Editor's Note: This post originally appeared on TechNode, an editorial partner of China-based TechCrunch
From Alibaba to JD, China lacks e-commerce power plants. Although the country's e-commerce market is highly consolidated, it is not impossible for startup teams to break this market as long as they solve the right problems for the right customer group.
The Chinese social e-commerce platform Pinduoduo has just proved this. The Shanghai-based company raised $ 1.6 billion this week through an initial public offering in the US, which turns out to be one of the biggest deals of the year. The company, which has reached 195 million users per month and managed to succeed in the highly competitive e-commerce market within just three years, is enjoying rapid success.
What is Pinduoduo and what did it do right?
Like Alibaba's Taobao and competitor JD.com, Pinduoduo is an e-commerce platform that offers a wide range of products from daily grocery to home appliances. Pinduoduos Twist is the integration of social components into the traditional online shopping process, which the company describes as the "Team Purchase" model.
By sharing Pinduoduos product information on social networks like WeChat and QQ, users can invite their contacts to form a purchasing team to receive a lower price for their purchase. The mechanism keeps users motivated and provides a more interactive and dynamic shopping experience. In combination with other incentives such as cash, coupons, lotteries and free products, Pinduoduo manages to acquire users at very low cost. Combined with the added satisfaction of making a good deal with your friends as a team, Pinduoduo soon became a viral sensation in China.
Extremely low prices are another compelling attraction of Pinduoduo. The discount is usually up to 90 percent, including bed linen from RMB 1
The company's bulk-selling model easily creates large orders for sellers and leaves them more room to lower prices. At the same time, Pinduoduo's app is designed to make this easier, an expert told local media: "The user interface of Alibaba Taobao is search-based and focuses on multiple product presentations, while Pinduoduo is more like a newsfeed, thus providing more attention to a single product and easy to create "爆 款" [ baokuan, means viral items]. Taobao has listed more products, but Pinduoduo focuses on fewer best sellers who attract more buyers. "
Pinduoduos C2B model allows to deliver directly from the manufacturers eliminates layers of distributors, not only reduces the price for buyers, but also increases the profit of the manufacturers. This approach is particularly effective for selling perishable agricultural and fresh products where the speed of supply and demand matching is critical.
Lesser known brands have been selected over known brands to eliminate any premium that comes from branding. In addition, the cost of advertising and marketing through the use of users on social media. The approach is both cost effective and effective. Through social sharing, users send product information to friends and groups with similar income and consumption habits. Viral marketing is a clever way to build the identity of all lesser known brands on its platform. Financially, the platform could offset some of the discounts with fewer marketing budgets.
Price and social features are not just the only way to Pinduoduo's meteoric rise, and finding the right user profile is the final piece of the puzzle.
Chinese mobile e-commerce platform director Chuchujie, Yang Lin, went to the heart of the problem in an interview with local media: "Taobao has over 500 million users, while WeChat has over 1 billion, the gigantic missing Group Between Two of China's Giant Apps are distributed in third- or lower-tier cities, mostly seniors, and this group, which has just recently gone online and relies on omnipresent WeChat as its primary source of information, is Pinduoduo's target group. "
Jiguang Research Institute Show Third-Level and Lower-Hierarchic Users Are Responsible About 65 percent of Pinduoduo's total user base, while JD users were half this in first and second cities and the rest of China. In addition, women account for 70 percent of Pinduoduo's users. They are responsible for family purchases and are more price sensitive. This guarantees more active sharing and purchases.
Consumer spending, a trend where affluent Chinese consumers are increasingly willing to pay for quality, has been China's e-commerce industry for the last few years Years dominated. Taobao and JD's globalization initiatives involving overseas quality products, the boom of cross-border e-commerce sites such as Red and NetEase Yanxuan and Kaola are all based on the background of increased consumption.
But the growth of Pinduoduo has sparked an argument focusing on whether the platform represents a consumer demotion. Perhaps the increase or decrease in consumption is not the main problem. It's just another testament to how big and segmented the Chinese market can be. Rising incomes could give some of the Chinese urban population the freedom to vote for quality, but a price difference of RMB 1 could be an incentive for their rural counterparts, which have so far been neglected by e-commerce.
Costs Performance is still the most important factor to consider for consumers. A higher price does not necessarily mean better quality or vice versa. The great potential in this often overlooked market attracts more competitors. Taobao launched Taobao Tejia, a special app for China's low-end users.
Pinduoduo did not invent the social e-commerce model. Groupon introduced the concept of group buying years ago. But it succeeds thanks to a new ecosystem consisting of WeChat super app, mobile payment infrastructure and mobile first user.
Pinduoduo's History and Milestones
Founded in September 2015, Pinduoduo is the fourth startup of Colin Huang, an ex-Googler who used to work on early search algorithms for e-commerce. His earlier start-ups included the electronic consumer goods Web site Ouku.com, Leqi, a marketing agent service for e-commerce platforms, and a WeChat-based role-playing game company.
