Breakdown of Pinduoduo’s Business Model to overtake Alibaba
When Pinduoduo’s CEO Colin Huang’s net worth of USD 45 billion surpassed Alibaba founder Jack Ma’s last month, the world still knew quite little about this new e-commerce heavyweight in China. Many researchers and entrepreneurs reached out to us with questions about their new group-buy business model. Specifically every one wanted to know about exactly how they are able to catch up with the big e-commerce boys in only 4 years since launch. So we decided to dig extremely deep about this company.
Since Pinduoduo went public on Nasdaq in 2018, there has been a strong voice in the market focusing on the criticism that some of the products being sold on the e-commerce platform is super low-quality that it is almost a joke. For example, the pictures of USD 0.01 rotten oranges that people received in the packages have gone viral, creating a sub-par standard company images for people that have not used the service. However the company has proven to be able to churn out unprecedented growth quarter over quarter:
Rocketship Growth in 2019
2019 full year GMV (Gross Merchandise Value): RMB 1.997 Trillion, 113% growth YoY.
Active users: 585 millions, with 167 million increase YoY. The quarterly growth of active users is 2X of those of JingDong and Alibaba.
2019 full year Revenue: RMB 30.14 billions (130% growth YoY)
2019 4th Quarter Operational Loss: RMB 1.34 billions (compared to 2.1 billions YoY).
In summary, the company has been growing much faster than China no. 1 e-commerce Alibaba and no.2 JD.com, directly challenging the incumbents that had taken 20+ years to build. In fact, there are some very interesting things that Pinduoduo has invented in the space of e-commerce that Alibaba and JD.com have openly and massively copied (we will cover that in the later part of this article)
Let’s take a deep breath and dive into our 3–week research of the Pinduoduo success. First we downloaded the App and experienced it first hand.
Yes, the experience shopping on this APP was like watching a thriller. We eventually paid for a bunch of things all under the RMB 1 New User Campaign. Things UNINTENDED but IRRESISTIBLE.
The Business Model Explained
The prerequisite for a successful APP is simply whether the business model works, and if the market is large enough for it. The strategy of Pinduoduo with low-price discounts as its core was to solve 3 problems:
- how to make merchants willing to sell at very low prices
- how to find the target user group on the buyer’s side
- how to connect the people and the goods.
1. Merchant side | Helping the Unloved Sellers on the Big Platforms
The early stage of the establishment and development of Pinduoduo was in 2015 and 2016 when the e-commerce field began to advocate “consumption upgrading”. The impact of this consumption escalation movement on consumers is irrespective of the impact on small and medium-sized businesses. The B2C model Tmall and JD.com have limited support for small merchants at the long tail, and the survival space and benefits of the merchants in Taobao’s tail are increasingly encroached upon. These small and medium-sized businesses that have been squeezed out and eliminated during the continuous upgrade are precisely the resources of Pinduoduo’s early merchants.
Merchants gradually gathered heard about Pinduoduo; new small and medium-sized businesses. How can Pinduoduo make this group of merchants willingly make a profit? First of all, most of these merchants are small manufacturers or low-end sellers that cooperate with small manufacturers. Most of the products sold are “white-brand goods”, that is, non-branded goods. Less intermediate circulation links mean lower intermediate costs and non-branded goods. There is no brand premium for the goods. Compared with the branded products on the market, the price is much lower.
Secondly, this is a new platform and new competitive opportunities. Many original waist and tail merchants have the opportunity to become head merchants on this platform, and the platform’s low-price strategy is bound to tilt its traffic resources to low-priced goods, so merchants Active profit making is the most effective means of competition in the new environment (compared to the complex operations of other platforms).
And what can Pinduoduo bring to these businesses? The new platforms and opportunities mentioned above are one aspect. It is also important. Pinduoduo can achieve a certain degree of mass customization to the upstream supply chain through the aggregation of consumer demand. A major difficulty for small and medium-sized manufacturers to survive lies in the uncertainty of production: Inadequate knowledge of market information makes it difficult for them to determine exactly what commodities they need to produce and how many commodities they produce. The large fluctuations in production also lead to high production costs (for example: the production line is suddenly more and less, suddenly stopped, and the manufacturer’s effective utilization of production resources is extremely low).
Pinduoduo gathers consumer demand and provides small and medium manufacturers with sufficient demand information. Based on this, manufacturers can make reasonable planning of production resources for a certain period of time. In turn, the reduction in production costs can further compress prices, thus forming a positive cycle.
2. User side | Targeting the Bottom of the Pyramid
The merchant has found it, and the next thing to solve is how to find the user. Huang Zheng’s understanding of Pinduoduo users is “price-sensitive users.” May wish to consider from two perspectives. The first is the group with low spending power, and the typical ones are the third- and fourth-tier user groups. Also from the beginning of the 15th and 16th years, smartphones have rapidly spread to cities below the third and fourth tier cities, and a large number of sinking users who have been taken into the mobile Internet have brought a huge wave of underutilized traffic benefits. The per capita disposable income of this group is lower, more sensitive to price, and the pursuit of cost performance.
