Pinduoduo’s Cross-border E-commerce Platform Temu Charges A Service Fee of 0.5%

Recently, Temu, a cross-border e-commerce platform under Pinduoduo, has introduced a new agreement to sellers called the ‘Customer Service Outsourcing Service Agreement’. The 0.5% service fee rate mentioned in the agreement is interpreted by the public as a signal that the platform will start charging commissions.

According to the new agreement, Party A (Temu) has the right to charge a service fee based on 0.5% of the actual payment amount (excluding tax and including credit) made by users under store orders. If there is a refund for an order, no additional service fee will be charged at the time of refund, but any service fees already collected will not be refunded. At the same time, Party B hereby unconditionally and irrevocably agrees and authorizes the platform to deduct the corresponding service fee directly from the sales proceeds.

For this clause, any seller who opens a store on Temu must sign it promptly. There is only one confirmation option: ‘Read and agree to accept.’ Otherwise, the quality and effectiveness of the store’s services cannot be guaranteed, and the operation of the store cannot continue.

From the perspective of the platform, Temu’s front-end is rapidly expanding in various countries and regions. The use of customer service outsourcing to handle excessive workload is considered a normal business practice, and the resulting 0.5% fee falls under the category of third-party service fees. However, from the perspective of sellers, any expenses incurred while operating on the platform are easily seen as a signal for commission charges.

In fact, the 0.5% fee rate is still relatively low compared to the commission rates of other mainstream cross-border platforms currently. However, Temu platform is known for its label of ‘low-price internal competition’. When profit margins are further squeezed, sellers will have to face even fiercer competition and this may be the main reason for their expression of dissatisfaction.

According to the understanding, other platforms such as AliExpress charge different commission fees based on different categories. Some categories have a commission rate of 5% of the total transaction amount, while some have a commission rate of 8%. On the other hand, Shopee platform’s commission rates range from 1% to 5%, depending on the seller’s level and category. All these rates are much higher than Temu’s current service fee of 0.5%.

However, a seller on the Temu platform revealed that the newly imposed service fees have a significant impact on products with low profit margins, especially for individual sellers. Due to the current bidding model adopted by the platform, where prices are transparent and profit levels are low, for example, some of her products only have a profit margin of one or two yuan per order (approximatly $0.14-0.27). It will be difficult to sustain such business under these circumstances as the profit margins will further shrink.

Pinduoduo adopts a fully managed model, precisely targeting the vast group of small and medium-sized manufacturers in China’s manufacturing system. These manufacturers are skilled at production but lack funding and operational experience. The fully managed model helps them solve these problems. On the other hand, this model also deeply integrates the platform with the supply chain, allowing those with price advantages to stand out while most intermediate traders and individual sellers are prone to extinction in competition.

SEE ALSO: Is Pinduoduo’s US Sister Site Temu Too Good To Be True? I Decided To Find Out

When Temu was launched in September last year, it attracted a large number of merchants to join the platform with its low cost of 0 commission and high investment in traffic. Along with Temu platform, they embarked on an overseas sprint. During this process, the platform claimed that sellers only need to bear a small portion of the costs.

Until now, with the deepening of platform expansion overseas, some newly generated costs are gradually being passed back to sellers, such as EPR environmental fees required by certain local laws.

In May of this year, the appearance of the ‘Warehouse Service Bill’ function in the Temu merchant backend also caught the attention of sellers. At that time, platform representatives repeatedly emphasized and explained that this function was intended to properly handle ‘logistics fee payment’ and not a signal for the platform to charge warehousing fees. It can be seen that every move regarding fees by the platform is causing concern among sellers.

With the rapid expansion of Temu overseas, cost is also a problem that Pinduoduo has to consider. Charging service fees appropriately is also a way to control costs. The latest financial report from Pinduoduo shows that in the second quarter of 2023, Pinduoduo‘s sales cost was 18.9 billion yuan, an increase of as much as 137.3% compared to the same period last year. Both the front-end expansion and back-end fulfillment by Temu have put pressure on costs.

But at that time, Liu Jun, the Vice President of Finance at Pinduoduo, responded by saying that Temu is currently in a learning phase and the platform will not focus on monetization and other financial indicators. ‘As we continue to understand and explore consumer demands in different markets, we will carefully evaluate the return on investment for each opportunity and make responsible capital allocation decisions.’

Another interesting signal is that in the latest financial report, commission fees are indeed becoming the main driver of Pinduoduo‘s revenue growth. In the second quarter, its transaction service (commission) revenue reached 14.35 billion yuan (approximatly $2 billion), a year-on-year increase of 131%, which is the largest growth among all its businesses.

At present and in the future, Temu’s attitude towards commissions is still unknown. However, the current 0.5% service fee may lead to a new round of reshuffling among Temu’s merchant community.