The Power Of Social – Pinduoduo’s Business Model

It’s impractical to argue against the influence of China on the world – both culturally and economically. China has been making the news for all sorts of reasons in the recent decades – from billion dollar companies to human rights violations – the country is growing rapidly, and penetrating into other countries as well.

From Alibaba to JD.com, even China’s ecommerce platforms are a cut above the rest. One such recent eCommerce platform, focusing on a rather unconventional niche, is Pinduoduo. The company is now listed on NASDAQ and is valued at $60 billion USD.

Pinduoduo went public recently, raising around 5.6 billion USD through its IPO, considered to be one of the largest deals made in recent times. The company has around 195 million monthly users and has emerged as a leader in the eCommerce space in just a little over 5 years. But there’s a lot more to it than just the numbers.

Pinduoduo: What You Need To Know About It

Just like Alibaba or jd.com, Pinduoduo is an eCommerce platform which provides a range of products, from agriculture-related home appliances to even ordering groceries on a daily basis. The Pinduoduo business model works on something called the “team purchase” business model.

Social networks like WeChat and QQ are integrated with the company, allowing you to invite your contacts and do a bunch of shopping together.

Image Source – ecommercechinaagency.com

You’d think one extra feature isn’t going to help much, but this mechanism opens doors to multiple purchases during a single trip. This is how Pinduoduo makes money while spending as little as possible. This is a great way to acquire users at a cheap cost. Pinduoduo became a sensation in China in no time.

Bengaluru-based Meesho, hailed as India’s Pinduoduo, has raised 300 million in their latest round, according to TechCrunch.

Selling to businesses through a C2B business model, Pinduoduo eliminates the need for businesses to go through several manufacturers to find the right one.

They can simply look to their phones for high quality products and the companies behind them. And that has been a revolutionary move for the $60 billion USD valued company. But it’s not the only reason. Let’s take a look at why Pinduoduo is successful at what it does.

Why is Pinduoduo successful?

One could point that Pinduoduo’s success can be attributed to its rapid adoption of social eCommerce through apps like WeChat. In the year 2017, Pinduoduo had roughly close to 100 million users. The next year, they jumped to a staggering 343 million users. Of course this isn’t all because of WeChat, but a significant portion of it is. Pinduoduo successfully tapped into WeChat’s massive user base – which is close to 1.2 billion people – and made swift changes to its marketing strategies, targeting a more socially active demographic.

The result? A $60 billion mammoth looking to offset the likes of Amazon in the coming years.

But that is just one of their defining pillars. Pinduoduo makes money by driving on pivots, and embracing changes faster than most giants. It realized that the agriculture niche can only make one so much money, and immediately shifted to more products and targeting more businesses.

Today, they sell everything from water hoses and irrigation equipment to branded shoes.

How does Pinduoduo work?

Social eCommerce is the backbone of Pinduoduo’s business model. It gives the company a crucial leverage in a cut-throat industry.

Colin Huang, founder of Pinduoduo, takes credit for understanding the gap between the number of people present on social media platforms and the people who are active on E-Commerce platforms, even though China has a large number of smartphone and internet users.

Pinduoduo was the result of Huang’s attempt to capitalize on a high-income opportunity by targeting customers at a very low acquisition rate.

This experience was given a much richer color with the concept of collective or team shopping. If you are a Pinduoduo user, you will be able to invite a friend through your social network contacts and make a team purchase, which of course gets you additional discounts than if you shop individually.

It resembles a Bazaar model, where a lot of people are attracted to make purchases in massive volumes for discounted prices. Profits both the customer and the business owner. It’s such a simple business model – so simple that it often gets overlooked.

Pinduoduo is smarter than just its discounts, however. It makes use of several small tactics to get the customer to buy in large quantities, and then keep coming back for more. The company has three primary insights that make the most of customers:

1. Increase impulse purchase with the help of social media integration.
2. Informed choices through a list of smart recommendations based on one’s network.
3. Providing validation to purchase through the live streaming feature.

This might look a bit of a stretch for an eCommerce company, but it creates the desired result for Pinduoduo, and that’s why the company is deciding to stick with it. Analyzing a person’s buying history, with the data of whom and why they make these purchases – it is a powerful tool. One that every eCommerce business should be looking to capitalize on.

