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 (forthcoming).
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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.
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"
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.
China's Income Disparity
The differences in income levels between China's top tier cities and lower tier cities, as well as between the urban versus rural residents of China's most prosperous cities, are extremely large.
Chinese cities are categorized according to one of five tiers. As of this year, there are four first tier cities (specifically Beijing, Guangzhou, Shanghai, and Shenzhen), 15 new first tier cities, 30 second tier cities, 70 third tier cities, 90 fourth tier cities, and 128 fifth tier cities. Some cities can fluctuate between two tiers depending on the year of classification.
In the table below, we select several representative cities from each of China's city types and present (1) the city's average disposable income, (2) the disposable income for each city's rural area, and (3) the disposable income for each city's urban area. Unavailable data is left blank. We base our city classifications on the most recent 2021 rankings by Yicai (Chinese name: 第一财经), a financial news source similar to CNBC whose city rankings are the most widely used in China.
As shown above, the level of inter-city disparity in income is very large. China's annual average disposable income is RMB32,189, with a rural average of RMB17,131 and an urban average of RMB43,834. First tier cities have average incomes that are double this amount (i.e. Shenzhen) or even higher (e.g. Beijing and Shanghai), while there is significant income variation among new first tier cities and second tier cities. Cities with more developed economies such as Hangzhou (China's e-commerce centre where Alibaba is headquartered - average income RMB61,879) or Jinhua (a city in Zhejiang province that has a thriving SME industry - average income RMB50,580) tend to have substantially higher income levels compared with politically important regional hubs or provincial capitals that are not backed by strong economies like Xi'an (average income RMB35,783) or Kunming (RMB38,762). Third, fourth, and fifth tier cities have average incomes that are lower or substantially lower than the national average.
More interestingly, intra-city level income disparity can also be very substantial, with urban income levels in first, new first, and second tier cities equal to double their rural counterparts or even higher. Quite shockingly, averages for rural disposable income in first tier cities are even lower than the average level of income for second tier cities in the table, while rural incomes in new first tier and second tier cities are often lower than the average income in third and fourth tier cities. The differences between urban versus rural income levels are further magnified in the lowest tier cities.
Clearly, Chinese consumers are very dispersed in terms of purchasing power. Whilst Alibaba and JD have traditionally targeted the urban population of China's top tier cities, Pinduoduo recognized that China's rural majority was a potential market for the company to tap into.
The Lower Income Consumer and Value-for-Money
Undoubtedly, lower income consumers have distinctively different characteristics from middle and higher income consumers, with the biggest difference perhaps being price sensitivity. Specifically, lower income consumers are relatively more sensitive to price, and are often willing to sacrifice a certain level of quality as part of a trade-off in obtaining lower prices. Pinduoduo refers to this concept as "value-for-money" and emphasizes the sourcing of value-for-money products as a core component of its business model.
We think that the price sensitivity of lower income consumers and their prioritization of "value-for-money" in online shopping explain why social and group buying strategies were so effective in spurring Pinduoduo's rapid growth. Lower income consumers are more willing to devote their time to obtaining lower prices (via the sharing of product links), whereas consumers with higher levels of income may feel that social or group buying is not worth the opportunity cost. Moreover, the willingness to sacrifice quality for a lower price explains why sellers who were removed from Taobao were able to list and satisfactorily meet customers' demands on Pinduoduo.
Key Business Initiatives
In addition to its core business as a group/social buying platform for general merchandise, Pinduoduo also has a number of additional business initiatives related to agriculture, brand establishment, and the the direct selling of specific, in-demand but under-supplied products.
As an application of its core business model, Pinduoduo developed an "Internet + Agriculture" initiative to facilitate the direct sale of products between agricultural producers (i.e. farmers) and end consumers. The initiative improves overall supply chain efficiency and benefits farmers by generating higher demand for fresh produce and reducing the reliance on intermediate distributors, while consumers gain from lower prices.
To supplement this initiative, Pinduoduo launched its Duo Duo Grocery (Chinese: 多多买菜) service in August 2020. Duo Duo Grocery is a next-day grocery pick-up service where consumers can place orders for fresh produce on the Pinduoduo application, after which local farmer merchants will supply the ordered items to regional warehouses to be delivered to designated pick-up points for consumers the following day. Pinduoduo's role as a platform is to connect local farmers with local consumers and provide supporting services for delivery of the goods.
