Alibaba’s Worst Nightmare: Pinduoduo Becoming the No.1 E-commerce App in China

Have you ever used Pinduoduo?

There is a wide variety of e-commerce start-ups in China, but why is Pinduoduo suddenly so popular ?

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It is because it has a large user base? Public data show that Pinduoduo has already attracted over 300 million users even though it is less than 3 years old, and its monthly gross merchandise volume (GMV) has even exceeded that of JD.com.

Is it because it covers a large geographical area? According to Jiguang, a big data service provider in China, the penetration rate of Pinduoduo in Chinese internet users located in first and second tier cities is about 55%, while its penetration rate in third and forth tier cities are 21.38% and 35.34% respectively, exceeding Taobao mobile app’s 20.31% and 31.50%.

The fundamental reason is, as obvious to both the market and regular consumers, this e-commerce app which grew in an area where e-commerce giants like Alibaba and JD.com thought was too insignificant, has created a new e-commerce model and grabbed a significant amount of market share. It is seen as the black horse with a potential to overturn the entire industry.

“Steven Jobs did an advertisement for Apple in 1997 in which he said: ‘You can quote them, disagree with them, glorify or vilify them. About the only thing you can’t do is ignore them.’” Founder and CEO of Pinduoduo Huang Zheng said.

How did Pinduoduo grow so fast?

The history of Pinduoduo:

• September 2015 was the month of Pinduoduo‘s official launch. It received 8 million U.S. dollars of angle round investment. Their angel investors include Wang Wei of S.F.Express, Ding Lei of NetEase, and Duan Yongping of OPPO and Vivo.
• In July 2016, Pinduoduo received over $110 million in Series B financing, and Tencent was on the list of its investors.
• In September 2016, Pinduoduo boosts over 100 million users and more than 1 billion yuan ($159M) of GMV per month, with over 1 million orders being placed everyday, close to the number of users on the established e-commerce platform Vip.com (唯品会).
• In the third quarter of 2017, a huge turning point occurred when the weekly active rate, penetration rate, and open rate of the Pinduoduo app all surpassed those of JD.com.
• In October 2017, Pinduoduo‘s GMV has reached 10 billion yuan ($1.59B), which was 5 times the 2 billion yuan ($317M) GMV at the beginning of 2017. It took JD almost 6 years to reach this number while Pinduoduo did it in 2 years.
• In April 2018, Pinduoduo completed a new round of financing raising 3 billion U.S. dollars at a valuation of nearly 15 billion U.S. dollars, and Tencent was the lead investor.
• At present, the number of Pinduoduo users has exceeded 300 million, behind only Taobao and JD.com who has 540 million and 300+ million respectively. It has also been speculated that its GMV has reached 40 billion yuan ($6.35B) in January 2018.

Main reasons for the rapid growth of Pinduoduo:

1. “Social Shopping”

WeChat is the best channel for operating Internet-based products as it is the first product in China to reach a monthly active user base of over 1 billion. Pinduoduo was popularized through incentivized group purchases at low prices with WeChat friends through social interactions on the WeChat feed named WeChat Moments.

In simpler terms, Pinduoduo uses the Groupon business model where users can receive a group discount for purchasing as a group. For example, if a piece of clothing is originally priced at 58 yuan ($9.2) on another platform, you can buy it for a group discount price of 39 yuan ($6.2) on Pinduoduo. Users share their Pinduoduo product link with their WeChat friends, and if there isn’t enough interest, then the purchase will not take place.

The lure of Pinduoduo is not its low prices, but the satisfaction of getting a good deal.

It is due to this desire for a good deal that people would share Pinduoduo product links to their WeChat groups and WeChat Moments to complete a group purchase. It was through this process that Pinduoduo spread like wild fire.

In 2016, when people didn’t think it was impossible to exponentially grow user traffic, Pinduoduo accumulated one hundred million users through the above method.