How is Pinduoduo making money – The Pinduoduo Revenue Model

In 2019 PDD had acquired 585.2 million active buyers and they all have made at least one purchase on this platform during that year. jd.com had 362 million in Chinese E-commerce market faces during the same period, and having started in 1998. It just proves Zerodha founder Nithin Kamath’s advice: 

It’s no longer about the big beating the small, it’s about the fast beating the slow.

But for all the numbers and the growth, is the company making money? Is Pinduoduo profitable? And if so, then how? Let’s take a look.

At its heart, Pinduoduo is an eCommerce company. It makes money through commissions on the products it hosts on its platform. Business owners gladly agree to Pinduoduo’s percentage cuts (which have not been made public for some reason), because they get more eyeballs on their products than if they were to go to Alibaba or jd.com. This is also because not everyone can afford to pay heavy prices to get their products into the market.

If we look at it in terms of market share, PDD is the third largest E-Commerce player in all of China, right behind Alibaba and jd.com (but not for long). The smaller Chinese cities are where a large part of the PDD users come from. This is because of the price consciousness that these customers bring with them. jd.com and Alibaba usually dominate in the tier 1 cities in China.

Last year the company disclosed that 45% of its gross merchandise value had come from first and second tier cities. That means that 55% comes from tier three cities or below. GMV refers to the total value of all orders for a product and the services placed on the Pinduoduo mobile platform. This shows how low income businesses with quality products find Pinduoduo a far more reliable solution than Alibaba. And that is a major winning point for Pinduoduo.

Not everything is rainbows and sunshine, however, since Pinduoduo is still unprofitable. The company is shedding a lot of money on growing at a rapid rate, and investors are getting skeptical about this. Growth is essential, but grow too big too fast without making a profit for your investors, and things won’t be good for long.

But optimism is key with tech startups. We imagine Pinduoduo will come up with a more sustainable business model in the near future. Will it hold its own against the tough competitors in the meantime is the real question.

Pinduoduo’s Competitors

Alibaba and JD have succeeded in capturing a majority portion of tier 1 and tier 2 cities. Apart from these two mammoths, we also have Sulekha, eBay, Wemakeprice, and many more smaller businesses vying for the top spot. Pinduoduo has a really tough battle in tier 1 and 2 cities, so it’s understandable why the company is focussing so much on tier 3 cities. But will that be enough?

Alibaba’s Taobao is now focusing on capturing a position in the low-tier cities. Even JD released an application called Jingxi – which can integrate seamlessly with WeChat to compete with PDD.

Needless to say, social eCommerce is a tough space to conquer, and Pinduoduo is going to have a difficult time in the days ahead.

Fortunately, it has the capital to make key pivots and make greater innovations, owing to its investors. Let’s find out who these are.

Pinduoduo Investors & Founders

Colin Huang, also known as Huang Zheng is Chinese billionaire businessman, and founder and CEO of Pinduoduo. Huang is also the owner of at least three other limited liability companies, owning 7.7% in between them. He founded the company in 2015 and the company reported a revenue of 1.4 billion Yuan in the year 2017, totalling up to $280 million USD.

Suggested Reading : Colin Huang exits board of Pinduoduo’s China operating body

PDD, apart from being a public company, also has three lead investors, and a total of 11 other investors. Boyu Capital and Hillhouse Capital Group are the most recent investors. Gaorong Capital, Sequoia Capital China, Tencent, Cathay Capital and Cathay Innovation are the other big players in Pinduoduo’s $60 billion USD empire.

Conclusion

Social eCommerce is a powerful weapon, and data is an absolute game changer. The Pinduoduo business model has been building on this very aspect, bringing in more customers with interactive experiences, capturing data that is very attractive to manufacturers.

However, what Pinduoduo is doing is not anything out of the box, or completely new. But it’s use of capital and clever pivots to adapt to the changing marketing trends are what give Pinduoduo an edge over the likes of Alibaba and JD. Companies like Amazon are sure to try and get their hands on China in the coming years, and that will create a massive battle for companies already eating each other out in the market. What Pinduoduo will come up with then is anybody’s guess.