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Pinduoduo

Shopping together, for more savings, and more fun

Sector: Futurestore
Themes:

Pinduoduo is an innovative and fast growing technology platform that provides buyers with value-for-money merchandise and a fun and interactive shopping experience. The Pinduoduo mobile platform offers a comprehensive selection of attractively priced merchandise, featuring a dynamic social shopping experience that leverages social networks effectively

It is the second-largest online marketplace in China, and the world's leading "interactive" online retailer. It has pioneered several new trends including social e-commerce, team purchase and consumer-to-manufacturer (C2M) that have revolutionised online shopping in China. Founded in 2015 by Huang Zheng (aka Colin Huang), Pinduoduo has become the fastest growing tech company in the world.

Pinduoduo, less than five years old, is the latest extraordinary e-commerce business from China, an online shopping site that specialises in extraordinary discounts on everything from tissues to Teslas.

Pinduoduo’s success has turned its founder, Colin Huang Zheng, a 40-year-old former Googler, into China’s third-richest person. Explaining his vision for the company before its flotation on the US Nasdaq two years ago, Huang said Pinduoduo was a mixture of “Costco and Disneyland” that combined bargain products with entertainment.

What distinguishes Pinduoduo from China’s other e-commerce giants, such as Alibaba and JD.com, is that it uses social media. Buyers put details of products on sites like WeChat – China’s answer to WhatsApp with 1.2 billion users – to get friends and family to buy as a group. The bigger the group, the bigger the discounts available.

The result has supercharged Pinduoduo’s growth. It now has 683 million active users and 50m orders a day. In August 2020 its market value had more than doubled in recent months to $114bn (£87bn).  In just its fifth year Pinduoduo reported almost $4.5bn in revenues in the year to the end of March – almost half that of eBay, which reported $10.8bn in revenues last year.

Huang, who earned a masters degree at the University of Wisconsin USA, joined Google as an intern in 2004, aged 24, and then worked there for 3 years as an engineer, and then also worked with Microsoft. He founded Pinduoduo in 2015. He stepped down as CEO in 2020 after 5 years of rapid growth, handing over to new CEO Lei Chen, but remains chairman. He is Pinduoduo’s largest shareholder, with a 29.4% stake worth around $34bn.

But not everyone is impressed with the company’s business model. When Pinduoduo shoppers managed to pick up bargain-priced Tesla cars through a group-buying event on the site, the US electric carmaker at first refused to supply the vehicles. Tesla only sells direct to buyers through its website, cutting out dealers and middlemen.

The buyers did eventually get their cars, but the clash put a spotlight on the way Pinduoduo regularly offers customers cash subsidies in order to offer the discounts, which it then records as sales and marketing fees. As a result the company has never even come close to making a profit. In fact, these fees often outstrip quarterly revenues.

One analyst said “Pinduoduo’s discount model has powered its impressive growth story. The company has achieved massive user growth in the last two years, which it has prioritised over profits.”

Many tech companies, from Amazon to Netflix, have put growth before profits and investors continue to be happy with what they are seeing. Pinduoduo has pulled in $5bn from investors in four separate rounds of fundraising, including its flotation.

The company’s second-biggest shareholder is the Chinese web giant Tencent, which has a 16.5% stake and also has investments in companies including Universal Music, Spotify and Snapchat. Tencent also owns WeChat, which Pinduoduo exploits heavily to bring in sales.

Pinduoduo says “We are an innovative and fast growing “new e-commerce” platform that provides buyers with value-for-money merchandise and fun and interactive shopping experiences.”

“We pioneered and popularized a dynamic shopping experience through “Pin”, a team purchase format that seamlessly integrates social experiences with online shopping experiences. We have consciously built our platform to resemble a “virtual bazaar” where buyers browse and explore a full spectrum of products on our platform while interacting with one another. Using Pinduoduo, buyers could share product information on popular social networks and invite their friends, family and social contacts to purchase together, through which they not only enjoy the fun and excitement of discovery and shopping, but also a comprehensive selection of value-for-money products.”

The business makes most of its money from advertising and promotions by its more than 5 million sellers. They account for almost 90% of revenues, with sales fees low, given the wafer thin margins most sellers operate on.

Unlike Amazon, Pinduoduo holds no stock, products are shipped directly from the seller, who also has to cover shipping costs.

It has successfully tapped the super-budget end of the consumer market but its reputation has suffered from large numbers of counterfeit products being posted on the site, as well as customers complaining about issues such as delivery.

As a result the company is now also trying to cultivate an image as a destination for more premium products, gaining high-profile coverage for events such as the Tesla sale and offering big discounts on products from brands like Apple.

Pinduoduo describes its strategy in this strategic report, and in its fact sheet:

Our Vision

Pinduoduo’s day-to-day business decisions are guided by three core principles:

Build a mobile commerce platform that benefits all – Our pla6orm is built to benefit consumers, merchants, and partners by making high-quality, value- for-money products accessible. Pinduoduo’s user base spans China and mirrors the populaDon distribuDon of the country. Through our pla6orm, these users are able to access products that may have been previously unavailable to them. At the same Dme, through the process of demand aggregator and our Consumer-to-Manufacturer (C2M) initiatives, Pinduoduo helps reduce costs throughout the supply chain by driving greater volume of sales, benefiDng both our users and merchants.

Put people first — User satisfaction is at the core of everything we do. Our recommendaDon engine puts people first, and is centered on understanding users and their evolving needs through our innovaDve “team purchase” model. By focusing on users’ needs, we can generate more relevant recommendaDons for our consumers, aggregate demand, and drive customized producDon for manufacturers.

