How Pinduoduo Became the 3rd Largest eCommerce Company in China
You may have heard about Chinese eCommerce giant Alibaba but what about Pinduoduo? Founded four years ago by an ex-Googler engineer Pinduoduo is a Chinese eCommerce company that sells a wide range of products including household toiletries, groceries, apparel and electronics. The company has grown like a rocket ship and only two years after launch it generated more than RMB 100 billion ($14.7 billion) in gross merchandise volume. In contrast it took Taobao (Alibaba) five years to achieve that milestone and JD ten years. It is now the third largest eCommerce company in China behind, Alibaba and JD with an estimated 7% market share. The retailer does not appear to be slowing down anytime soon with revenues increasing in the second quarter of 2019, by 169% to reach RMB 7.29 billion ($1.06 billion), beating analyst’s expectations by $187 million.
With 77.5 million daily active users Pinduoduo has surpassed JD.com which has 37.3 million daily active users to take the second spot in terms of the daily active users for a Chinese eCommerce site behind Alibaba which has 209 million daily active users on its Taobao site. So what makes Pinduoduo so special? For one it has been able to crack social commerce. The growth of the site is largely due to recommendations from friends to take part in group purchases which then drive down the price of items for sale. Secondly, its strategy of focusing on markets where Alibaba and JD do not have as strong of a foothold like tier three and lower cities have helped to spark growth. Finally its platform has a gaming element which has made it popular in a country that has the largest gaming population in the world. Here is more insight to why Pinduoduo is growing so rapidly.
1. Group discounts and social sharing with viral effects. Groupon may have introduced you to the concept of group discounts but Pinduoduo is the one that has really taken it to the next level. When shopping on Pinduoduo merchandise features two prices, one price for the item if it is purchased individually and another price if it is bought as part of a group. To enact group buying all a customer has to do is share a link with the item they want to buy with family and friends via WeChat, China’s largest social network. Once enough people have decided to join in customers can get a “team discount” that provides a discount of as much as 90% off. This strategy has been particularly effective in attracting new customers to Pinduoduo who have discovered the site via friends and family. Since WeChat, which has more than one billion monthly active users blocks links on its platform from rivals like Alibaba it has played a central role in Pinduoduo’s growth.
2. Gaming. Pinduoduo is about more than just shopping it also about gaming. One of the games that is popular on the platform is Duo Duo Orchard. Players grow fruit on trees by logging into the site daily and by product sharing. The game drives 11 million users to the Pinduoduo app every day. Features like this have worked particularly well for Pinduoduo since China has the largest gaming market in the world with nearly 600 million gamers. Pinduoduo’s CEO Zheng Huang has commented that its shopping experience is a “combination of Costco and Disneyland" meaning that customers can get great deals but are also entertained at the same time.
3. Underserved markets. While Alibaba and JD.com have grown by focusing on affluent customers in cities such as Beijing and Shanghai, 65% of Pinduoduo’s customers are from tier three and lower cities. These cities (tier three and lower) represent 73% of China’s population. These consumers have lower disposable incomes motivating them participate in group buying in order to get the best possible price. For example, the average transaction value on Pinduoduo is $6 versus $60 on JD.com and $30 on Tmall and Taobao (Alibaba). To be able to sell such low priced items Pinduoduo has focused on selling lesser known brands. According to Morgan Stanley: “while much attention is paid to China's largest cities, the country's smaller urban centers could become the larger driver of growth and consumer spending in the coming decade.” “While investors perceive larger cities as offering the most important consumer base, we believe that lower-tier cities will be bigger, wealthier and more eager to spend, and could contribute two-thirds of incremental growth in national private consumption toward 2030."
Now that Pinduoduo has a foothold in lower income areas it has been moving up market. Last year it introduced a “Branded Goods Pavilion” on its site that features over 700 brands including Nestle and Yamaha. Its move up market is working with total sales from top tier cities increasing from 37% in January of this year to 48% by June of this year. The move upmarket is critical to increasing profitability since while Pinduoduo may have surpassed JD.com in terms of daily active users it only generates 5% of JD’s quarterly revenue due to much lower average transaction sizes. Pinduoduo is still unprofitable losing RMB 411.3 million ($59.9 million) but its losses are narrowing.
Sources
https://techcrunch.com/2018/07/26/the-incredible-rise-of-pinduoduo/
https://www.fool.com/investing/2019/08/23/is-pinduoduo-catching-up-to-alibaba-and-jdcom.aspx
https://www.voguebusiness.com/consumers/lessons-on-chinese-shopper-from-discount-app
https://www.wired.com/story/china-ecommerce-giant-never-heard/
https://www.emarketer.com/content/pinduoduo-blazes-trail-for-new-kind-of-social-ecommerce-in-china
https://qz.com/1319909/shoppers-in-chinas-heartland-give-rise-to-e-commerce-giant-pinduoduo/
https://www.thestreet.com/investing/stocks/pinduoduo-in-no-rush-to-conquer-rest-of-world-15065958
https://www.nytimes.com/2018/07/25/technology/pinduoduo-ipo-china.html
https://www.morganstanley.com/ideas/china-small-cities-economic-growth
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