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Deceptive marketing schemes on video sharing platforms in China

Author: LB 2020-06-08 305

During the coronavirus pandemic many companies in China with no online presence suffer significant losses. Among these are restaurants, hotels, car dealerships, hair salons to name a few. The story I am going to tell here started roughly 2 years ago in China, where video sharing platforms are still booming.


There are several video sharing Youtube-clones in China for live broadcast. If we want to send a short update to our friends, these come very handy because with a few taps we are ready to rock and roll. Moreover these platform turned out to be saviours for many Chinese companies that were on the verge of bankruptcy with the lucrative money making schemes.


Users do not just simply talk about their personal life, but also they are affiliate with sellers and they try to sell products to the innocent audience. E-commerce in China has very sophisticated means and selling our own products with the use of such a platform is not rocket science. During the first wave of the coronavirus several cities in China were under lockdown, however this did not prevent quick witted Chinese users to earn some extra money. With a well-made live broadcast one could earn 6 months of salary and there were users who managed to generate revenues in the 800.000 CNY (115.000 USD) range.


These extraordinary numbers are not uncommon on these online video sharing platforms. Some sell cars, some sell high-end real estate and with a few hours of live broadcast these users earn several millions of CNY. Although, some users became doubtful, because how is it possible to earn that much money with only a few hours of work. Does not sound like right... Many of these users were even warned by other users to stop deceiving the crowd.


Obviously, common users tend to believe to celebrities more and these users were able to generate extraordinary revenues. In the current economical downturn these numbers have stimulating effects, because who does not want to get out of whirpool? Chinese entreprenours seeing these numbers opened their wallets and invested some capital into these shady marketing schemes.


Actually, this is one of the main peculiarities of capitalism harangued even by our famous economist, Karl Marx. Capital is an animal that is very sensitive to scents. The more appealing the financial opportunity the larger leaps the capital is willing to do. And these video sharing platforms make use of this law. I invest some money into these live broadcast and I will be able to extract more out of the scheme...


But if there are so many users of these video sharing platforms and users actively purchase items while watching videos, how is it possible that many of the sellers still lose money on this? Where does this money eventually go to? How large is the capital behind these MCN (Multi-channel network) platforms?


The triangle


There are there corners of the triangle, with the seller, the platform operator and the user providing the live broadcast. Each of these participants have different goals. The seller would like to sell his item, the broadcaster would like to generate revenue with the views and the platform operator would like to maintain a sustainable business model by collecting many advertisers and live broadcasters to earn his middle-man fee.


These participants have no option, but to rely on each other. Mainly because not many sellers have their own marketing channels. It is only the MCN platform that is capable of connecting millions of sellers with millions of live broadcasters and optimize the matching process to find the most talented users for those who abounds in marking money. So the platform is responsible for this kind of administration, which is great because sellers do not have to deal with this and they are blissfully register to the platform and sign these marketing contracts.


The platform operators help the advertisers to choose the appropriate products so they recommend the items that will be advertised on these channels. After finding the best live broadcasters the sellers are provided with marketing strategies. They receive several proposals including various live broadcasters, therefore they can save a lot of time that should be spent on finding these channels.


Obviously, this is not a free service.


In 2019, there were more than 20.000 MCN platforms in China. This is something like you could use 20.000 Youtubes in China. But are these MCN platforms that efficient? Obviously not. With sincere business models these MCN platforms could never earn enough money. The only option is to resort to frauds.


If we investigate the details we find that there is a common point when it comes to discussing MCN platforms. The videos get a lot of views. Some even have millions of views. Regardless of the content. And they receive hundreds if not thousands of likes. Even if the user is a digesting chicken legs, drinking coke or dancing at home. What a nice video! Everyone likes these videos...


Fake likes and views


Likes and views in social media are not more than part of a huge scam scheme. The users do not even exist. For this kind of deception a small amount of money suffices. You just have to buy a woden rack and a few hundred smartphones and employ a single person to operate these phones that will view the videos. He will have to press like sometimes and write some kind of gibberish under the video so there is no value added to these videos at all!