Maintain an open platform – People prefer to have more choices. As such, Pinduoduo seeks to grow while maintaining an open pla6orm for our merchants, logisDcs operators, payment processors, and other ecosystem players. By being open to all parDcipants in the market, PDD can concentrate its resources on the most meaningful investments – increasing user satisfaction.

Our Business Highlights

The “Pin” Model

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In this new mobile era, Pinduoduo is building a dynamic online community of merchants and consumers that mirrors the social interacDons consumers tend to have offline. The innovaDve “team purchase” model that Pinduoduo has pioneered leverages social networks such as WeChat and QQ so consumers can easily share product informaDon and shopping experiences with family and friends. When two users parDcipate jointly in a team purchase, they both get to enjoy a lower price than if they had bought it individually. This naturally incenDvizes users to share and invite their contacts to engage with them on our pla6orm. Pinduoduo can thus benefit from network effects that further sDmulate our buyer and GMV growth. As users interact more on our pla6orm, we are able to gain better insights into their shopping preferences and needs, and use that to show them more relevant products, driving a virtuous cycle of even greater user saDsfacDon and engagement. At the same time, these insights could be relayed to our merchants, to drive the creation of more tailored products for our users.

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Consumer-to-Manufacturer

As a pla6orm connecDng millions of merchants with users, Pinduoduo also sees an opportunity to transform the manufacturing supply chain in China by uDlizing the sheer volume of data and traffic generated daily on our pla6orm. Under the tradiDonal mode of retail, developing a new product ofen involves a lengthy process of market research, focus group tesDng, feedback through distribuDon channels and then large-scale producDon. Through our C2M model, factories can design and produce based on a large volume of anonymized user preference data provided by Pinduoduo, shortening the new product development process by 50%, such that new products can reach the market in a more Dmely fashion.

New Brand Initiative

Pinduoduo believes that as the manufacturer of the world, we will see many Chinese brands emerge as internaDonal brands over Dme. In December 2018, we launched our “New Brand Initiative” campaign, which aims to support 1,000 manufacturers in developing their own brands.

The pla6orm provides factories and manufacturers with big data analyDcs on consumers’ needs, comprehensive R&D planning on products, and accelerated IP registraDon with the government. This helps them to offer value-based products that saDsfy consumers’ ever-changing needs through customized producDon. Access to Pinduoduo’s large user base helps manufacturers to ramp up sales more quickly than convenDonal channels, helping them speed up the brand-building process.

IP Protection

From the first day, Pinduoduo has had a zero-tolerance approach to counterfeit products and we are one of the most stringent pla6orms when it comes to enforcing penalDes on counterfeits. We take IP protecDon very seriously and have employed both technological and human intervenDon to combat infringing products on our pla6orm.

Pinduoduo is the first e-commerce company in China to impose a 10x penalty on merchants found guilty of selling counterfeit goods, with the penalty being applied against the monetary value of the enDre batch of goods idenDfied to be counterfeit and then paid out as compensaDon to all buyers of these products. This is done regardless of whether these buyers actually complained about the products. We have also introduced sophisDcated onboarding procedures that all merchants are required to undergo in order to open a store on our pla6orm. With the latest technology in keyword idenDficaDon, image filtering, text and video imagery recognition, opDcal character recogniDon, and semantic analysis, Pinduoduo has developed AI-based models to screen product lisDngs on our pla6orm to idenDfy potentially infringing products.

Internet + Agriculture

Using Pinduoduo’s differenDated and personalized approach to e-commerce through our Distributed AI framework, we have developed an “Internet + Agriculture” iniDaDve that aims to facilitate sales between small-scale farmers and consumers. By analyzing a broader amount of data, Pinduoduo’s dynamic AI engine can understand consumers beQer over Dme, construcDng more robust user profiles to beQer match buyer demands, and provide product trend informaDon that was previously inaccessible to farmers. With our advanced data analytics capabilities, Pinduoduo is helping farmers to beQer understand user demand and leverage Pinduoduo’s unique model to quickly aggregate larger volume orders for their products.

This deeper understanding of consumers makes it possible for farmers to be less dependent on tradiDonal distributors, by allowing them to sell directly to consumers, thereby improving the overall supply chain efficiency and reducing costs. Through this initiatve, consumers can get fresher products at a lower price, while farmers earn more through lower distribuDon costs and larger orders. For farmers, this is addiDonal capital that can be reinvested in farming equipment and beQer pracDces to further improve production quantity and quality.

Interaction + Fun

Coupled with the “team purchase” model, we have added to Pinduoduo’s interacDve and fun shopping experience with the launch of our in-app game Duo Duo Orchard in May 2018. Through the app, users choose a virtual fruit tree (the choices vary depending on seasonality) that they need to tend to in order to grow from a sapling to a fruit tree. Once the user’s virtual tree is fully grown, they will receive a free box of real fresh fruit from Pinduoduo.

Over 60 million users log on to the game to play and explore each day. To earn water droplets for their tree, players need to fulfil a variety of missions such as shopping on Pinduoduo’s pla6orm, sharing products, and inviDng friends to join Pinduoduo. Players can also see how their friends’ trees are doing and either help them water their trees or “steal” their water droplets. Duo Duo Orchard is not only an effecDve channel for incenDvizing consumers to browse and purchase, but it also allows users to interact and enjoy shopping with friends. The acDvity of a user can thus generate positive knock-on effects by acDvaDng other users.

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