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Clark Boyd

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Pinduoduo: Everything You Need to Know About PDD, China’s Third-Biggest Ecommerce Site

The C2M model may change how we all shop.

Clark Boyd

Apr 28·10 min read

Pinduoduo is known as PDD.

Recently, it has appeared with much greater frequency in my news feed in this initialized form: PDD.

At first, I genuinely thought it was a new name for Sean “P Diddy” Combs and left it at that. Just one step from turning himself into a symbol, I assumed.

Then I saw that PDD was indeed that Chinese ecommerce site — the country’s third-biggest, no less — and I had another thought.

‘P Diddy won’t like this’, I thought. P Diddy will not like PDD taking up his air space at all.

So I looked Diddy up and it turns out he was sued in 2011 (unsuccessfully, and you’ll soon see why) for $1 trillion in damages for, among other things, “causing 9/11”. No joke.

I guess he has bigger concerns than minor name infringement by a borderline homophone.

With that important distinction clarified, let’s get down to it.

Pinduoduo: What do you need to know?

First, just gimme the facts.

  • Pinduoduo was founded in 2015 by an ex-Google engineer, Colin Huang.
  • Huang wanted to merge the strengths of Alibaba and Tencent in ecommerce and social media, respectively. “Neither of these companies understands how the other makes money”, Huang noted in an interview with Bloomberg.
  • PDD is NASDAQ-listed since 2018, when it was one of the biggest IPOs of the year.
  • Pinduoduo finished 2019 with 585.2 million active shoppers on its platform, which represented a sharp rise from 418.5 million in 2018.

Pinduoduo user stats.

  • It has a 7.3% share of the Chinese ecommerce market, behind JD.com (17%) and Alibaba (56%).
  • Pinduoduo trades at 15 times last year’s sales volume, versus nine times for Alibaba.
  • The company has increased investments in research and development, marketing, and staffing, meaning it still operates at a loss. Investors are, as in so many other cases, more interested in the growth rate of users and sales, for now.

Pinduoduo sales and operating losses.

  • Pinduoduo has been the prime beneficiary of the recent recovery in Chinese tech stocks. It is up over 50% in the last month, versus respective rises of 19% and 17% for Alibaba and JD.com.

How does Pinduoduo work?

Pinduoduo’s model is customer-to-manufacturer (C2M), cutting out all the intermediaries — except themselves, of course.

Users download an app (it is ranked third on the App Store, behind TikTok and WeChat), or they can use the PDD mini-app within WeChat.

The app’s users can secure group discounts on products by buying together in bulk, straight from manufacturers.

In the example below, the user can buy this infant formula as an individual shopper for ¥59 (about 8 USD), or they can club together with other shoppers and get it for ¥35.5 (5 USD) instead.

Manufacturers can have more control over their profit margins by reducing the intermediaries between them and the end customers. They should also be able to match their supply with demand more accurately, cutting down on waste.

Making a purchase on PDD works a bit like this:

- To make a purchase via Pinduoduo, shoppers form ‘teams’ and post product listings for their desired items, usually on WeChat.

- If you see something you’re interested in, you can join the team and help drive the price down.

- Of course, you will then want to share the code to get others on board to get an ever bigger discount, and so on.

- If your item listing gains an audience, it will appear in more users’ home feeds on WeChat.

- The ‘viral’ potential of social media is therefore essential to the success of this model.

OR:

Wait, this doesn’t sound all that new

Yes, the revelation that bulk-buying means lower prices will probably not shake you to your core.

Many consumers already buy in bulk, some at large outlets and others on a smaller scale through ecommerce sites like Amazon.

You may even recall the Groupon era, when we all went cuckoo for group buying hang-gliding lessons and all sorts of other discounted nonsense.

Where Groupon took a hands-off, anonymous approach to social commerce, PDD incentivizes shoppers to get involved and drive prices down themselves.

In essence, Pinduoduo uses the network effects of social media to give this age-old practice a 2020 makeover.

Last week, we discussed the difference between ‘social media’ and ‘social networking’. The former is asynchronous, intermittent, and not always that personal. Brands can broadcast to an audience that may or may not pay attention.

Social networking is about immediacy and interpersonal connection, using technology.

Think WhatsApp, Instagram Stories, and even Zoom. There is less opportunity to add that layer of polish before posting in these environments, which helps to foreground that elusive “human” element.

So, where does ‘social commerce’ fit into this?

Well, we typically think of ‘social commerce’ through the perspective of social media at the moment.

For example, ‘How can our brand get customers to buy stuff off us on Facebook?’, and so on.

Instagram’s new commerce features focus on removing friction in this journey, liberating us from our cash with increasing ease. The ‘social’ part just means that the purchase happens on a social media website or app, in most cases.

Pinduoduo is about using social networking to connect with like-minded buyers, with clear benefits to reaching out to as many people as possible.

They are also keen to stress that shopping should be fun. There are leaderboards, animations, and all the usual accoutrements you’d expect these days.

PDD depends on WeChat, that ‘everything app’ that dominates online life in China, for the majority of its traffic.

Notably, Tencent (WeChat’s parent company) holds an 18.5% stake in PDD.

It is a savvy move by PDD to integrate with WeChat to this extent and it is perhaps surprising that so few companies have managed to tie social media to shopping in this way.

