Pinduoduo (Part 1): Targeting China's Forgotten Consumers

Pinduoduo (Chinese name: 拼多多) is an e-commerce company that found great success in targeting China's forgotten consumers, i.e. the price-sensitive residents of lower tier cities who were eager to enter the e-commerce market but lacked an appropriate platform to meet their needs. The company pioneered the concept of piecing together purchases on a widescale, i.e. "pingou" (Chinese: 拼购), whereby Pinduoduo users would share links to products listed on the platform via social channels in order to make group purchases at lower (similar to wholesale) prices. Pinduoduo's business model, which the company's founder Zheng Huang describes as "a combination of Costco (i.e. value-for-money) and Disneyland (i.e. entertainment)", attracted over 300 million buyers and over one million merchants within the first three years of its founding in 2015.

In this article, we provide an overview of Pinduoduo's corporate history and key business initiatives, discuss the concept of and underlying ideas behind "pingou" that precipitated Pinduoduo's rapid growth, and summarize the company's overall performance.

In Part 2, we provide a snapshot of Pinduoduo's business and financial performance, in addition to describing some of the company's key marketing strategies and analysing their overall effectiveness.

The future of Pinduoduo is discussed in Part 3 and Part 4.

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Corporate History

In 2015, what is now Pinduoduo commenced operations as two companies both founded and led by Zheng (Colin) Huang: (1) Pinhaohuo, a group/social buying (see below) platform with the direct selling of and flash sales for fruits, and (2) Pinduoduo, a group/social buying platform (see below) for general merchandise posted by third-party merchants. The two companies initially received separate venture capital funding, although Pinhaohuo was absorbed by and became a wholly-owned subsidiary of Pinduoduo in mid-2016.

During its first two years, Pinduoduo primarily relied on direct selling for revenue, as opposed to commission and marketing fees from third party merchants.

During Pinduoduo's founding years, the company's e-commerce competitors were also going through significant changes. In 2015, Taobao purged around 200,000 counterfeit goods sellers and sellers that sold low quality products. Subsequently in 2016, JD closed Paipai, the consumer-to-consumer (C2C) e-commerce platform it acquired from Tencent (read more here). Many of the sellers who were forced to leave Taobao and Paipai were attracted to and listed themselves on Pinduoduo.

Note: many unpurged sellers who sold cheaper, lower-quality goods on Taobao also moved to Pinduoduo as they found the Pinduoduo platform to be more lucrative. Over time, Taobao increased its focus on promoting high premium and/or high value products (including featuring T-Mall stores at the top of Taobao search results), with the platform lowering search rankings for sellers that had low quality items. Oftentimes, sellers of low quality products also had lower ratings from customers.

Also in 2016, Tencent invested in Pinduoduo's Series B funding round and facilitated the rapid expansion of Pinduoduo's group/social buying platform by allowing the sharing of Pinduoduo product links on WeChat, whereas competitor links from Taobao were blocked (see our related article on China's anti-trust crackdown here).

Note: as of Q1 2021, Tencent holds 15.6% of Pinduoduo's total shares.

In 2017, Pinduoduo tried to further increase its publicity exposure by sponsoring several popular entertainment TV shows. The company was able to penetrate a large proportion of residents in lower tier cities as well as the lower income demographic segment in China's first and second tier cities.

During the first quarter of 2017, Pinduoduo terminated its Pinhaohuo direct selling business and transitioned to a pure marketplace model. Specifically, Pinduoduo ceased to conduct direct sales of products but rather relied completely on third-party merchants to sell products on the platform.

Note: Pinduoduo started engaging in direct selling of merchandise again in 2020, albeit to a much lesser extent than before. We discuss more about this under "1P Initiative" in the Key Initiatives section below.

Pinduoduo went public on NASDAQ in July 2018.

The Concept of "Pin"

Pinduoduo's rapid growth can be largely attributed to the company's core concept of "pingou" (Chinese: 拼购), which Pinduoduo abbreviates and refers to as "pin". The literal translation of "pingou" is to "purchase by piecing together", and essentially refers to the concept of group or social buying mentioned above.

Pinduoduo concept
Source: Pinduoduo Prospectus

The Financial Aspect of "Pin"

Pinduoduo describes the concept of "pin" as an effective way to aggregate consumer demand that can be matched with batches of products produced in bulk by the manufacturer. Consequently, manufacturers can ship products directly to end consumers without the need to go through multiple layers of intermediary distribution.

The "pin" model gives rise to two important financial benefits for buyers and sellers:

(1) Consumers can benefit from lower prices for goods

(2) Manufacturers can gain exposure to a larger customer base in order to boost sales, while also potentially being able to obtain better prices than if they were to sell to intermediaries with superior pricing power

The Social Aspect of "Pin"

The social aspect of the "pin" purchase model specifically refers to the sharing of product links via social channels such as WeChat and QQ.

Pinduoduo identifies two key benefits related to this social aspect:

(1) The network effects arising from the sharing of links via social channels generate low-cost organic traffic to the e-commerce platform

(2) The social element of online shopping (i.e. the sharing of links with friends and family) fosters a more interactive and engaging experience compared with the traditional online shopping models where buyers have to take the initiative to log on to the platform and search for items

Note: we think that the social element of online shopping could also have the effect of encouraging consumption beyond what consumers might normally buy themselves, while products shared by people in a consumer's social circle might better suit their preferences than items that are suggested by a conventional e-commerce search engine.

As a whole, Pinduoduo's philosophy behind the "pin" purchasing model is that the financial and social aspect benefits to pingou increase the platform's consumer base, which in turn attracts more merchants and encourages merchants to offer more competitive pricing, and competitive pricing attracts even more consumers as part of a positive reinforcement cycle.

Targeting China's Forgotten Consumers

Pinduoduo's founder Zheng Huang writes at the beginning of the company's letter to shareholders that Pinduoduo was founded "when the China market accepted the status quo of the existing e-commerce landscape and thought its formative phase had come to an end". Indeed, industry incumbents Alibaba (the Taobao platform was initially launched in 2003, with T-Mall founded in 2008) and JD (online platform established in 2004) had played a dominant role in launching and shaping the formation of China's e-commerce industry, as both companies had benefited greatly from the rising income levels and growing purchasing power in larger cities as the Chinese economy boomed. However, much less attention was paid to the residents of lower tier cities and lower income residents of China's growing metropolises.

We think that two of Pinduoduo's most important success factors are that (1) the company saw a business opportunity in the lower tier cities that most people overlooked, and (2) Pinduoduo was able to effectively exploit its first mover advantage through an accurate understanding of consumers in China's lower income markets.