While I certainly doubt most of my readers are aware of “Pinduoduo”, this online platform managed to make its owner and co-founder, Colin Zheng Huang, the third richest man in China. Only behind Ma Huateng (Tencent Chairman) and Jack Ma (Alibaba Co-founder).
Pinduoduo is the leading Chinese App for social e-commerce, and the fastest growing app in the history of the Chinese Internet.
Let’s explore how a social-ecommerce managed to secure a position usually held by Tencent, ByteDance and Alibaba.
Pinduoduo was launched in 2015 by Colin Zheng Huang.The most interesting thing about the company is its revenue model. Pinduoduo is an online discount platform. A product worth $20 on Alibaba maybe available on Pinduoduo for just $1. The only condition is you need to find other buyers for the product so that there is a bulk order. And this model has worked out fine in the age of social media where knowing what someone else wants is an easy task. Also, factoring in is the excessive usage of WeChat for these purposes. Initially, the company bought products from suppliers and sold them to customers, however after 2017, it changed its way of working to simply become a middleman. Since 2017, the company simply gives sellers a platform to reach out to customers. It is this change that sparked an exponential growth in the company. To the extent that, by September 2017, it had 200 million active buyers.
How Pinduoduo Succeeded?
Pinduoduo captured a market that is often ignored by companies like Alibaba. While Alibaba and Tencent focus on the urban and educated crowd, Pinduoduo focused more on the lower classes and the upper middle class. This class holds a significant amount of number in terms of value and population both. Pinduoduo users are predominantly female, living in Tier 3+ cities. The company simply sourced fresh products like milk and brought buyers and farmers in direct contact.
A chart showing the % of discounts offered by the company on agricultural products
|Fruit Group||Deal Price||Market Price||Discount(%)|
|Oranges from Gongxi||23.9||59.9||60|
|Apples from Yantai||28.8||66||57|
|Pears from Xinjiang||13.9||39.9||75|
|Dragonfruit from Vietnam||31.8||88||64|
It eliminated layers of distribution and that worked out well for both- the customers and the company.
Pinduoduo plans to invest $7 billion (RMB 50 billion) over the next five years to develop infrastructure to help farmers sell their products online.
In fact, seeing the success of the model, other ecommerce sites too replicated the same formula.
What did Pinduoduo do different?
Pinduoduo managed to focus on one of the most neglected sectors and digitized it. Agricultural produce like vegetables, fruits and milk were not the focus of other e-commerce sites. When Pinduoduo began a special initiative namely, Duo Duo Farm Initiative in April 2019, hordes of farmers registered on the site. The success of the initiative was so immense, that it sold agricultural produce worth Renminbi 136 billion in the same year.
The average order on Pinduoduo is 6 USD, against 30 USD on Taobao/Tmall and 60 USD on JD.com.
The COVID-19 Impact:
Initially, the company suffered the same consequences as other companies throughout the world. Its stock prices went down $31.77 per share on March 18 following a market crash. However, in the third week of May, prices bounced back to close at a record of $68.70. This was a result of a shopping spree caused by people locked down in their houses.
In a statement by the company, Huang said,
“Covid-19 has unleashed powerful forces that are changing the way we live, work and play. It has compressed the years of the behavioral change and accelerated the adoption of online commerce at an unprecedented pace. Our mission has never been more relevant or salient in these challenging times, which is to provide a fun and engaging environment for people to shop together and get the best value for their money.”
The company said its average daily orders since May are close to 65 million, compared with around 50 million before the pandemic outbreak. PDD said that the company’s revenue rose 44% to 6.54 billion yuan ($916.63 million), beating estimates of 4.97 billion yuan, according to IBES data by Refinitiv.
Leading large cap e-commerce companies worldwide by 2022
|Amazon (United States)||19.7||15.7||13|
|Prosus* (The Netherlands)||15.7||12.5||9.9|
|eBay (United States)||8.3||7.8||7.4|
|Pinterest (United States)||–||48.9||21.3|
Rising problems for the Company:
A study by 86 Research based in Shanghai, said that an average user spends $50 on Pinduoduo per year. In comparison with $1,300 on Alibaba and $500 on JD.com.
In fact, net losses for the company have been rising too. In fact, the company is estimated to have suffered a loss of 38% per share on revenues last year. There are multiple reasons for this.
The first being that Alibaba itself has started a similar feature based on PDD’s model, Taobao Tejia, which allows customers to buy in bulk.
Secondly, the company is still not charging fees from merchants who sell their products on the website. It charges them for sharing information related to customer needs and demands. Unlike Alibaba, whose revenue model is based on ads and merchant fees too.
Thirdly, there is a problem of fake goods. According to a 2016 survey from China E-commerce Research Centre, Pinduoduo accounted for 13.2% of total consumer complaints filed against China’s top 25 online shopping platforms, with users reporting issues such as shoddy goods, rotten fruits and difficulties in getting refunds.
Why is Pinduoduo in the news?
Last week, following a surge in shares which increased his wealth by $4.5 billion, Colin Zheng Huang became the third richest man in China. He is now worth $35.6 billion following the 14.5% surge in stock prices. What’s also amazing is that he is one of the youngest persons in that list, at the age of 40.