The most imprudent solution


With the advances of technology these brutforce like farms are getting replaced by cloud based solutions. You can imagine this as a similar smartphone rack, but everything is virtual so there is no need for actual devices. With the use of a single PC, hundreds of smartphones are launched virtually and the targeted videos are being watched from these.


A like farm (image source: Baidu).

These services can be ordered online and with the aid of these like farms one can boost his personal profile as well. Note that these services are also being offered to target Facebook and Instagram profiles.


Lies to be paid for


Depending on the number of followers a celebrity has the price for ads varies. For a 1 second ad it could reach 3-4000 USD. The most important factor is the number. How many follower an account has or how many views it gets in a certain time frame. Tariffs are determined by this.


Sellers are not completely dumb either


If there are no actual sales, the video sharing platform is cheating, isn't it? In theory, you could make an approximation on how much sales you would have to have for a certain number of views and if a channel is really followed by that many people sales should appear as well, right?


These can be modelled easyly and sellers find out that the MCN platform is cheating in no time. They stop trusting the platform, but there comes the operators. They convince the worrisome seller that the numbers are real, however in reallity they just tweak their practises a little bit.


Sophisticated scams on MCN platforms


Having invested into these marketing plans a few million CNYs and witnessing no sales yet the seller is worried. Or in some cases angry. He would be very glad to be convinced of guaranteed sales and that is exactly what the MCN platform operator will do. In the newly signed contracts the MCN platform operator gurantees sales.


Let's see a simple example that will shed light upon this blatant scam.


The seller pays let's say 100.000 CNY for marketing services. Whenever the contract is signed, the platform operator gurantees the ROI. Specifically, they guarantee that in case the investment does not generate enough revenue they will refund the 100.000 CNY.


They require no deposit upon signing the contract, but in case the investment generates the desired return, they charge a 20% deposit to be paid by the seller.


Ain't it a good deal?


We use their platform for marketing purposes and if we do not sell for 100.000 CNY the platform operator refunds or investment. Maybe this will be the best option, because we kill two birds with one stone. We promote our product and we get our money back!


But here comes the twist...


The MCN platform operator makes sure that we generate 100.000 CNY in sales.


Users cooperating with the MCN platform operator purchase goods for 100.000 CNY and we have no option but to pay the 10% deposit compelled by the contract.


And also let's not forget that most of the views we get on the Youtube-clone is nothing but bot traffic.


In other words, we pay for marketing, but no one actually sees our products.


Okay, but what about the 100.000 CNY that was used by the platform operator? No problem, because these items can be returned!


These items are returned in various stages. Right after they were paid for, during shipment or after it arrived.


According to the official numbers 30-50% of the items purchased during live broadcasts in China get returned eventually.


So in case 50.000 CNY of the 100.000 CNY gets refund nobody thinks of anything suspicious.


Many of the sellers a still satisfied, because even though their original plan was to sell for 100.000 CNY and they could sell for 50.000 they reached many potential customers with this kind of marketing plan.


What happened on the platform's side. First of all they collected 100.000 CNY for marketing fees and a 20.000 CNY as deposit. From this they purchased items worth of 100.000 CNY and they immediately recovered 50.000 CNY with the returns. The remaining items are sold on secondary channels to recover most of the invested capital.


If you sum this up and subtract the costs you will get a very nice positive income with this deceptive strategy.


Oddly enough, if in addition to this naive users purchase items from the seller, the platform earns an additional 20% and the seller is happy too.


The best thing in this scheme is that everyone is happy. Who gets deceived are the users who comment, press like and purchase low quality products with enthusiasm.


What if we increase the ROI threshold?


In some cases these platform offer 300% ROIs.


So for example we pay an initial 100.000 CNY and we will be able to sell for 300% (well this is not exactly ROI, but let's keep it like this for the sake of simplicity).


If the deposit is 20% just as in the previous case, this will be 60.000 CNY this time.


So in case the seller sells for 300.000 CNY there is still a 140.000 CNY to earn.