With the further development of Pinduoduo, the user group is no longer limited to “Beijing Fifth Ring Road”, and the proportion of users in first- and second-tier cities has gradually increased. The reason is that most people’s pursuit of high-quality goods will not cover all aspects. In some scenarios, low-priced goods have great appeal. The scale of user scenario requirements for low-priced goods is actually enormous. If you can buy reliable products at low prices, users in first- and second-tier cities can also become loyal users of the products.
3. Connecting People and Goods | The Matchmaking
E-commerce is essentially to solve the problem of the connection between people and goods. The shopping scenarios and shopping guides adopted by traditional e-commerce can be roughly summarized into the following categories:
The difficulty of satisfying the demand with clear objectives, the demand with ambiguous objectives, and the goal with no purposeful loitering increases in turn. With the gradual saturation of the e-commerce market, how to better meet the user’s purposeless loitering needs, increase the user’s use time, and increase the user’s order rate have become the top priority. In addition to the usual promotional activities, relying on thousands of personalized recommendation algorithms to build scene-based channels, make efforts to do video graphics and other content, subdivide user scenario needs, and refine operations, including Taobao, JD. The direction of business platform efforts.
At this point, the practice of Pinduoduo is very different. If other e-commerce is using user interest preferences to guide users to place orders, Pinduoduo is using low-cost explosions to guide users to place orders. As long as the attractiveness of the low price is strong enough, the shortcomings of poor accuracy of product recommendations become very small-the user’s threshold is low enough, then the user’s interest preferences that need to be met to cross this threshold are simple enough. The basic shopping guide of Pinduoduo is roughly as follows: category tab + product recommendation, simple user demand screening through category tab, and then promotion of users’ purchasing desire through low-priced recommended products.
THE USER EXPERIENCE DISSECTED
This unique business model allows Pinduoduo to carve out its niche at the beginning, but its success depends on the excellent quality of the product itself. Interestingly, compared with the general e-commerce business-driven characteristics, Pinduoduo has strong product-driven characteristics, and excellent product design and gamification directly contributed to its success.
Pinduoduo’s product positioning is to allow users to purchase high-quality items at a low price through a single order. The above has explained that Pinduoduo has designed the category + personalized product recommendation features around the strategy of low-cost Specials.
Combined with the core gamification, the basic shopping process of a Pinduoduo user should be: Homepage-flip Category tab page (or click the recommended icon at the bottom)-look at the product recommendation list-view product details-initiate a single order-payment is successful. Let’s see how Pinduoduo guides users in this process.
ELIMINATING DISTRACTIONS TO MINIMIZE THE STEPS TO PURCHASE
By taking out the top search box they reduce the frequency that users leave the current browsing item. There are few homepage modules, and there are no various special channels and scene channels that other e-commerce platforms have learned under the first focus, functional entrance, and big promotion floors, but directly access the product recommendation list, so that the recommended products are on the first screen.
Swipe between Tabs to Replace Search
The category tab serves as a fixed top navigation bar, and users can swipe left or right to switch tabs. Category tab page: The category tab page is the product recommendation list under the second category, without the filtering function, all users can do is keep scrolling down the page.
The main purpose of the above two links is to use streamlined design to create a sense of scene when users visit low-cost hypermarkets, to attract users to continue to slide down on the product recommendation page, and finally to attract users to click to enter the detailed page. Afterwards, the core purpose of the page design is to guide the user to make orders quickly.
Constant Emphasis on Current Group Activities and Countdown
At the top left of the product map (after sliding down, in the middle of the top navigation bar), the positive user behaviors of other users’ initial orders, successful orders, five-star evaluations, etc., are continuously displayed on the floating layer, and the user endorsement is used to increase the user’s trust in the product. The purchase bar below shows the two buttons of separate purchase and initiation of a single order. Separate shopping sets a higher price, and uses the psychology of the user to take the advantage to guide the user to initiate a single order.
Quickest Way to Pay
The complete elimination of the shopping cart design shortens the user’s decision path drastically, because traditionally many users drop off during the checkout process.
The whole package defaults to free shipping, reducing user decision-making costs and guiding users to place orders quickly.
Pinduoduo Pindian (Group-pay) supports both stranger and friend lists. The advantage of the stranger’s billing is that the order is quickly formed, but the more encouraging way of the product is to initiate the payment of the bill and then share it with friends in the circle of friends. The purpose of the latter is to attract more traffic through social elements.
Taking Shopping to a New Level of Social
Of course, it is even more worth mentioning that what makes Pinduoduo stand out (and also makes it highly criticized) should be its various social fission gamification outside the main process of Pinjang.
The basic characteristics can be summarized as using discounts and cash stimuli to induce users to share and continuously spread in the user’s social relationship chain, so as to achieve the purpose of acquiring new users and activating old users.
At present, there are various social games on the platform as follows:
- Free item if group reach size goal: Invite new users to help, reach a certain number of people can get goods for free.
- Free bargains: Share and invite friends to bargain, and bargains to 0 yuan can get goods for free.
- One point draw gift: pay a penny to start a group and invite friends to join the group, all members will get a lottery chance after the group is formed.
