Author/Wang Huiying

Editor/Ziye

Zhou Yuan, the founder of Zhihu, has often talked about profitability in recent years.

In the last month of 2023, Zhou Yuan set a new year's goal for Zhihu: profitable growth. At that time, Zhihu's stock price fell sharply, and Zhou Yuan responded to the market: he believed that there were multiple factors contributing to the stock price volatility, and that Zhihu's value was underestimated. However, temporary fluctuations in stock price would not affect the direction and determination to advance the strategy.

The so-called strategic direction is to maintain a healthy ecosystem and achieve profitability. In March 2024, Zhou Yuan reiterated that accelerating profitability is the primary strategic goal for 2024.

Having developed to this stage, Zhihu has long passed the balance point between content and commerce, and is now at a turning point between losses and profits.

This turning point is now on the horizon. The third-quarter financial report showed that Zhihu's net loss narrowed by 96.8% year-on-year to 9 million yuan, making it the quarter with the least losses since its listing.

Although still incurring losses, the loss of 9 million yuan indicates that Zhihu is on the verge of profitability.

This is largely attributed to Zhihu's cost reduction and efficiency enhancement. The financial report also shows that, compared to the decline in revenue, cost control is the key to reducing Zhihu's losses. In this quarter, Zhihu's total operating expenses decreased by 30.5% year-on-year to 624 million yuan.

It is noteworthy that Zhihu's revenue structure has undergone significant changes. In the third quarter, Zhihu's paid reading revenue was 459 million yuan, marketing services revenue was 257 million yuan, and vocational education revenue was 105 million yuan. Farewell to the past when advertising revenue dominated, paid memberships have now become the main source of Zhihu's revenue, accounting for more than half of the total for the first time.

This also means that in terms of commercial exploration, Zhihu is generating more and more direct revenue from its content. Zhihu, which grew out of the community, has returned to the community, better answering the question of "Who is Zhihu?"

On October 31, when asked about when Zhihu would break even, Zhou Yuan's answer was "soon." A month later, Zhihu's performance echoed this statement. Three years after its listing, Zhihu is finally getting closer to profitability, and Zhou Yuan should be able to relax now.

1. Is Zhihu just one step away from profitability?

In 2016, when Zhou Yuan was asked how Zhihu made money, he was somewhat agitated. "Many people keep asking us how to commercialize, and it annoys me. So I took a team to create something commercial, isn't that how you make money?"

It didn't take long for the money-making project "Zhihu" to fizzle out, and Zhou Yuan's joke became a reality, with making money becoming a persistent problem for Zhihu.

Since the end of last year, Zhou Yuan has set a break-even target for 2024, and Zhihu has been working towards this goal from top to bottom.

After nearly a year of exploration, Zhihu has received good news.

On the evening of November 26, Zhihu released its Q3 2024 financial results report, showing that Zhihu's net loss in Q3 this year decreased by 96.8% year-on-year to 9 million yuan, making it Zhihu's lowest loss quarter since its listing.

This is undoubtedly good news for Zhihu, as it has achieved a record reduction in losses. More importantly, a loss of less than 10 million yuan means that Zhihu is one step closer to profitability.

What did Zhihu do right?

Generally speaking, there are two main reasons for a company to significantly reduce losses: one is to increase revenue, and the other is to reduce costs.

From the financial report, Zhihu's third-quarter revenue was 845 million yuan, a year-on-year decrease of 17.32%, with declines in revenue from all three major businesses; in contrast, Zhihu's total operating expenses for this quarter were 624 million yuan, a year-on-year decrease of 30.5%.

Comparing these two sets of data, it is evident that Zhihu's significant loss reduction this quarter is due to cost control. The financial report points out that the reduced operating expenses are mainly concentrated in marketing and personnel. Specifically, sales and marketing expenses decreased by 27.4% year-on-year to 388 million yuan, R&D expenses decreased by 28.2% year-on-year to 179 million yuan, and general and administrative expenses decreased by 50.1% year-on-year to 57 million yuan.

In addition, with the significant reduction in various expenses and the improvement of operational efficiency, Zhihu's income cost for this quarter decreased by 35.6% year-on-year to 304.9 million yuan from 473.7 million yuan in the same period last year, with a gross margin of 63.9%, reaching an all-time high.

The effectiveness of Zhihu's cost control is evident to all, but as internet traffic becomes more precious, Zhihu's cost reduction inevitably leads to a decline in some performance indicators.

For example, marketing services revenue decreased. Zhihu stated that the decrease in marketing services revenue was mainly due to optimizing service product offerings and focusing on increasing profit margins as a strategic core.

For example, the average monthly active users decreased year-on-year. Zhou Yuan stated that the change in user scale had two components: on the one hand, the company optimized advertising spending, leading to a continuous decrease in low-activity users; on the other hand, the company increased efforts in enhancing the user product experience, resulting in an increase in high-activity users, which was essentially a decrease followed by an increase.