2. Driven by WeChat, But Not Solely Reliant on WeChat

After Pinduoduo harvested its first batch of users on WeChat, it began to direct users to its WeChat mini-program and their mobile app.

At the Tencent Global Partners Conference in November 2017, Pinduoduo shared that it has attracted over 100 million users and achieved more than 20 billion yuan ($3.18B) of monthly turnover through WeChat.

In February 2018, Analysys.cn released the list of Top 100 WeChat mini-programs, and Pinduoduo ranked third in the number of users.

The amount of actively users on their mobile app also shows a stair step pattern. For a long time in the fourth quarter of 2017, Pinduoduo ranked first among all e-commerce apps in the App Store in China and second among all apps.

3. Targeting The Emerging Market

After Pinduoduo became viral, some media asked whether what Pinduoduo is doing represents consumption downgrading in an era of consumption upgrading where people are seeking better and more expensive product with an increase of income in China.

Not necessarily.

A statistical bulletin on National Economic and Social Development released by the National Bureau of Statistics of China in 2017 shows that the median of national average disposable income per capital is 22,408 yuan ($3558.8), while the median of rural average disposable income is 11,969 yuan ($1900.9). The above numbers are all annual figures, which means that the average Chinese citizen has around 1800 yuan ($285.87) of disposable income per month, while the rural resident has less than 1000 yuan ($158.82).

Consumption upgrade doesn’t necessarily mean an increase in the price of good bought, value is still the most important factor to consider for consumers. A higher price tag does not necessarily represent consumption upgrade, and a lower one does not necessarily mean consumption downgrade.

To understand Pinduoduo, we must understand the users behind Pinduoduo.

Comparing Pinduoduo and JD.com‘s user distribution, we see that 65% of Pinduoduo users are from third tier cities or more rural areas, while half of JD.com users come from first plus second tier cities, and half from the rest of China. Pinduoduo has achieved unprecedented growth by targeting the low-income population who are also new internet users with its value game.

Additionally, 70.5% of Pinduoduo users are women, over 57% are aged between 25 to 35. This group consists mainly of newly married women with a responsibility of budgeting for the family and Pinduoduo helped them complete rounds after rounds of group discounted purchases.

For entrepreneurs in the new economy era, their product must segment a large percentage of the population. China’s middle class is growing, regular folks make up majority of the population. For these folks, bang for the buck is the number one key to their wallets.

The Boston Consulting Group (BCG) estimates that by 2021, China’s consumer market will reach $6.1 trillion, with an increase of approximately $1.8 trillion which equivalent to the size of the entire U.K. consumer market in 2021. The majority of this increase will come from outside China’s first-tier cities.

According to Jiguang, the penetration rate of Pinduoduo‘s app has increased from 1% from the beginning of 2017 to 19.37% at the end of 2017. Maybe these numbers are the true reflection of Chinese consumption market.

4. More profit for the merchants

In 2012, Taobao Mall’s name change to “Tmall” was important news in the field of e-commerce in China at the time. This was also the beginning of their elimination of the low-end market. After the name change, Taobao began to focus more on quality testing, directing less traffic to low-quality and low-price goods. Merchants of lowe-end products were hit massively.

According to a report by the Caijing magaine, less than half of the 8 million sellers on Taobao receive real orders.

In addition, the high cost of advertising and buying keywords made it difficult for small business owners to survive. Today, operation and advertising costs could account for nearly 30% of the price on platforms like Taobao and Tmall.

Meanwhile, Pinduoduo attracts merchants by charging zero fees for selling on their platform. Advertising is achieved through users sharing to social media. As the number of Pinduoduo users grows, the app has formed an ecosystem of user-generated product promotion, allowing merchants to reach the 300 million users directly.

The survival needs of the mid-tail merchants are therefore satisfied.

According to Pinduoduo‘s data, in the course of its two years of development, nearly 1,000 factories producing to sell on Pinduoduo have been hatched, with order volumes that have grown exponentially.

