Breaking into the market in mainland China takes a great deal of time, money, and effort. So, how can you determine whether it’s a worthwhile investment for your business?
One of the best ways to do that is to gather data from Baidu, which is the Google of China. Search ads are a popular way to test new markets because they can be turned on quickly and targeted for specific searches.
This post isn’t going to be about the details of Baidu ads, but rather the questions that I think a CMO or CEO of a mid-sized business should be considering.
Why Listen to Tait?
I consider myself a veteran of this game—I was doing China marketing BEFORE WeChat was even a thing. I’ve helped hundreds of clients launch and scale campaigns in China, and helped thousands more via consulting, webinars, my YouTube channel, blog, etc. I’ve served a diverse set of clients such as the Microsoft Store (where I was reportedly managing their biggest global SEM campaign at the time) to Grammarly (proving their potential profitability) when it was just a startup, way back before it became the unicorn everyone knows it to be today.
Plus, I’ve done this consistently from the trenches in China from 2009 until now. I used to work on the nitty-gritty of accounts and then strategy. I now work on systemizing the marketing activities for a portfolio of clients, mostly B2B-oriented, and have our 20+ person, China-based team lead the execution of most activities.
For this post, I also called in some help from my friend Dave Sue, an expert at providing strategic advice for SMBs.
Setting the Stage
First, let’s make sure we understand one thing. From a marketing perspective, there are two markets in the world: China and the Rest of the World (RoW).
I am not making this statement simply because I read about it in The Economist or some international business publication somewhere. I have been living it first hand for over a decade now, on the marketing frontline while leading my digital marketing agency in China.
One way I have seen this in the trenches is because of the vast difference between the two digital ecosystems:
Although Douyin and TikTok are run by the same company, they are still separate networks with separate users. Other platforms are totally different—there’s nothing like WeChat in RoW.
Also, China is large enough to merit being considered as a separate market. In terms of global GDP, China makes up about ⅕, while the RoW makes up ⅘. And all the futurists out there predict that China’s portion of the global GDP will most likely continue to grow.
Yes, there are some different platforms in other countries, but not so many different platforms that any of those countries really counts as an ecosystem of its own. In fact, if you know of one that I’m missing, I would love to hear about it so I can adjust some of these statements.
The above are a few reasons why I believe that if you want to be a truly global company, you need a strong presence in both China and the RoW.
Ways to Measure the Opportunity
So, how can you measure the potential opportunity in China to determine whether the ROI is worth the risk? There are several ways you could go about this:
- Use a traditional market research approach.
- Just jump on in.
- Look at your current customers and see if they already include people from mainland China.
This third one is the most common reason people end up contacting us. They already have some Chinese customers and think, “How can I get more?”
One of my favorite ways to test the market is via Baidu. A live Baidu campaign can help you gather real-world data, which is preferable to market research. I mean, surveys and focus groups are one thing, but I find it much more interesting to get feedback from real potential customers. There are two reasons why:
- Survey respondents tell you they’ll buy something…but maybe they won’t.
- People in real buying situations will give you honest and accurate objections. While a focus group member might tell you the couch you’re selling is beautiful, the real-world buyer might tell you straight-up, “My wife would never let me put a yellow couch in the house.”
Before launching on Baidu, we can use their tools to find estimated monthly clicks and cost-per-click (CPC) for a range of keywords. Then you can compare that data to the estimated lifetime value of your customers.
(Side note: Other Chinese platforms can help provide this data too. If you’re in B2C e-commerce, you can learn this stuff from Tmall.)
So here is a quick back-of-the-envelope method you can use to see whether this market is worthwhile.
Comparing Lifetime Customer Value to Baidu Advertising Costs
Calculate customer lifetime value like this:
For example, if you are
- selling a SaaS product with an average order value of 199 USD/month, and
- customers pay 12 times per year, and
- stay with you for 2.5 years on average, then
- you have a variable profit margin of 80%.
- Overall, your lifetime value is 4,776 USD.
SaaS companies that sell at fixed rates are good at doing these calculations. But, what if you’re a service business with a range of project sizes? I recommend you make a reasonable guess because it’s better than nothing. Just because you don’t have perfect data doesn’t mean that you can avoid making decisions. 😉
Then move on to calculate Baidu ad costs, which you can use as a comparison. Your Baidu ad costs are what you’d need to pay to acquire each client.
For example, let’s imagine these numbers:
- Cost-per-click (CPC): 1.5 USD.
- Current conversion rate (clicks-to-leads): 2%…but bring it down to 1.5% to be conservative.
- Percentage of leads that end up as actual sales: 10%
In this case, it will cost 1,000 USD to acquire each new client.
You can calculate the profit per customer by subtracting the acquisition cost from the lifetime value, as follows:
Of course, this model is just something to start with. You might extend it by
- measuring ROI as profit-per-customer over the cost-of-acquisition,
- building a long-term cash flow estimate into the model instead of using only lifetime customer value, and
- adding additional stages to the funnel.
Plus, the above model might not give anything to the marketing or sales teams yet. Don’t forget to pay them.
Why Are Some Companies Not Ready for Baidu Ads?
It’s not uncommon for me to do this analysis for companies and end up seeing that they actually do not have a great opportunity right now. In fact, that happens about a quarter of the time.
Baidu ads, like Google ads, have their costs bid up by companies competing for the same ad space for the given keywords they’re targeting.
So it’s not uncommon for Chinese companies to capture more value from their users and then spend more on ads on a CPC basis.
Incumbent competitors might be able to do this for many reasons:
- They not only value the sales from new customers but also attach a USD value to each new social follower acquired.
- They can upsell their customers’ additional products, e.g: They provide a visa application service, as well as global wealth management services.
- They have a stronger sales team, meaning even if they sell the same thing you do, they can close a higher percentage of the leads.
Calculating Monthly Earnings
If you’ve decided that you have a good shot at making money on a per-customer basis, it’s easy to continue this back-of-the-envelope method to calculate projected monthly earnings.
The clicks/month data can be obtained from Baidu’s keyword research tool. However, remember at this point, we’re still using data that is probably understated (more on that below).
Using the same numbers from the stage above, calculate the monthly earnings as follows:
How Far Can You Expand?
Baidu is great to start off with as it’s great for spearheading entry and gathering data; however, it’s not a full-marketing solution.
It is quite hard to guess how far a campaign could expand via digital marketing, but here are our guesses based on our decade-plus of experience:
- Baidu ads themselves: Potential 200% growth.
- Adding content marketing: Potential 300% growth (but it will take two years to do so).
- Adding other ad channels: Another 200% increase.
So, if a company is making 16,992 USD/month via only the initial Baidu campaign, and then you expand an additional 700%, the earnings would increase to about 136K USD/month.
I’ve come up with these numbers by running our models for current projects. In other words, we have one person on our team generate the numbers for a given project as if we’ve never worked on it before. We then later compare those projections to the actual numbers. No two projects are the same, so this isn’t an exact science, but for getting a quick sense of the potential, we found it to be more than sufficient.
But What About Cash?
These numbers help you know what to do, especially if you have the cash to do it. But what if you don’t have the cash yet? What if you need to get the cash flowing in to fund the expansion?
A customer paying out 4,776 USD over two-and-a-half years is not the same as a customer paying you 4,776 USD upfront.
By inputting the previous numbers into an Excel/Google Sheet, it’s possible to estimate all the future cash flows. I think this is a bit beyond the scope of this blog post, but I’m glad to work with companies on more advanced models on a case-by-case basis.