In fact, over the past year, centering on the core strategy of increasing profits, Zhou Yuan has led Zhihu through a series of reforms, including simplifying the organization, eliminating waste, incentivizing high output, and eliminating low efficiency.

Amidst a series of trade-offs, Zhou Yuan has prioritized profitability.

As early as the end of November 2022, Zhou Yuan bluntly stated, "Our efforts have given us more confidence to invest in long-term growth while striving for short-term profitability."

In March of this year, Zhihu provided a timeline for turning a profit, expecting to achieve Non-GAAP profitability in Q4 2024. The performance in the third quarter brought confidence to Zhihu for the fourth quarter. If there are no unexpected issues, Zhihu is expected to achieve profitability in the fourth quarter of this year.

During the financial report conference call, Zhou Yuan emphasized again that in 2025, there are two priorities, one of which is to achieve significant loss reduction on a full-year basis, or even approach full-year profitability.

After years of market competition and capital scrutiny, the founder no longer views making money for Zhihu as an impatient topic but has become accustomed to prioritizing profitability and leading the team towards profitability step by step.

2. Ecosystem first, with paid content carrying the banner of growth

On the day of Zhihu's Hong Kong listing, Zhou Yuan posted on Zhihu, "Listed in Hong Kong, let's chat." In the post, he responded to the outside world about how Zhihu could grow healthily, expand its scale, and support itself.

Zhou Yuan provided three straightforward answers: ecosystem first, social value, and rational optimism.

The so-called "ecosystem first" refers to creator experience, content satisfaction, a good community atmosphere, and commercial growth that matches community growth.

In March of this year, the profitable growth strategic goal proposed by Zhou Yuan also included "ecosystem first." "Ecosystem first must not be removed," Zhou Yuan bluntly stated in a conversation with Tencent Qianwang.

In Zhou Yuan's view, a good ecosystem leads to good content, and good content leads to good business.

This attitude is reflected in the financial report through changes in the revenue structure. As early as the first quarter of 2023, paid memberships surpassed advertising business to become the main revenue pillar for Zhihu. This quarter, the proportion of paid membership business further increased, exceeding 50% for the first time, accounting for 54.32% with 459 million yuan; in comparison, marketing services accounted for 30.41% with 257 million yuan.

The essence of the change lies in focusing on growth that is related to and supportive of the ecosystem. During the financial report conference call for this quarter, the management team's summary of the advertising business centered on one core aspect: reducing low-quality, untrustworthy commercial content and capitalizing on Zhihu's differentiated advantage for high-value brands.

According to official data, the exposure of low-quality content on the recommendation page decreased by more than 40% compared to the beginning of the year, and negative user feedback decreased by more than 30%.

During the years when Zhihu's commercialization was particularly aggressive, advertising was the main engine of Zhihu's revenue. However, the proliferation of advertising affected the content ecosystem and community tone that Zhihu had gradually established. Additionally, with limited advertising budgets for enterprises in recent years, advertising is no longer suitable as a "cash cow."

In contrast, focusing on paid content within the community ecosystem, Zhihu has made a series of adjustments.

The primary change was to address the "watering down" of Zhihu and rebuild its professionalism. Zhihu established a PGC content ecosystem, continuously expanding the group of accounts composed of Zhihu officials and the content matrix screened by officials, ensuring their exposure so that users can see "strictly selected" content from officials; secondly, Zhihu separated its "storytelling" content and established a "novels" channel, expanding a large number of content sources through procurement, contracting, and conversion.

In addition, independent of the main Zhihu brand, Zhihu also launched Yanyan Stories. According to Zhihu data from March of this year, the number of creators submitting to Yanyan Stories has exceeded 600,000, with over 100,000 short stories launched cumulatively, covering more than 180 subcategories.

At that time, Fan Junmei, head of the paid reading business, stated that Yanyan Stories had become the largest production and consumption base for short stories on the entire network and the preferred submission platform for short story authors.

It is worth mentioning that this content system has also allowed Zhihu to catch up with the trend of short dramas. As of March of this year, nearly 100 IPs from Yanyan Stories had completed film and television licensing, with over 400 self-produced radio dramas and audio dramas launched.

Under this series of combined efforts, Zhihu is generating more and more revenue directly from content, reflecting a healthier content ecosystem on Zhihu. A healthy ecosystem enhances user experience and attracts more users.

In the third quarter of this year, Zhihu's average monthly subscribed members reached 16.5 million, with both year-on-year and quarter-on-quarter growth, and the average monthly active users also achieved quarter-on-quarter growth. In terms of the content creator ecosystem, as of the third quarter of this year, Zhihu's cumulative content creation volume reached 855 million, a year-on-year increase of 14.9%; the cumulative number of content creators on the platform reached 77.7 million, a year-on-year increase of 11.6%.

Regarding this, Zhou Yuan stated during the financial report conference that the community ecosystem optimization has achieved multiple positive results, including steady improvement in core user health indicators and quarter-on-quarter growth in monthly active users. "We have also revitalized content creators' confidence, thereby improving content quality, user activity, and strengthening the community atmosphere."

