, counterfeit products, illegal drugs, and untraceable health products in commercial activities.
“While TikTok Shop is becoming popular, the low entry barriers in the early stages have led to a significant influx of counterfeit and substandard products onto the platform.” An analysis by an industry expert points out that, in addition to TikTok’s algorithms and consumer preferences for low-cost items, KOL (Key Opinion Leader) promotion also drives the sales of these counterfeit and substandard goods. Counterfeit product sellers collaborate with influencers, leading to more people purchasing fake goods. E-commerce platforms should take the initiative to enhance platform governance, facilitating businesses’businesses’ global expansion.
