How Pinduoduo Became the #2 eCommerce Marketplace in China

Some buzz has arisen lately among watchers of Chinese eCommerce about the scrappy upstart marketplace Pinduoduo. According to some reports, it has overtaken JD.com as the 2nd largest eCommerce website in China, behind only Alibaba.

Is this true? Yes and no.

Pinduoduo has risen to become #2 in terms of daily active users, but in terms of revenue and gross merchandise volume (GMV), it is still lagging behind. In 2018, JD brought in $244 billion in GMV and $67 billion in revenue, dwarfing Pinduoduo’s $69 billion GMV and $2 billion in revenue. Today, Pinduoduo is still in the red, despite its monumental 379% year-over-year revenue growth from Q4 2017 to 2018.

Why isn’t Pinduoduo profitable yet? Several issues are at play, including quality control and regulatory troubles, aggressive growth-focused spending, and a low take rate (the company earns revenue mainly from transaction fees).

Nonetheless, the meteoric rise of Pinduoduo is noteworthy. Its aggressive attempts to expand the niche market it has carved out, namely the lower-income rural regions of China, is keeping China’s top eCommerce players on their toes.

Pinduoduo’s Birth and Quick Rise to Prominence

In 2015, former Google engineer Colin Huang launched Pinduoduo with the vision of filling a gap left by China’s eCommerce duopoly, Alibaba and JD — the fusion of mobile shopping with an “entertaining” social networking scheme.

Huang brings to bear a professional and entrepreneurial background steeped in both eCommerce and social gaming, and his instincts turned out to be bankable. Pinduoduo is the fastest-growing eCommerce startup in China’s history, achieving unicorn status just 2 years after its launch. It reached a GMV of nearly $15 billion by 2017, a feat which took Alibaba’s Taobao marketplace and JD.com 5 and 10 years, respectively, to accomplish.

The startup’s quick growth attracted major investors, including Lightspeed China, Baoyan Partners, and Tencent, which runs the QQ and WeChat channels that Pinduoduo leverage to great effect. Pinduoduo went public on the NASDAQ in mid-2018 at a valuation between $20-24 billion, while Alibaba and Tencent were in business over a decade before making their IPOs.

With nearly 420 million active buyers and 135 million daily active users, Pinduoduo is giving the other eCommerce giants pause, despite their persistent early-stage challenges.

The Value Proposition: Social eCommerce on a Budget

Pinduoduo brings something unique to the world of Chinese eCommerce. The eCommerce startup’s novel “team purchasing” model is attractive to the more rural, lower-income demographic that makes up more than half of Pinduoduo’s user base.

Items sold on Pinduoduo’s site are budget-friendly, ranging from household groceries and clothing to cosmetics and electronics. Single purchases are possible, but by purchasing in bulk with friends or family, Pinduoduo users get discounts of up to 90%.

A user can recruit others for a group purchase via WeChat, QQ, voice chat, or a few other means by sharing product information from the Pinduoduo site. The third-party sellers set a minimum group number for bulk orders; if a customer group hasn’t formed within 24 hours, the sellers will cancel the transaction.

Pinduoduo further incentivizes social sharing and bulk purchases by rewarding loyal users with free products, cash, and other perks. This often creates “viral” effects that drive up purchasing activity.

The interface is more similar to a Facebook newsfeed than an Amazon-like digital storefront. Users can log in at any time to see products that the AI engine has tailored specifically to them, and quickly get a group together to score great deals.

A Huge, Expanding Market in Rural and Lower-Tier Cities

Pinduoduo owes much of its success to date to the underserved audience they’ve tapped into. While some relatively young, affluent city-dwellers are starting to catch on, the platform has seen its highest rates of adoption outside of the bigger, wealthier urban centers like Beijing and Shanghai, where many of Alibaba’s and JD’s users reside.

Pinduoduo’s user base is concentrated in smaller cities and rural regions, and are relatively new to the internet. The internet infrastructure that exists is largely built on WeChat, to which many rural and “lower-tier” citizens turn for information, social networking, and other needs on a daily basis.

In addition to having lower incomes and less formal education on average, Pinduoduo users tend to skew older and female. Since many of the older women are charged with caring for a whole household, Pinduoduo’s bargain-priced group purchasing model has garnered broad appeal among the demographic.

Going by the common classification of China’s municipalities into “tiers” of socioeconomic activity, about 60% of Pinduoduo’s users come from cities in the third-tier and lower, creating huge opportunities for the startup. While Taobao’s penetration rates max out at 4% in Tier 3 and 4 cities, Pinduoduo has seen 21% and 35% penetration rates in those areas, respectively.

An Aggressive Spending Strategy

Pinduoduo is burning through cash, and its huge expenditures on R&D, marketing, and corporate infrastructure are making some investors nervous. But with its quest to raise $1 billion shortly after their IPO, Pinduoduo appears to have two main goals in sharp focus: expanding its user base and reforming its brand image.

The company has subsidized over 100 hand-picked brands in order to improve customer experience in rural areas. It’s a cogent response to increasing incomes and demand for high-quality imported products across China, as part of the goal was to push out rampant counterfeiters selling “unbranded” goods. It also marks Pinduoduo’s bold entry into the $1.3 trillion Chinese cross-border business.

The company has also launched an ambitious program to build 1,000 plantations in southwestern and northwestern China, furnishing local farmers with technological and business-building resources. This will put specialty farmers in front of millions of potential customers, giving local agrarian economies a major boost.

The biggest players are paying keen attention to Pinduoduo’s moves in the formerly neglected lower-tier markets. In March 2018, Alibaba launched Taobao Tejia to offer bulk discounts on already-cheap products, a direct shot at Pinduoduo. JD similarly launched a group-purchasing service a few months later. And while Tencent is a major investor in Pinduoduo, nothing is preventing them from launching a rival eCommerce business targeting the same consumers.

Time will tell whether Alibaba’s and JD’s bets will pay off, or whether Tencent and other Chinese tech giants will launch a serious offensive.

Will Pinduoduo Cement Its “Top 3” Position?

The startup has achieved striking success in just a few years, but its long-term path to profitability is questioned by many, and it still has some issues to contend with. Nonetheless, Pinduoduo has created a new normal in untapped markets and, as per CEO Colin Huang, is “not afraid” to invest in its future. Can Pinduoduo expand from its main successful platform into a successful platform conglomerate? We will see what the future holds.

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