More people are now buying from Pinduoduo than from JD. The platform which initially started as a marketplace for discounted goods is turning towards branded products. Pinduoduo wants to cater to lower-tier city consumers and rural areas, which represent a massive market. Could their strategy threaten the current market dominance of established e-commerce giants?
What is Pinduoduo ?
Pinduoduo (拼多多) is a Shanghai-based e-commerce platform founded in 2015 by Colin Huang, a former Google engineer. When asked about Pinduoduo’s business model, Huang has compared it to Costco and Disneyland, because the app combines elements of entertainment and discounts. In 21 months, Huang built a $1.5 billion startup, making it the largest IPO of 2018 with an innovative business model that combines group-buying, social networking, and gamified user experiences.
The company uses what is called the “Social+” model, or “Social selling”, relying on social media to drive engagement and growth. In this case, Pinduoduo leverages social networking to grow its user base and includes social features to attract users and keep them engaged. On Pinduoduo, products are already available to users at a discounted price, but they get further discounts on products if they participate in group buying, by sharing the deals with their friends on WeChat and purchasing them together.
Pinduoduo vs Other e-commerce platforms
Although Pinduoduo only accounted for 6% market shares in the first half of 2018, the company is experiencing rapid growth and could benefit from the increasing price sensitivity of consumers, especially in lower-tier cities.
Its innovative business model has allowed a faster customer acquisition than JD.com and The Alibaba Group Holding, as existing customers were incentivized to invite their friends to get further discounts.
Traditional e-commerce players are facing increasing competition from smaller players. Similarly to Pinduoduo, Xiaohongshu is also a rising social commerce app, which combines entertainment and e-commerce. The app is described as an equivalent of Instagram and Amazon, as it encourages users to post pictures featuring products and tagging them with links redirecting to the e-commerce platform where the product is available.
Pinduoduo has successfully leveraged the Chinese digital ecosystem to achieve rapid growth in a short amount of time, by leveraging social media platforms and their active users to acquire customers, and creates incentives to return to their app through entertaining and gamified experiences.
What about Pinduoduo’s sustainability?
On one side we notice an increasing engagement of buyers and users of the platform and on the other a firm which is buying its growth thanks to heavy expenses.
Pinduoduo’s sales exploded on the fourth quarter of 2018, and marketing costs as well, overtaking the revenues generated. Despite this fact, investors made the value of the shares on the stock rise by 60% since the company’s IPO. Now the trendiest question that arises for investors is related to Pinduoduo’s growth sustainability.
Some analysts maintain that the sustained growth of the company’s revenues would be linked to the fact that the dispatched coupons offering discounts on future purchases would only be recorded as expenses once the buyer cashes them. This is what would make the company’s revenues artificially high.
On the other hand, the sustainability of its business model in the long run might be questionable as the platform generates revenues mainly from publicity but not from the products.
Some data also show that the penetration rate of third-tier and fourth-tier cities are saturated. So in order to sustain its growth, it seems that Pinduoduo will have to escalate its efforts to reach buyers from first and second-tier cities.
Even if investors seem to be quite enthusiastic towards the firm for questionable reasons, who knows what Pinduoduo’s future will be made of?