But let's not forget about the crazy return rate!


So for example if 50% of the items get returned, then 150.000 CNY is already missing. So this means that instead of a positive revenue we have a loss of 10.000 CNY.


The situation might be a little bit better if the return rate is only 30%, because then a positive revenue of 50.000 CNY should remain. So the actual ROI is 0.5 or 50% instead of the expected 300%. This profit will probably not even cover our operational costs. What a great business..


Obviously everyone wants to increase efficacy and sellers look for the most influential creators. But here comes another problem. These popular influencers would like to keep a stable selling rate.


They do this by forcing the sellers to provide their items on the lowest possible price, because in some cases potential buyers see the live broadcast and immediately start searching for the same item on a different site. This would only cause harm to the live broadcasters business.


The sellers are in a very difficult situation, because they are forces to keep the prices low, they have to pay their marketing fees and they get scammed by the MCN platform operators.


This will lead to...


Degradation in quality. You should not be surprised if the item you saw in the live broadcast and the item you got are of different quality.


Those sellers, who have been using these platforms for marketing purposes might be in a better situation and in some cases they can generate positive revenue, but what happens on the entry level?


Sophisticate means to deceive naive participants


There different types of marketing schemes in this field. An interesting one is when an entrepreneur in China rents a 1000 sq. m. office space and constructs hundreds of small boxes where young Chinese beauties with excessive makeup are employed to advertised low quality items in live broadcasts.


The account utilized for these purposes have thousands of virtual followers and they seem to be ideal marketing materials at first glance. They target entry level sellers with this scheme.


If you want to advertise for a night, they charge 500-1000 CNY. Who cannot afford this amount of money? But the middle-man guarantees nothing.


Small and middle-size merchants and restaurants are aware of the fact everyone is watching these platforms during the coronavirus pandemic and they do not want to left behind when Noah's ark is leaving.


They are happy to invest a few hundred CNY for reaching these potential clients.


So they pay these fees and they would like to see the results. But let's see what happens in reality.


Such a decorative lady in China introduces approximately 20-40 products in a night show. Every items gets a 3-5 minute session.


The management does not care about the actual sales, because they charge a fix fee every time an item appears in the show. They focus on followers, because this is the most important factor when they determine their prices. If you consider that every night one of your girls presents 40 items and you have a few hundreds of these workers you will earn a pretty nice amount each month.


It is not only about the marketing fees


There are many platforms in China which request you to send sample prior to making your ads. Or in more imprudent cases, they would not even charge money for displaying your items, just send them your products and they will do the job for you. Appealing, right? They say that quality needs to be ascertained prior to advertisement and your item has to pass their quality control. When you send them the item they do their quality check and your item fails to pass. For them this means that you did not follow the rules stated in the contract and they stop contacting you. You cannot contact them either. These are the most common and simple means to deceive entry level online sellers in China, but there are more sophisticated ones as well.


Video platforms turned into financial institutions


There are those who play bigger games.


Their deceptive scheme is as follows.


They do not charge any deposit, but the initiall marketing fees are significantly higher than in the previous cases. Sometimes it could be even 1.000.000 CNY.


And these platform try to entice customers with 100% ROI.


They set up an initial time frame, let's say a month and they measure sales for this amount of time. If sales do not reach the target goal they return our money. What a good deal!


The first month costs nothing and we get our money back if the ROI does not reach the target.


Why not try this method?


The desired ROI does not appear, as the whole platform is virtual, there are no real users and followers on it.


According to the contract we get our money back.


Meanwhile the operator uses or money for short term investments that have high ROI with high risk. With these risky investments the operator realizes significant profits.


If we have a look at the Chinese official corporate databases, we see that many of the lending corporations in China started as a small company operating video sharing platforms.


Clearly, what they do is that they lend this marketing money to short term borrowers and generate significant revenues.


Source: YouTube


You can support me using the following BTC address: 1D6qYk7mWQFE1K5tUgqimjiCLT66AHdyNX


Image by Philippsaal from Pixabay

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