Cooperation in Chinese Internet space is unusual, particularly among companies fighting for the same target market. It was therefore surprising that, at the end of the second quarter of 2013, Dianping.com — the biggest online dining and entertainment guide in China — announced that it was extending its API (an application programming interface that allows software interaction)to Internet giants such as Baidu Map. With connections to other well-known mapping service sites such as AutoNavi, Dianping has more than 70 million active users each month, and 26 million plus reviews covering 4 million restaurants in more than 2,300 cities.
Zhang Tao, CEO of the company, a Wharton graduate who returned to China a decade ago, is confident that his content puts up an entry barrier others will find difficult to surmount. In terms of business model, the company has tried offering membership cards and reservation services, and has found success with group-buying deals and e-coupons. “Our clients do not pay based on impressions or transactions, but pay the same way as traditional display ads,” says Zhang. “On group-buy business, we gained more than 500 million yuan revenue every month.” Zhang is now focusing on the mobile space to create a first-user advantage.
In an interview with China Knowledge at Wharton, Zhang talks about his company’s revenue model experiments, as well as his suggestions for starting up a business in the country’s online space. “I believe that in today’s Internet or mobile space, you can bring more value from changing traditional industry, although it will pose more challenges in terms of the structure and operation of your company. But in the future, there will be more integration between online and offline service,” he notes.
Below is an edited version of the interview:
China Knowledge at Wharton: Mobile has been hot for the whole Internet industry. What has dianping.com done at the mobile end?
Zhang Tao: Mobile Internet has brought new opportunities. On the Internet, dianping.com is only a website to review dining options. On mobile Internet, dining is a daily need; it has made us a must-have app, and a portal for mobile Internet.
We have been more innovative on the layout, design and presentation of information on the mobile. We launched a 5.0 mobile version mid-last year and upgraded some functions to improve user experience. Earlier, our mobile versions had more PC features as we started from the PC. The new mobile version has taken into account the unique user behavior and expectation at the mobile end. For example, the mobile screen is much smaller, mobile users are less patient, and they expect the interface to look more cool and fashionable. Your search results have to be faster and more accurate.
We will recruit more R&D staff for our mobile business this year to upgrade products further. On the operations side, we will optimize the structure, rather than add more staff. As of today, the mobile version has upgraded to 5.8.1, with quite some improvement in personalization and user experience. We have to be faster, more convenient and more accurate on mobile.
China Knowledge at Wharton :Dianping’s mobile version has recently become part of the apps of mapping services Baidu Map and AutoNavi and Weixin, the highly-popular mobile social app of Tencent. How do you view this cooperation [unusual in Chinese Internet space]?
Zhang: Weixin is a communication tool that addresses the relationship between people. Baidu offers search which addresses the relationship between people and information. Dianping.com is addressing the relationship between people and service.
In theory, mapping is a service to help users solve the issue of map orientation and navigation. But the ambition of Baidu is not only in mapping, but in LBS [location-based service] too; they have added many restaurants and entertainment places to their map. Everyone is getting more diversified. But I believe users will like the app to be light, more focused and cheaper; they won’t want complete aggregation of all services. We are focused on a life service guide application and the relationship between these companies and us is more cooperative than competitive.
China Knowledge at Wharton: On top of mobile applications, the other important business unit of Dianping is group-buy. We hear that group-buy companies, after several years of struggle, are getting better in terms of margins. How is dianping doing on group buy?
Zhang: The gross margin of group-buy companies is approaching 10%. I think this is not bad. Several big group-buy companies are now working hard to improve operational efficiency to reduce their losses.
In group-buy deals, merchants have more power in the deal and the pricing. But group-buy sites bring value to customers, so this service has been acknowledged by the merchants only gradually. Group-buy is a sort of marketing channel for merchants, as well as a platform to dispose of surplus production.
China Knowledge at Wharton :The group-buy market reached its peak in 2010, and Dianping is a relatively late player. However, your group-buy business is now No. 2 in the industry. Critics say that if hotel review was a good market, you should not have got into group-buy.
Zhang: We have positioned ourselves as a ‘local life consumption service’ company, rather than a review company. We help users find local information on dining and entertainment, and help merchants find consumers.
The hotel business is not a purely local service but more a long-distance consumption and travel-related business. A group-buy deal is discount coupon, and it’s closely connected with our core business – the dining guide. This is needed by the restaurants and also demanded by the users. That’s why we naturally entered this market.
China Knowledge at Wharton: On top of group-buy, what other revenue channels does Dianping have?
Zhang: We are like Taobao [the biggest e-commerce company in China] for local life. We build the bridge between buyers and sellers. Consumers need to find different places to consume, and we are the navigator.