- Help free group: start a group for free and invite friends to help pay a certain amount, and the group leader will get the goods after the group is formed.
- Receive cash every day: get a red envelope, open the red envelope by inviting friends, etc., users who get the full amount can get a cash coupon.
The rules of activities such as power-assisting, bargaining, and lottery are simple and clear, and the effect of obtaining traffic is significant. Now it has been used by major social e-commerce for reference. The self-help property of Gangbang is too strong, and the author doubts its online effect. This article mainly collects cash every day.
Random Cash Award via Red-Envelopes
There is a certain difference between the activities of getting cash every day on the Android side and the iOS side (price discrimination). Here we take the iOS side as an example for analysis. The basic business process is as follows:
Multi-level and multi-dimensional induced social sharing.
The total amount of red envelopes is huge, and users need to share multiple times to meet the conditions. The first amount of the user’s demolition is large (about 40% of the total amount), and the user’s excitement is used to quickly guide the sharing and dismantle the second amount to the user. The continuous amount forms a continuous sharing power. New users will get more money and old users will get less money, and guide users to take the initiative to pull new ones. If a friend has a red envelope activity, at the same time, they can also get the amount of their own, mutual benefit, and guide users to share with each other to form multi-directional communication; if there is no red envelope activity, the friend will send a red envelope to the friend, forming a new spread.
A 50 yuan red envelope can form a huge sharing chain, and the most powerful thing is that the amount is only effective if the conditions are met-so, continuous feedback and reluctance to sink the cost will make users find ways to start after the task To complete (of course, the chain of control tasks should not exceed the user’s patience limit); and if the user fails to complete the task, all the previous sharing is just to do the wedding clothes for the platform-the platform gains massive new users through the user’s sharing.
Cash from Red Envelopes can be Initiated by Anyone.
Pinduoduo also added some branch tasks in addition to the shared main task. One is to dismantle the whole red envelope, and the task can be achieved faster by grabbing the red envelope. The second is the lottery. Compared with the difficulty of removing the 50 yuan red envelope, the lottery must get a more convenient discount. The third is to open the red envelope by completing the single order, and to guide the user to place the order is the ultimate goal of the platform. The replacement and mutual promotion of the means (red envelope subsidy) and the purpose (guided order placement) are also subtle.
Key Challenges and Opportunities for Pinduoduo
While the company has invented the ultimate social shopping experience through its low-cost strategy + social fission gamification this precise strategy has also become the barrier to growth after it has reach the current scale. Founder Colin Huang has mentioned that their strategy is the “Costco+Disney model”.
Low Cost equals Low Quality?
The low-price strategy allows Pinduoduo to take over the low-end supply chain. The problems of counterfeit goods, counterfeit goods and inferior goods have become the deepest pains of Pinduoduo. For counterfeit goods, the platform can be rectified by strict review and severe punishment; for counterfeit goods, it can be rectified and guided both ways; but for inferior goods, it is subject to the small and medium-sized merchants’ own production capacity, not the platform can do it with a single effort Resolved quickly. This will inevitably become a difficult problem that can’t be circumvented on the development path of Pinduoduo-the pit that Taobao once stepped on. Does Pinduoduo have to step on it again at the same pace, or a new way?
Is Gamification Sustainable in the Long Term?
relying on WeChat’s huge flow welfare, the social fission gamification has made Pinduoduo’s traffic exponentially increase, but it also buried hidden dangers. First, these gamification are still mainly one-sided profit and can not achieve mutual benefit. It is essentially consuming the social currency of the initiator, and its viral spread has also caused many users to be deeply disturbed; second, its gamification introduces many advantages of gamification, but also brings a major disadvantage of gamification: it is difficult to guarantee long-term vitality. The attractiveness of users with constant rewards will decrease rapidly as the user’s frequency of use increases. This forces the game to continuously update, iterate and create, creating novelty and changeable rewards for users.
Opportunity lies in the C2B Market
through C2B, promote the upgrade of the low-end supply chain. The supply chain of small and medium-sized manufacturers is the foundation of Pinduoduo, but it also drags down Pinduoduo’s further upgrade. Mastering the supply chain is the core moat for e-commerce. To break through the supply chain, many efforts should be made to develop the C2B model. The so-called C2B is to mass-customize the supplier side after gathering consumer demand on the consumer side. The same goes for the ultimate models of Netease Yanxuan, Xiaomi Youpin and Beijing-made. It’s just that the two have different approaches.
As a result, the small manufacturers who originally pushed back the low-end supply chain have achieved the ultimate in single products. This can be seen as a unique form of empowerment of Pinduoduo to the supply chain, and also a more suitable way for Pinduoduo to guide small and medium-sized manufacturers to upgrade. The author believes that the main supply chain of Pinduoduo in the future may be in the form of one to several super strong products corresponding to one manufacturer. Of course, the introduction of high-end suppliers and brand companies should also be promoted, but Alibaba and JD.com’s Dashan are in front, and their conflict with the main station’s team play may be a difficult problem to solve gamification with weak sharing that emphasizes interactive interaction within the station.
Visit ChinaPotion Research Store