Taobao villages; how the internet is blurring rural-urban boundaries

Posted on by Bart Doorneweert

Taobao Marketplace is China’s premier online consumer-to-consumer market place. It is owned by the Alibaba Group, a company that grew in fame for its online wholesale platform. Recently, Taobao was covered by The Financial Times in an article describing how the marketplace spurs entrepreneurship in rural areas.

Village epicenters called Taobao villages, where 10% or more of the families are involved in e-commerce operations with joint revenue of over 1.5 million USD, are mushrooming. Entrepreneurs are investing in order processing operations, and hiring people to make sure that products are packaged properly and on time for shipment. There are even reports of youth returning to the village from the city after their studies to help grow the business.

Taobao advertisements are seen in Qinghe village, Hebei province. Photographer: Tianyi Li/Alibaba Group Holding Ltd. via Bloomberg

 

What’s under the hood?
One element that drives success for the platform is a demand for authentic and healthy products, directly from the countryside with Chinese rural consumers. A backlash following the stream of food scandals in the country’s food industry. The platform can now link producers and consumers directly together, and they are able to forge deals based on trust.

But this is not the most compelling element of the platform. What the FT article also mentions is that poor and less-developed rural areas are spurring sales growth the most. What I thus suspect to be the real driver underlying these new rural business models is revealed by what this rural e-shop owner says in this short video. As the most import problem that Taobao solves, he states:

“With a real shop, the worst thing is that customers pay on credit. The advantage of Taobao is that you can’t pay on credit”

Instantly you can see the value that the platform has been able to create. Before, a rural shopkeeper’s market was tightly geographically constrained to where the influence of the next village took over. No wonder that many of its customers could get away with putting their purchases on the tab. With the internet enabled marketplace, this geographic constraint is lifted. Shopkeepers are now able to filter out rural dwellers who have cash in hand to directly pay for their purchases, amongst a population of a couple of 100 million people.

Through creating new and expansive market connections, the internet has been able to accommodate a new revenue stream, and to accelerate cash flow within a rural economy. It is a classic mechanism that creates economic development, just like cash accelerated trade in the barter economy. And it all flows naturally from what people on both sides of the trade aspire to achieve.

Take-aways:

  • the internet is blurring urban-rural boundaries; an e-commerce site can contribute to rural development!
  • expansive social networks generate new opportunities for value creation
  • value creation can only be achieved if these networks allow people to fulfill their own purposes.

Market size estimation in uncharted rural economies

Posted on by Bart Doorneweert

Agriculture is the main driver of the rural economy in developing countries. Realizing product and service innovations targeted at these agriculture-based markets holds tremendous potential for creating new growth engines for business, as well as achieving social and economic development.

While this is a market with huge opportunity, it is also very difficult to navigate. Much of the rules and patterns of behavior are based on informal solutions to irregular and low incomes, semi-literacy, and social and environmental uncertainty.

Estimating your market in such an economy is not a likely task. Insights are yet to emerge on the radars of formal market intelligence approaches, like the chamber of commerce, or Google analytics, etc. And, if there’s little else to target specific customers by, than referring to them as a number of 2 billion or so people who grow crops on small pieces of land and rear animals, your business is likely to fail.

Needless to say, emerging rural economies require different market estimation approaches. We need to be more creative and develop proxies, which are more sensitive to picking up signals of upward market dynamics.

The water tank indicator
I recently had an idea for such a signal, based on some photo’s I took of water tanks during fieldwork. I still need to validate this thought, but I’ll write it out here, for sake of argument (I’m open to your comments!).

A water tank located near your home provides a lot of convenience. You can collect rainwater in substantial volumes that can be accessed from your own premises. Also it could help you eek out your water supply during the dry season.

The very common alternative to the water tank, is to walk to the water pump or the lake with a jerry can, for which you often need to cover substantial distances. Water tanks thus create a considerable saving on time and effort dedicated to fetch water. Time that can be freed up for other activities on your farm or on someone else’s farm.

Water tank in North Buganda Region, Uganda
Water tank in North Buganda Region, Uganda

Occasionally you will find a household that has invested in a tank, and my experience is that these are relatively well-off people, because water tanks are a big investment (or an NGO has dropped by with a program…). Could water tanks be a soft signal for upward mobility?

Now correlate this line of thought with a photo I made in Kagio in Kenya below. What would such an inventory of water tanks signal about the overall wealth dynamics of the area around this town? 

Water tank inventory in Kagio, Kenya
Water tank inventory in Kagio, Kenya

What we could do with such insights
I don’t know whether the water tank story will hold up if I try to validate it. But if it does prove to be relevant, it could be a very interesting indicator. It could help determine great locations for piloting or launching a new product or service for an emerging market segment with purchasing power. I think you could also use remote sensing data to locate such water tank inventory points, as they’re pretty conspicuous. This market sizing indicator might even be brought to scale!

The big question is whether it would be worthwhile to invest in digging up more of these insights. If we can create a validated set of such context-rich indicators that can be brought to scale, then we can inform the emergence of new growth pockets in a very resource extensive way. I think it might be worth a shot! Do you?

Take-aways:

  • It’s hard to estimate the size of your market in an economy that is yet to emerge
  • If you want to take a new group of 2 billion non-customers online, then you need to become smart about your targeting methods.
  • It might be easier to infer purchasing potential from a water tank, than through formal survey methods that filter out the demographic that has that extra dollar per day to spend.