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E-Commerce Innovation Tech & Society

How to Understand China’s Social E-Commerce Giant

(Image: Shutterstock)

The U.S. has nothing like Chinese social commerce app Pinduoduo. It’s most similar to Groupon, but a lot more functional – like many mobile apps that’ve popped up in China over the past few years. Its business model could spread to the West and even eventually disrupt Amazon, Instagram and Pinterest.

Pinduoduo, which loosely translates as “much more together,” combines bargain shopping, gaming and social media. Its founder, Colin Huang, a Chinese engineer and serial entrepreneur who was part of the team that set up Google in China,  likes to describe his creation as a fusion of discount retailer Costco and Disneyland. If more people in China had heard of Home Shopping Network, he’d probably include that as well.

However you define it, the app has caught on among bargain hunters –especially in China’s aspiring middle class—and is fun to use. Here’s how it works: Shoppers select an item to purchase, and then invite friends, family and social connections to click and buy online with them. Prices drop as each new buyer joins in the team purchase. Gaming-type promotions such as one-hour specials, cash rewards for daily check-ins, discounts, lotteries and lucky draws are blended in to keep it entertaining and to encourage impulse shopping.  

Pinduoduo’s business model is creative and distinct, and has arrived as China has embraced consumerism and a mobile digital world.  China has nearly 829 million Internet users and about 783 million people on smartphones—the most in the world. China’s e-commerce market, also the world’s largest, is expected to amount to about $1.1 trillion this year. 

Pinduoduo is tapping into China’s aspiring middle class. (Photo: Shutterstock)

Within three years of the app’s start in 2015, the Shanghai-based startup went from zero to $278 million in revenues, attracted 300 million users and 1 million merchants, and sold $21 billion worth of merchandise.  And when Pinduoduo went public on Nasdaq in July 2018, it fetched a market valuation of nearly $24 billion. After a year of up and down trading, it sits only slightly above that now.

But the upstart mobile shopping app is shaking up China’s e-commerce market. Pinduoduo has surged to the number three spot, aggressively challenging first generation Chinese e-commerce contenders Alibaba and JD.com. They both sprang up 15 years ago. To counter the upstart, market leader Alibaba launched its own special deals site in China.

Pinduoduo’s social commerce approach has been tried in the U.S. Amazon dabbled for the past two years with a social shopping platform, Spark, but recently shut it down to focus instead on a tagline, #FoundItOnAmazon,” that influencers and friends were already using on Instagram and Pinterest.  A startup in the U.S. might be able to grab this space and win over consumers who enjoy bargain hunting, sharing sales tips and playing games with friends online at the same time.

“Everybody thinks that China’s BAT (Baidu, Alibaba and Tencent) are so big that it would be impossible to disrupt them, but there’s always a company in the garage that is going to come out and do something different,” says James Mi, an early investor in Pinduoduo as a founding partner of venture firm Lightspeed China Partners, based in Shanghai.  

Like Groupon, this Chinese shopping app is built on driving bulk sales of overstocked products with cheap prices – and it’s sometimes been criticized for selling poor-quality items that don’t work right or fall apart quickly. Best sellers include standard household items such as umbrellas, laundry detergent, tissue paper and lemon tea. The average sale is $6.

China has nearly 1 billion people on the Internet and smartphones. Its e-commerce market is expected to amount to about $1.1 trillion this year. 

In China, the app’s biggest appeal is in rural areas and people with relatively less income. As the Internet has spread from China’s mega-cities to the countryside, residents of more rural enclaves have taken to new forms of digital entertainment, and this discount shopping app has caught their attention.

Pinduoduo owes some of its success to building on top of another Chinese web platform, Tencent-owned messaging app WeChat. Teams form on WeChat to shop Pinduoduo’s apps, and payment is made on WeChat’s mobile payment feature. Tencent has an 18.5 percent stake in Pinduoduo.  Bulking up among China web players to leverage strengths and gain market share is not uncommon in China’s fast-moving and cut-throat tech markets.

The company generates revenues primarily from collecting fees for marketing services such as pay-for-search keywords and ad placements. The rest comes from vendor commissions, though they are just .6 percent. Like many fast-growth Chinese mobile startups, Pinduoduo remains unprofitable, with losses of $1.5 billion in 2018. It is now looking to move beyond search revenue in order to turn around its cash-burning business.

Huang, the company’s founder, feels the pressure of running the dynamic startup. On Pinduoduo’s opening day as a publicly traded company, he told IPO investors, “I hope our team wakes up feeling anxious every day, never because of share price volatilities but because of their constant fear of users departing if we are unable to anticipate and meet user changing needs.” Like other fast-moving, aggressive Chinese tech startups, a willingness to pivot quickly to meet or anticipate market shifts is part of the regular game plan.

Anyone even remotely involved in e-commerce anywhere in the world needs to pay attention to what happens next with Pinduoduo and its $25 billion valuation. Either this company—or an imitator—might spread this social spending model to other countries in Asia and elsewhere. It might help boost consumer spending and economic growth. Meanwhile, as China’s tech leaders keep expanding their ambitions and battle for dominance of key sectors, expect Pinduoduo to continue helping its ally Tencent putting pressure on Chinese e-commerce leaders Alibaba and JD.com.

Rebecca Fannin is the author of Tech Titans of China, published September 3, 2019.


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