Pinduoduo also has an initiative called "Duo Duo Farm" where the company works with local governments and academics to facilitate the modernization of farming practices and improve production efficiency in rural China.
"New Brand" Initiative
At the end of 2018, Pinduoduo launched its “New Brand” initiative to help upstream suppliers, especially manufacturers, launch their own brands. Many manufacturers in China traditionally produced goods on a contract basis, meaning the same factories would be used to produce similar goods for a number of different brands. At the same time, these factories might also produce unbranded goods to sell locally. During its initial days, Pinduoduo hosted many unbranded goods sellers that were typically smaller manufacturers who lacked the capacity or resources to launch their own brand.
As Pinduoduo’s group/social buying platform grew, manufacturer-sellers on the platform were able to derive higher economies of scale from the large volume of customer orders, making it more worth the investment for the manufacturer-sellers to start developing their own brands. At the same time, with rising income levels and urbanization, Chinese consumers were also increasingly becoming brand-conscious, with a larger proportion of consumers developing a strong preference for branded goods that are expected to be of higher quality and consistency.
We think that the New Brand initiative is also part of Pinduoduo's attempt to "upgrade" the image of its e-commerce platform and reach out to relatively higher income clientele compared with the company's original customers. Pinduoduo's later years saw the platform featuring high premium products (and even promoting these during their 11.11 sales) including luxury beauty items and high-end electronics, which consumers would normally associate with T-Mall or JD. Featuring branded "value-for-money" items on the platform can be viewed as a strategy to boost Pinduoduo's image and attract new customers who might have previously felt skeptical about the quality of products traditionally sold on the Pinduoduo platform.
Since many of the brands launched under the New Brand initiative primarily produce low-value goods (e.g. household essentials), new customers could be more willing to try and place an order via the Pinduoduo platform to test these products' quality. Pinduoduo could use these newly branded, lower value products as a way to gain new consumer trust* in the platform, which might eventually encourage more customers to order higher premium items in the future. At the same time, branding products is also advantageous in attracting price sensitive consumers who would feel that they are still buying value-for-money goods but perhaps with higher manufacturing standards and better quality control.
*Indeed, Pinduoduo's management highlights in their earnings calls that one of the company's key priorities is to enhance user trust in the platform. While new user growth will naturally stagnate once a certain level is reached, increasing user trust can potentially boost existing users' levels of spending.
As of the end of 2020, Pinduoduo has worked with over 1,500 suppliers, launched more than 4,000 new branded products, and generated over 460 million cumulative orders as part of the New Brand initiative.
Although Pinduoduo fully transitioned to an online marketplace model in 2017 where third-party merchants could sell to consumers through the Pinduoduo platform, the company brought back its direct selling business (also called "1P" or "first-party" selling) in 2020. The new 1P business involves identifying products for which there is consumer demand but for which there are no available products yet on the Pinduoduo platform. Pinduoduo then temporarily sources these products for consumers to purchase until similar items are made available by third-party merchants.
In particular, Pinduoduo can use big data analysis to identify key search terms that users commonly type in, aggregate the consumer demand for similar products, and place orders with manufacturers to produce these specific products. For example, Pinduoduo realized that many consumers on its platform were looking for sensor trash cans where the trash can user can get the trash can lid to automatically open by waving their hand in front of a sensor. Pinduoduo then placed an order with a trash can manufacturer to have trash cans with this specific requirement produced for sale on the company's platform (source).
Pinduoduo does not provide data for its first two years of founding, although we argue that 2015 and 2016 data are not so significant in evaluating the company since Pinduoduo only completed the transition to its current business marketplace model in 2017.
Since 2017, Pinduoduo experienced rapid growth with significant increases in the number of buyers and merchants listed on the platform, as well as substantial growth in the number of orders placed and gross merchandise value (GMV) sold. As of the end of 2020, Pinduoduo has 8.6 million merchants and 823.8 million buyers who placed 38.3 billion orders on the platform, with a total GMV of RMB1.67 trillion.
We dissect Pinduoduo's overall business performance and financial standing, as well as describe and analyse some of the company's key marketing strategies and their effectiveness, in Part 2.
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