"If you buy a product from Taobao for Rmb29, you will likely get it for Rmb9.9 at Pinduoduo. And that includes delivery fee as well," a widely-circulated message on China's internet reads.
This message offers a simple explanation of how the young startup has so far managed to grow exponentially in China's lucrative e-commerce market – by selling products at heavily discounted prices.
Founded in September 2015, Pinduoduo is now China's third-largest online shopping marketplace by gross merchandise volume behind Alibaba's Taobao and JD.com. The application has more than 300 million users and is connected to over 1 billion users through Wechat, China's largest social messenger.
According to equity analysts, Pinduoduo is estimated to be worth about $15 billion, based on its latest round of fundraising in early April, in which Tencent and Sequoia Capital both participated. At that valuation, Pinduoduo ranks fifth among China’s biggest unicorns behind Didi Chuxing, Xiaomi, Meituan-Dianping, and Lufax.
The high-flying e-commerce site has a star-studded list of angel investors including Alibaba co-founder and former Taobao chief executive Sun Tongyu, NetEase founder Ding Lei, S.F Express founder Wang Wei and Oppo and Vivo founder Duan Yongping.
RISING OUT OF NOTHING
Its rivals were already left stunned by how quickly Pinduoduo was able to build an online shopping platform of over Rmb100 billion ($15.9 billion) in revenue last year – a milestone that Taobao and JD took five and 10 years to achieve, respectively. However, it is perhaps more amazing that it managed to do this in a market nearly fully dominated by Taobao and JD.
"We compete with Taobao in the same market, but for different consumption patterns," Huang Zheng, Pinduoduo's founder and CEO, said earlier this month.
By that, Huang means Pinduoduo's focus on low-cost purchases such as snacks, fruits, and daily necessities. Naturally, Pinduoduo's target customers are mostly the lower-income group in less-developed regions.
According to data analysis firm Jiguang, 65% of Pinduoduo's users are from third-tier cities and only 7.6% are from first-tier cities. By comparison, JD generates 15.7% of its orders from first-tier cities.
FORMULA OF SUCCESS
Pinduoduo has been pushing forward a consumer-to-business (C2B) strategy that differentiates itself from Taobao’s consumer-to-consumer and JD’s business-to-consumer model.
Under the C2B model, Pinduoduo operates as a group purchasing site that encourages customers to purchase in groups instead of individuals.
In fact, Pinduoduo literally means “many group purchases” in Chinese.
While in reality a customer can still buy products individually, the price of the product is generally double of what he could get in a group of five or more. As such, orders through Pinduoduo are mostly made by groups of friends, family members, or neighbours.
Huang said Pinduoduo is able to operate C2B because it only offers a limited variety of products for its customers.
“Taobao is unable to follow the C2B model because it literally sells everything,” Huang said. “At Pinduoduo, we don’t have a lot of variety [of products] but we can locate the customers that want these items.”
One apparent characteristic of Pinduoduo’s app is that it does not have the search function on its homepage. Users can only choose from a list of products on the app, but they can generally get the items at a 30% to 50% discount to other online shopping sites.
According to Huang, Pinduoduo is able to strike a lower-than-average price for customers because the orders always come in size. In practice, Pinduoduo first gets the bulk of orders from customers and then uses them to bargain with suppliers for lower prices.
Dubbed as the dark horse in China’s e-commerce market, Pinduoduo is seen as a disruptor in China’s e-commerce industry and its low-cost strategy has already alarmed the bigger players.
In March, Taobao launched a discount app that features mostly items below Rmb20 – a move that was widely seen as countering low-cost sites like Pinduoduo.
THE BIGGER GOAL
Huang, a former Google engineer, said Pinduoduo aims to apply artificial intelligence and machine-learning technologies to recommend products to its customers in the future.
“Group purchasing lets us understand our users and their preferences,” Huang said. “The big data we possess can effectively turn into customised recommendations through AI technology in the future.”
Pinduoduo has a team to analyse the data it collects everyday and turns them into customised recommendations, but Huang said this method is highly inefficient.
E-commerce giants like Alibaba and Amazon has already adopted AI for product recommendations, but Pinduoduo wants to take it a step further.
In the future, Huang hopes to conduct all data analysis through computers. He sees Pinduoduo as the e-commerce equivalent of Toutiao, the Chinese news aggregator that fully customises news selection through an AI application.
Currently, Pinduoduo makes revenue from commission charges. It hopes to expand its revenue stream through advertisements and by splitting revenue with suppliers in the future.