Pinduoduo, the New Low Cost Solution To Sell Big In China

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Currently, Pinduoduo is the second most used e-commerce platform and the fastest growing app in the history of the Chinese Internet. (source)

The startup, whose name is roughly translated as “Buy more together”, was launched in Shanghai in 2015. It became a Unicorn after just 21 months, much faster than its older competitors like JD.com and Alibaba’s Taobao.

How fast is Pinduoduo growing?

Pinduoduo posted strong earnings in Q2 2019, beating market expectations. Revenue jumped to RMB 7.29 billion (roughly US$1.02 billion), an increase of 169% YoY. Net loss also narrowed to RMB 1 billion (roughly US$141 million) from RMB 6.5 billion (roughly US$917 million) in the same period last year.

Pinduoduo’s current annual active customers as of Q2 2019 reached 483 million, surpassing that of JD.com.

It has 77.5 million daily active users according to data firm Jiguang — more than JD (37.3 million) and still behind the number of mobile users on Alibaba’s Taobao (209 million).

Who are buying on Pinduoduo?

Different from Alibaba and JD, Pinduoduo initially and continuingly targets people in 3^rd tier or lower tier cities and rural areas.

Types of Pinduoduo’s customers, by city tier, February 2018

This segment of customers has increasingly become a fertile ground for e-commerce development.

• The lower-tier city consumer base that makes up 73 percent of China’s population is a massive source of customers.
• According to the latest statistics from CNNIC (China Internet Network Information Center), the number of internet users in Chinese rural areas reached 209 million while internet penetration has significantly increased to 36% at the end of 2017, compared to just 7.4% in 2007.
• Rural customers spent RMB1.37 trillion on e-commerce in 2018, a 30 per cent year-on-year increase, according to the China Internet Network Information Center.

 

How is Pinduoduo different from Alibaba or JD?

Let’s look at its business strategies to gain customers and make sales.

Low priced products

Pinduoduo is well-known for affordable products that are often unbranded or white-labeled. This is because their customers who live in the countryside have limited disposable income. They prioritize prices over brands.

GDP per capita in China’s top tier cities is 5.2 times more than that in third-tier cities, based on data from NBS (National Bureau of Statistics).

However, they are spending more and more as Pinduoduo registered an 87 percent increase in annual spending per active buyer in the first quarter of 2019.

Group- buying model

This is the key strategy that sets Pinduoduo apart from other e-commerce platforms as well as fuels its astonishing growth. This is also why Pinduoduo is known as a group-buying platform.

In essence, it offers great discounts when people make group orders with friends or family. In details, for each product on Pinduoduo platform, shoppers can choose to buy the product individually, or initiate/ join a team purchase. Team purchases allow customers to enjoy lower prices but a team purchase order will only be possible once a team is formed.

To successfully create a team purchase order, the shopper can start the whole process by placing his order with an initial payment. The shopper can share the offer to his friends on WeChat. If there are enough friends to join, the order is considered successful; otherwise, the platform will refund the initial payment to the shopper.

Another way, instead of paying the initial fee, the shopper can just send out a price reduction post to his network on WeChat. The shopper and his friends can enjoy a discount or even free products if there are enough buyers joining the pool.

Source: Pinduoduo

Interface of the APP

A lot of games

Pinduoduo is known for its use of lotteries, flash sales and more complex gamification features that encourage users to check in regularly. Duo Duo Orchard is one popular game in which players can grow fruit trees by collecting points through daily log-ins and product sharing.

 

Why this strategy can make sense in China?

• Low priced products are a hit to Chinese consumers in less urbanized areas since they are more price-sensitive and care less about brands. Despite China’s rising income per capita, there is still a significant discrepancy in income levels in urban versus rural areas.
• From the perspective of buyers, Group – buying and Sharing-with-friends not only make shopping an entertaining experience but also give the satisfaction of taking advantage of great deals and discounts. From the perspective of Pinduoduo, this buying model creates natural viralty. Buyers become unofficial recruiters of new customers by sharing group buying deals on their social media, keeping cost per acquisition of the platform lower than competitors, while encouraging daily check-ins and spending on the app.
• Pinduoduo’s partnership with Wechat allows it to utilize the traffic from this super app through various touch points. Besides, buyers can easily share deals on Wechat or make transactions on Pinduoduo using Wechat Pay smoothly. This level of access on WeChat is not allowed for Tencent’s rival Alibaba. Many netizens in China’s rural areas have just started to use mobile Internet and find it much easier to navigate on Pinduoduo and make the payment directly through WeChat.
• Chinese people love games and are used to spending money in a game-like environment. China is the largest gaming market in the world and games appeal to everyone from rural consumers to wealthy shoppers. Market intelligence firm Niko Partners estimates that there are 598 million mobile gamers in the country, 40 per cent of whom spend money in games.

Recent moves to approach 1^st and 2^nd tier cities

Although Pinduoduo is mostly associated with lower-tier and lower-income buyers, the app is moving away from the frame of a second-level platform for lower-income buyers to finally make its way in the Chinese high-end market. Here, China’s internet titans, Taobao and JD.com, dominate the market.

Market shares of e-commerce platforms, April 2018

Last June, orders from Tier 1 and 2 cities such as Beijing, Shanghai, and Hangzhou accounted for almost half of the platform’s total order value.

In August 2018 it launched a “Branded Goods Pavilion”, which features more than 700 brands, including Nestle, Yamaha and Hong Kong jeweller Chow Tai Fook. The company also recently invested RMB1.5 billion in 100 Shanghai heritage brands, including cosmetics company Jahwa and footwear brand Warrior. These partnerships also improve Pinduoduo’s reputation, increasing the credibility of its other products while introducing more upscale brands to underserved consumers.

To reach its goals and be viable in the market, the Shanghai-based company thus plans to develop its own logistics network and, therefore, speed up its deliveries. According to Pinduoduo, with the use of artificial intelligence (AI) and big data technologies, new services will include route planning, parcel sorting, and the improvement of fresh produce deliveries. The plan is, therefore, to invest in advanced technologies like AI-powered routing in order to develop and then improve its logistics network.

Conclusion

Pinduoduo enables brands to reach a huge and growing segment of customers from 3^rd and lower tier cities whose disposable income and shopping spending are increasing.

However, the platform also presents challenges:

• Difficult to control the quality of products on the platform; counterfeit goods and knockoff products remain a huge concern.
• Difficult for merchants to build brand awareness and credibility when the platform focuses on low-cost products and its customers love discounts.

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