Is it a Smart Selection to Focus on Lower-Tier Cities?

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There are lots of relatively unknown cities in China and these lower-tier cities are contributing to China’s economy. According to Morgan Stanley, annual consumption in these smaller cities is expected to triple by 2030 as a result of an increase in population, favorable government policies, and more disposable income. Thus, brands are still pursuing these cities and being more strategic about which ones they target. Here is why investing in lower-tier cities is a continuing trend.

Cities such as Foshan, Wenzhou, and Changsha – among many others not considered to be among the country’s top tier – are rapidly expanding in population and expected to have an abundance of high-income consumers. These factors indicate increased spending and a demand for more premium services and expensive items. In addition, many of these lower-tier cities are updating their infrastructure and urban planning with advanced designs to be more modern and to accommodate new business. In general, lower-tier cities continue to be viable, untapped markets with consumers willing to spend, current technologies, and reasonably low production costs.

As the country’s bigger cities become more crowded and more competitive, the business potential in lower-tier cities has not been overlooked by many of China’s e-commerce brands. Alibaba, the e-commerce giant that operates Taobao and Tmall, revealed that online retail sales made through their platforms grew more than 100 percent in Gansu over the prior year, surpassing all other Chinese provinces and regions. Guizhou, one of the country’s vastly rural and poorest provinces, ranked the second highest in online retail growth.

More over apparently Pin Duoduo and also revealed that most of their customers are from the lower tier cities, beside is the chart showing that most of their customers are either from tier 4 or 2.

Even some of the challenges in these cities, like logistics for delivery of goods and services, have not been a deterrent. In fact, many brands are starting to invest in technology to overcome some of the difficulties. Recently, the well-known e-commerce platform announced a plan to use drones and automated warehouses to reduce costs and increase prompt deliveries to consumers in China’s lower-tier cities.

Additionally, new apps are focusing on lower-tier cities and contributing to sustainable business opportunities in these areas. The popular shopping app Pinduoduo, which offers inexpensive group deals that consumers share on social media, is one example. Their business model – the more people that buy, the lower the price – resonates well with the price-conscious consumers currently in this market. The app’s model has also been extremely effective in ongoing promotion without high advertising costs.

Expanding into Smaller Cities

 As China’s lower-tier cities become more sophisticated and consumers in these smaller cities become wealthier, higher quality products will be sought. Brands need to build awareness, monitor purchasing habits, and target specific consumer shopping behaviors in these markets to benefit. Similar to the premise that what works in one tier 1 city may not work in another because of varying consumer preferences and cultural traits, this theory applies in lower-tier cities as well. However, e-commerce brands have data that offers valuable insights into consumer habits in different cities, and they are using this data to pursue particular cities and consumers.

Wanda Group, for example, aimed to have 1000 shopping malls by 2025, China’s biggest commercial property developer are betting on consumer activity growth especially in lower tier-cities. Wang Jianlin, chairman of Wanda Group said that they will have at least 50 “Wanda Plazas” each year and there should be 400-500 shopping malls by 2020 and 1,000 by 2025. They will focus on lower tier cities especially the third and fourth tier cities. As people realized China’s economy is slowing, Wanda group has readjusted their strategy. To requote from Wanda chairman, “As long as there’s enough population in the city and a suitable rental yield, we can open a plaza. Wanda can expand into a large number of third-, fourth-tier cities,”.

While expansion beyond top-tier cities in China does not automatically translate into fruitful business because of the economic divide between rich urban cities and poor rural areas, many lower-tier cities are a large untapped market for brands to cultivate. Supported by increasing consumer wealth, growing sophistication, and improving logistics, brands that promote products through thoughtful, strategic marketing campaigns should be able to achieve long-term success in lower-tier cities.

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