Rather than seeing WeChat as a broadcast medium for ads, PDD identifies demand-side network effects to make their platform more attractive.

In other words, the customers do the marketing for them.

How much can you save on PDD?

The discounts are normally very significant.

Buyers can secure reductions of up to 90% versus standard retail price on everything from tissues to TVs.

PDD just invested $200 million is electronics retailer Gome this week, providing access to a whole host of gadgets and gizmos on the platform.

There has been an assumption in the past decade that Chinese consumers are willing to pay a premium to secure high-quality products, particularly in major cities.

The rise of Pinduoduo does not prove the opposite, as some have started to suggest; it is rather an indication of how complex and large the market is.

The expectation that low-price means low-quality is hard to shift, however, and PDD received complaints from a mammoth 18% of customers in 2018.

It has since increased its level of involvement as an intermediary between customers and manufacturers, with over 40 million suspicious links blocked in 2019, along with the removal of over 10 million listings. Many platforms, Amazon and eBay very much included, have struggled to maintain this balance between an open platform and quality control.

The aesthetic of the PDD app is pretty similar to Wish. It looks like a jumble sale and, given that the new version of the app offers no English translations, I could make neither hide nor hair of the whole thing. My opinion on this matter is, admittedly, of absolutely no consequence.

Either way, we can state with some confidence that PDD is well-positioned to cater for what will likely be a price-sensitive, post-virus age.

This is one reason investors view PDD as a relatively safe bet right now. People will still need to buy things; they just might think twice before paying an unnecessary premium.

The Average Order Value on PDD is significantly lower than on JD.com and Alibaba, which is one reason for PDD’s large investment in an electronics retailer this week.

As it stands, the PDD customer is likely to be female (70% of customers are women) and likelier to live in a “lower-tier” Chinese city than the average JD or Taobao customer.

That can certainly be a source of strength for PDD. In fact, JD and Taobao have tried to appeal to customers outside the major metropolises (where growth has inevitably stagnated), with mixed results.

PDD has just announced a $7 billion investment in rural China over the next five years, to create a “new infrastructure” for online retail and agricultural products.

This aligns PDD rather neatly with the Chinese government’s plans to modernize the country.

PDD’s competitive advantage is in its “C2M” model, which it can build into the rural infrastructure and entrench this advantage further.

How does Pinduoduo work with manufacturers?

This page on their website is very revealing.

Here are some choice quotes from the PDD website:

“We constantly provide merchants with consumer insights and preferences to help them tailor make products for their targeted customers.”

“By channeling analytics around consumer behavior and preferences, we hope to enable 1,000 brands to produce and sell products on our platform that are tailored to our users’ needs.”

“We facilitate direct sales between small-scale farmers and consumers by leveraging our insights on consumer preferences and aggregating demand to generate large order volumes for our farmer merchants.”

Where Amazon uses the data on its platform to create its own, high-margin products, PDD instead takes user data and packages it up for manufacturers.

Sounds great. So, who’s going to copy it first?

We can split the copycats into a couple of species, actually.

You’ve got your straight-up rip-off merchants, shameless in their attempt to trick us all into downloading their app instead. Yes, I did download many of these before I got to the real thing. In fact, was that just another copy? Who even knows.

Consider the challenge for this author, a beginner-level Chinese speaker (as in, literally started and then quickly gave up, today), trying to figure out which of these is real:

These imitators can mimic the look of PDD, but they don’t have the manufacturers on board or an ecommerce engine. They use affiliate links to point towards Taobao, normally.

PDD’s real innovation lies in its business model, and that is the element that its bigger rivals can mimic.

In fact, Alibaba already did.

The Taobao Special Offer Edition app has been a roaring success since its launch last month.

Given the clear appetite among Chinese consumers for this approach to shopping, there is room for more than one such app. Evidently, that’s a good thing, because there will be loads of them.

But what about in other countries?

We know that Facebook looks to WeChat to see which way the wind is blowing these days and it will have taken notice of PDD’s recent successes.

The fact that WeChat parent company Tencent owns a sizeable stake in Pinduoduo helps these two apps to play nicely together.

The bigger challenge in Western markets is that a variety of rivals is vying for the same position, albeit arriving from different directions.

Many of the same consumer demands are in place for a PDD-style app to take off, however. People are increasingly conscious of where their products come from, price is a big decision factor, and we are using technology to communicate in groups.

For example, this model could work well if people wanted to bulk-buy vegetables direct from producers, rather than buying the poor imitations we see in supermarkets.

As it stands, there are complex supply chains and inconsistent levels of demand, meaning we need standardized products that will last for as long as possible on the shelves. We end up with products that retain a vague essence of what their ancestors once were, at best.

The lemons I have seen would bring a tear to the eye of many a Sicilian.

Below left, a real lemon I purchased from the market. On the right, a lemon I purchased from my local supermarket.

To say the difference is stark is an understatement.

Huge companies like Amazon and Google seem to operate from a position of immovable dominance, but Pinduoduo shows that new entrants can make an impact by innovating the incumbents’ business model.

Alibaba is much bigger than PDD, but they are not competing on the same terms. Their size and scale means little if customers prefer the social approach to shopping.

The main challenge for Pinduoduo lies in sustaining this advantage when its rivals inevitably ape the customer-to-manufacturer model.

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