Another business within the scope of paid content on Zhihu is vocational education, which Zhou Yuan sees as part of the "complete form" of Zhihu. In January of this year, Zhihu officially announced that Zhihu Zhixuetang would operate independently as a sub-brand of Zhihu, marking a new stage of development for Zhihu in the field of vocational education.

In this quarter, Zhihu's vocational education business revenue was 105 million yuan, accounting for 12.5% of revenue. Currently, vocational education is still in the stage of improving efficiency and accelerating loss reduction, with the management team's goal being to achieve break-even for this business by 2025.

Essentially, vocational education is an extension of Zhihu's content ecosystem. Zhou Yuan previously mentioned that under vocational education, Zhihu is transforming into a company that builds platforms and provides services for new professionals. In a sense, new professionals are both users of Zhihu's services and creators who support the community atmosphere on Zhihu.

Currently, Zhihu has constructed a new arrangement and found a path for scalable and profitable growth - maintaining the community's professionalism without compromising the user experience and cultivating a new commercial ecosystem from the native community ecosystem.

3. Will AI search be Zhihu's new imagination?

In recent years, AI has emerged as a new variable for internet and technology companies. Facing this new round of technological change, Zhou Yuan is even more excited.

In Zhou Yuan's view, the new generation of technology should bring more opportunities to Zhihu, freeing it from the constraints of online discussion and sharing.

With this mindset, as large model applications begin to take off, Zhou Yuan is attempting to restructure Zhihu, with AI search being one of his main focuses.

In June of this year, Zhihu released its new AI product "Zhihu Direct Answer" at the 10th Salt Club New Knowledge Youth Conference. Based on creators' real Q&A data, this product can generate answers based on user questions, making it Zhihu's first independent AI product.

This also signifies that Zhihu has officially joined the table of large model applications for "AI search."

At the end of October this year, Zhihu Direct Answer officially launched the "Professional Search" feature, introducing professional content sources such as VIP and Zhihu Select, covering over 50 million Chinese and English document data. It also supports file uploads and long file parsing, providing functions such as single-article in-depth reading and question-and-answer from specified sources, making it more suitable for professionals' productivity scenarios.

As Zhou Yuan said, "Zhihu Direct Answer" is a new productivity tool and should also become a connector for discovering the world and a bridge for connecting people.

"In the AI era, some answers are also compressed into the AI large model, and we need tools to reconnect them," Zhou Yuan said. Zhihu Direct Answer is an attempt to integrate search, Q&A, and follow-up questions into one.

Supporting the operation of Zhihu Direct Answer is the underlying capability of Zhihu's AI large model. In 2023 and March 2024, Zhihu released the "Zhihai Atlas AI" large model and the community-native AI function "Discover · AI Search," completing two important steps from model development to open product applications.

Ultimately, AI has activated Zhihu's community attributes, but it cannot be separated from Zhihu's content and community genes.

During this financial report conference, Zhihu mentioned that the current launch of the Professional Search feature is to introduce more professional knowledge in vertical fields to meet the needs of different workflows. However, it also supports users to upload their own research materials for customized Q&A and in-depth interpretation, and its future upgrade direction is still integration with the Zhihu community.

Although Zhihu Direct Answer is referred to as the Chinese version of Perplexity, Zhou Yuan still maintains a cautious attitude towards AI search. Especially in terms of commercialization, Zhou Yuan has not yet found a definite direction for Zhihu, currently Stay in just memberships, paid access, and other attempts.

In Zhou Yuan's view, AI search is still in a relatively early stage, and it is too early to talk about commercialization. During the 2024 World Internet Conference Wuzhen Summit, when asked about the biggest challenge faced in doing AI search, Zhou Yuan responded, "Essentially, consumers are not yet fully accustomed to it. The difficulty lies in the insufficient depth of scenario-side integration, which cannot fully satisfy users' pain points."

Indeed, traditional search engines have occupied users' minds for decades, and they can solve a wide range of problems. For AI search to replace traditional search, it not only requires more powerful functionality but also more efficient integration.

Before realizing commercialization, Zhihu's AI search is destined to take a difficult path, which requires both financial investment and practical abilities. This is a pressure for Zhihu, which is not yet profitable, and it may experience a period of losses, but it must be done.

In the first few months after Zhihu's listing, Zhou Yuan struggled to reconcile with Zhihu's stock price. Scrutiny from the secondary market is much more intuitive than that from the primary market, with stock prices and market capitalization changing minute by minute.

Later, Zhou Yuan understood that Zhihu's development did not need to be excessively influenced by external changes. Whether it was digital disclosure or strategic actions, Zhou Yuan felt that Zhihu did not need to cater to the market but should do its own thing.

Now, Zhihu has also proven to the market that by doing its own thing, it can achieve growth. More importantly, Zhihu's community value still exists, and under the wave of AI, there is the potential to rekindle imagination. Of course, as the timeline for breaking even approaches, Zhihu still needs to answer how it will successfully kick the ball into the goal.

(The lead image of this article is from the Zhihu WeChat official account.)