On top of group-buy, we have other products and business models — reservation service, e-discount coupons, membership cards… Our clients do not pay coupons based on impressions or transactions [the Internet model], but pay the same way as brand ads based on monthly display fee [the traditional advertising model].
China Knowledge at Wharton: For reservation services, in some cases, customers and restaurants work together to avoid your agency fee, so you lose the deal. How do you tackle this?
Zhang: Ctrip, China’s biggest online travel agency, has also faced this problem. However, when your platform gets stronger and you get more attention from the industry, the no-show-rate will decline. This has also something to do with our own operation.
We have done a lot of work to make our membership card better, including adding an e-card. The membership card mainly helps merchants manage regular customer relationship; meanwhile group-buy can bring new customers to them. At the same time, we offer reservation service to help restaurants find better quality customers. So I don’t think the no-show-rate is a serious issue. Plus, we have been in the market for so many years, we know how to deal with it. Our core value is to help consumers enjoy better information and service.
China Knowledge at Wharton: Dining service is a core business for Dianping. You also have other categories of leisure and entertainment business like spa, karaoke, sports stadiums… How are those sectors growing?
Zhang: Local life includes leisure, hairdressing and beauty treatment, photography, spa and massage… All these sectors are doing well. They have low frequency, but high gross margins.
For cultural event and show tickets, the frequency is low, plus it’s restrained by traditional offline agencies. So the market is not that big for us.
The wedding market requires long decision time. But the consumption volume is very high. So there is a lot of potential in this sector.
Every industry has its own feature. We adopt different business models like display ads, or commissions based on deals or reservations, and some others to cater to different industries. But the unchanged model is you bring more customers for those places.
China Knowledge at Wharton: What’s your vision for dianping.com?
Zhang: Our vision is to help build bridges between customers and merchants, to offer more convenient, faster and more effective service, to address the issue of information asymmetry, and let Chinese people enjoy better consumption and life.
China Knowledge at Wharton: Is Dianping your first entrepreneurial project?
Zhang: I like dining. I was thinking of what to do after coming back to China after studying in Wharton. I found it was very difficult to find a good restaurant. And even when you are in that restaurant, you don’t know how to order. That’s when I started the restaurant review business.
After college, I did a project for two years. [But that wasn’t really entrepreneurship.]
China Knowledge at Wharton: With the growth of mobile Internet, there is new passion for entrepreneurship. The giants — including Baidu, Tencent and Alibaba — have all done some aggressive acquisitions in this space. How do you view the current environment for startups? How can they keep away the attacks from giants?
Zhang: Entrepreneurs have to be supersensitive. Some things may not be noticed by the giants or may not be suitable for them. When you do it, you must do it fast and well. Be low profile. When you have reached a certain size, you won’t be afraid of the giants because you already have your own brand and users.
Secondly, start a business to meet the demand of the market. As long as you closely hold the demand, there will be opportunities to grow big. The important thing is to stick to your core business.
Thirdly, you have to choose a big industry, so that there will be more opportunities. Dianping chose to work for the local life market. This market is big enough. It includes dining, drink and entertainment. Taobao [China’s biggest C2C ecommerce platform] is successful because it changes the market for retail. It has the potential to grow as people’s income rise.
I believe in today’s Internet or mobile space, you can bring more value from changing traditional industry, although it will pose more challenges in terms of the structure and operation of your company. But in future, there will be more integration between online and offline service.
Therefore, we target a huge market, and the demand in this market is clear. Consumers want to find a better place to dine or entertain, and those merchants want to find customers. So there is an issue of information asymmetry. We are here to address this issue, and upgrade ourselves to serve users’ demand, as well as finding a profit model for us to survive.
China Knowledge at Wharton: Starting up a company is a tough challenge. Many people have admired your patience and persistence to do dianping.com for 10 years. How did you persist for so long?
Zhang: It requires a long time to do any one thing well, or to grow a company well. Those famous companies — Huawei, Lenovo, Suning — have all accumulated a very long time on supply chain management and experience.
For the startups, many people would look at Baidu, Tencent or Alibaba. However, these models which gained a huge base of users in a short time are not available today. In most cases, it takes one or two decades at least to build up a solid company. Many startups are hurrying to make money in three years and go public in five years. Otherwise it’s considered a failure, but that’s a misunderstanding.
China Knowledge at Wharton: How long do you work every day? I heard you like reading?
Zhang: I am in office between 9 am and 8 pm. I love reading books on management, innovation and product development. I have many books on psychology. Anything is finally an issue of human nature. We need to have a profound understanding of human nature. To make products is actually based on your understanding of human beings. What do they need? What are their potential needs?
Managing people and companies requires an understanding of human nature as well. What do employees want? How does one motivate them? All these questions are related to human nature. If you know the answers well, you can do things more easily.