It was then stories such as “Girl born after 1980 achieves 5 million yuan in sales after four months on Pinduoduo”, and “Selling 260 million packs of napkinsin two years with three cents of profit per pack” began to appear on the news.

The quality of cheap goods

The rapid rise of Pinduoduo is not accidental. It is a special event that occurred at a special period in time and is not replicable. However, while it has brought large volumes of traffic in a short period of time using the group discount purchasing model, it is also being questioned for a possible “low-cost and low-quality” association.

According to the 2017 National User Satisfaction Survey of Major E-commerce Platforms released by the China E-Commerce Research Center, the percentage of complains on Pinduoduo is 17.87%, and the user satisfaction rating is only 1 star. Some users are mainly dissatisfied with the poor quality, speed of delivery, inconsistencies between product and photo, and failure to receive refunds after waiting for a long time.

To address these problems, Pinduoduo set up a consumer protection fund of 150 million yuan ($23.8M) to help consumers deal with after-sales disputes and claims. Pinduoduo also took off the shelves 10.7 million goods suspected of infringements in the past year, and intercepted 40 million links involving infringements throughout the year.

How can Pinduoduo transition from traffic and user growth to growth in the quality of goods? A complete transformation awaits Pinduoduo now that it has raised $3 billion in the last round.

According to an interview with the CEO Huang Xin, the repeat purchase rate is now the top internal operational indicator of Pinduoduo. “We do not want growth at the moment, I actually want to lower the GMV growth rate.”

It is clear to Pinduoduo that once its traffic reaches a certain threshold, there will be no more increases. How to keep valuable users and find more revenue streams is key to the success of Panduoduo’s upcoming transformation and their success overall.

Jack Ma’s Fear of Pinduoduo

The craze for Pinduoduo has brought pressure onto Taobao.

According to the data from QuestMobile, 50% of the users who uninstalled Taobao in December 2017 all moved to Pinduoduo, and 78% of the users who uninstalled Pinduoduo have flown to Taobao. Taobao and Pinduoduo has gradually formed a subtle relationship where they became replacements for each other.

“Though Alibaba is gigantic now, it has always been vigilant. It will defeat all its threats, especially those targeting its core business of e-commerce,” a staff of Alibaba said. The emergence of Pinduoduo “is probably making Taobao very anxious”, he comments.

In order to stop Pinduoduo from gnaw away at its market share, the Taobao discount app was released on March 15. Community combined with low prices is Taobao’s answer to Pinduoduo, and this marks the official start of the Taobao v.s. Pinduoduo war.

The lack of a social media product and the stringent requirements to use Alipay have always been the sore spots for Jack Ma, Alibaba‘s founder and executive chairman of Alibaba Group. From Ali WangWang (an instant messenger tool for buyers to communicate with sellers) to Laiwang (another instant messenger tool for talking to friends), to DingTalk (an office messenger tool), to Alipay friends, every attempt at a social media product has been a nightmare for Alibaba. It also represents an insurmountable challenge in their fight against Tencent who created the revolutionary messenger app QQ as well as the ubiquitous WeChat.

In terms of capital, Tencent has a certain amount of influence on Pinduoduo. According to the Caijing magazine, Tencent has a seat on the board of directors of Pinduoduo. According to commercial and industrial information, Tencent is the second largest outside shareholder with 8% of Pinduoduo‘s shares, the first being Banyan Capital with 10% shares. Banyan Capital is also the match maker in Tencent‘s investment to Pinduoduo, while one of Banyan Capital’s limited partners is a Tencent co-founder.

On the evening of April 3, when Meituan-Dianping purchased Mobike, the CEO of Mobike Wang Xiaofeng reluctantly summed up that in China, startup companies will eventually face the choice of teaming with Tencent or Alibaba. This explanation also applies in understanding Pinduoduo‘s ties to Tencent.