Huang founded Pinduoduo's e-commerce and gaming experience with a vision to combine the secret of success of Alibaba and Tencent, the two Chinese Internet giants known for their e-commerce and gaming / social dominance, respectively , "They do not really understand how the other one makes money," Huang told Bloomberg.
Huang seems to be right about how the two industries can work together. Pinduoduo's annual gross domestic product (GMV) exceeded RMB100 billion ($ 14.7 billion) in 2017, which is approximately two years since its inception. To achieve the same milestone, Taobao took five years, VIP.com eight years and JD ten years. Pinduoduo now claims more than 343.6 million active buyers with an annual GMV of RMB 262.1 billion, or $ 38.5 billion.
A major turning point occurred in the third quarter of 2017, when the weekly active rate, penetration rate and open rate of the Pinduoduo app outperformed all of JD. According to Jiguang, it has achieved growth of up to 1,000 percent year-on-year compared to the previous year.
A steep growth course eased the financial resources. In 2015, Huang Pinhaohuo, a fruit-based social commerce platform, launched the team of its second startup Leqi. His gaming startup spurred Pinduoduo. Four months after Pinduoduo received a secret A round from IDG and Lightspeed China in March 2016, four months later, the company secured over $ 110 million in Series B financing from Baoyan Partners, New Horizon Capital, Tencent, and Other. In April 2018, Pinduoduo completed a new round of financing that raised $ 3 billion, an estimate of nearly $ 15 billion. With Pinduoduo's WeChat-based ecosystem, Tencent joined the round as a recurring investor.
Given the history between Pinduoduo and Pinhaohuo, the two biggest players in social e-commerce at that time, the two companies merged into one dominator.
Another bad sky in China?
"If you close your eyes and visualize the next level for Pinduoduo, it would be a combination of" Costco "and" Disneyland ", driven by a distributed network of intelligence agencies "Huang wrote in the stock market prospectus. Huang's comparison was thus interpreted as a combination of "value for money" and entertainment, but many wonder if and to what extent Pinduoduo can meet the founder's expectations.
Although Pinduoduo claims to have multiple channels at lower product prices, increasing product quality and counterfeiting still raises concerns about possible cost-effective and poor quality collaboration. The percentage of complaints on Pinduoduo is 17.87 percent, and the user satisfaction rate is only one star, according to the 2017 national user satisfaction survey of the major e-commerce platforms published by the Chinese e-commerce research center. Complaints are mainly focused on poor quality issues, slow delivery, misleading advertising, etc.
In addition to increasing domestic complaints, the Chinese shopping app in the US was hit by a trademark infringement suit shortly after filing a US IPO. In addition to Alibaba and JD's efforts to remove counterfeit goods on their platforms, counterfeit goods are flooding the emerging e-commerce platforms such as Pinduoduo and Weishang, according to Alibaba.
As Pinduoduo revives as a public company, the company follows the e-commerce giants in cleaning up the platform. According to the company's annual consumer protection report for 2017, the company has taken out 10.7 million problematic offers, blocking 40 million suspicious external links, which accounts for 95 percent of counterfeit good sellers on the platform. The company has set up RMB 150 million ($ 22 million) to settle disputes after the sale.
However, tightening regulation is causing more tension between Pinduoduo and its dealers on the platform. In June, 14 shopkeepers selling products on Pinduoduo protested under the company's premises, claiming that Pinduoduo had carried out improper product quality controls that damaged the owners' rights. Company founder Huang insisted that Pinduoduo's decision and punishment of the owners is just and fair.
Many also questioned the validity of entertaining features in Pinduoduo's value proposition. "We've found that some users find shopping on Pinduoduo very entertaining, due to the extremely low pricing and interaction between Weixin users," according to Research Institute 86 Research
IPO and beyond
Pinduoduo entered the NASDAQ market on July 26, earning more than $ 1.6 billion with a $ 60 billion valuation. However, shareholders should continue to worry about the company's fundamentals
Financially, the company is still in the red. Pinduoduo suffered a net loss of RMB292 million in 2016 and 2017 (US $ 43 million) and RMB525.1 million (US $ 77 million). Net losses in the first quarter of this year were RMB 201 million (USD 30 million). The net loss is expected to be expanded mainly through investments in branding and advertising. More than 88.4 percent of Pinduoduo's revenue of RMB 1.2 billion ($ 180 million) was spent in the first quarter for marketing purposes. This could be translated as a sign of a difficult traffic acquisition.
The most typical Pinduoduo users are price-sensitive women living in low-population cities. Dealers sell at a low price to appeal to this group. But how to sustain these users and their growth momentum is a big challenge for Pinduoduo in the face of rising product quality issues.
"The retention rate is a major challenge for Pinduoduo, which implies a potential slowdown in GMV, and Pinduoduo will have difficulty navigating to a premium product marketplace due to the demographics and brand image of its users," said 86 Research.