Go For the WeChat Gold: E-commerce Business Increases 20 times In One Year?

Alibaba and JD.com have established offices to compete with Pinduoduo.” said Bin Huang, an e-commerce merchant. Relying on WeChat traffic, Pinduoduo has become a black horse within the e-commerce industry.

This rumor answers some of Huang’s questions. During the Spring Festival, Huang found that the sales data of his online Tmall store changed, suggesting that Taobao, Tmall’s parent company, changed its policies which would greatly affect Huang’s business. Since the Spring Festival, over 2,000 daily customers ordered goods priced at $3 (20 yuan) in his Tmall store. Back in 2017, the average daily sales of that product was about 200 units.

Similar situations were happening in other shops within Taobao, which has apparently changed its strategy quietly.

Huang set up store on Taobao in 2009, and later transferred business to Tmall. Like many sellers, Huang preferred to sell hit products. Huang had concentrated 40 to 60 percent traffic flow onto popular products, and he could earn the investment back within three to four months.

Since 2013, Taobao implemented a new ranking algorithm. Taobao recommends products to users according to the user’s preferences and shopping habits. This has had a huge impact over the past few years. Huang said he invested $315K (2 million yuan) to buy traffic to make his product the most-purchased one. But he couldn’t earn this money back. The data flow has become fragmented. As a result, Tmall and Taobao shop owners must adapt.

Taobao has every reason to change its algorithm. The new algorithm could prevent product homogeneity and expansive imitation, and also improves the user’s shopping experience. With the new rule, when searching for a product, few goods have identical styles in the first ten pages. A multi-channel network founder whose institution works for Taobao said, “As far as we know, the C2C shop on Taobao are all quality shops. These online shops prefer to have professional buyers.”

To some extent, Alibaba was determined to make this change. In Huang’s view, this unexpected change was obviously to intercept Pinduoduo.

Pinduoduo, the most favored e-commerce platform

To prepare for the 2018 Lunar New Year, many Alibaba partners gathered in Hangzhou to discuss cooperation and exchange discourse, including the topic of Pinduoduo.

“While Alibaba is large in scale, it is still very vigilant of competitive threats. Alibaba will destroy those that rival their core business,” said a senior Alibaba employee. “Pinduoduo makes Taobao very anxious now.”

Pinduoduo‘s fast pace of development surprised everyone.

“At the beginning of 2017, Pinduoduo’s monthly gross merchandise volume (GMV) was $315 million (2 billion yuan), a large number at the time. By the end of 2017, the monthly average GMV increased to $1.6 billion (10 billion yuan), shocking the industry. “I recently heard the data is nearly $6.3 million (40 billion yuan),” said Xiao Li, founder of Global Buyer, who said that it is hard to reach $1.6 billion in a year. It took JD.com six years to exceed $1.6 billion in monthly GMV.

“Its development has surely brought us quite some delightful surprises.” said Zhen Zhang, founder of Banyan Capital. Pinduoduo‘s angel investor Tongyu Sun stated that Banyan Capital has been investing in Pinduoduo since its Series A financing round, and is by far the biggest shareholder among institutions. Zhang expressed that Banyan Capital will continue investing until Pinduoduo‘s IPO.

Colin Huang, Pinduoduo Founder

Pinduoduo‘s fast development surprised even the company’s own founder, Colin Huang, who admitted, “In terms of growth rate, we are certainly somewhat surprised.” When Pinduoduo‘s GMV was $315 million (2 billion yuan) at the end of 2016, Huang projected a growth to $730 million (4 billion yuan) in one and half years’ time. The real development surpassed his own expectation by a big margin.

Model: hit products + low prices + zero-commission + community

Lu Cheng is one of the first sellers on Pinduoduo, while also being on Taobao at the same time. He contributes Pinduoduo‘s super-fast growth to the following factors: hit products, low prices, zero-commission, and community.

Pinduoduo Website

Free featuring on the homepage and zero-commission is a huge lure for sellers. At the time of Pinduoduo‘s founding, operational and miscellaneous fees accounted for about 30 percent of the value of products sold on Taobao and Tmall. A popular notion within the e-commerce industry states that only 20 percent of sellers are making a profit, while the other 80 percent are just making ends meet or taking a loss. “That’s why when a new platform emerges, sellers are very willing to try it,” said Lu Cheng.

Pinduoduo has also redefined social commerce. Pinduoduo promotes people to share on WeChat to find enough buyers for group discounts. The motivation for sharing is “hit products at low prices”.

First, Pinduoduo must offer a lower price than Taobao, including delivery. “Each seller must lose about $4.7K-7.9K (30-50 thousand yuan) worth of product value, by selling at 6 a product costing 9, at Pinduoduo‘s request, in order to help increase traffic on this platform.” Sellers who are adept at creating traffic are familiar with these tactics. They are very good at increasing profit by growing the transaction volume .

Second, it is better to compete directly with Taobao and Tmall on hit products. To consumers, hit products on Taobao are more attractive and have higher credibility. For instance, Pinduoduo can sell a product priced at $19.90 on Taobao for $9.90. Even today, there are large supplies of low-cost or even zero-cost products in China, such as gifts with purchase, leftover stock and remaining inventories, and the demand for such supplies is just as big.

“What it means to be a ‘hit product’? For instance, last year, once a type of hoodies makes it to the platform, its sales units can reach several hundred thousand,” said a Pinduoduo seller. All the hoodies from Guangzhou, Shahe and Shisanhang clothes markets are bought out by Pinduoduo sellers. Some sellers receive big fines from Pinduoduo for being out-of-stock and consequently delaying the shipping of orders. “From this you can see how quick Pinduoduo‘s volume has grown.”

In addition to hit products at low prices, Pinduoduo also owes its explosive growth to WeChat Pay. At the end of 2014, WeChat surpassed Alipay with its Spring Festival Red Envelope feature. Large numbers of Taobao and Alipay non-users then placed their first online order on Pinduoduo through WeChat Wallet.

“WeChat has over 800 million unique users, which means other than the illiterate and children, it has almost penetrated the whole country. Alipay has 470 million users. This difference of almost 500 million are Pinduoduo users,” said Xiao Li.

A survey by an investment research institute showed that Pinduoduo users can be segmented into three types: non-online-buyers; buyers aware of Taobao and has made some purchases, but are not frequent users; and Taobao users. Since Taobao is in the process of transformation, some users will overflow to Pinduoduo.

“Of course, Pinduoduo is very successful in its operation. When the iPhone 7 first came out, it hosted a lucky draw at $0.16 (1 yuan) to drive traffic to its platform. I remember the number was over a million. It also has very flashy colors, as well as designs and algorithms well suited for fourth and fifth tier city users,” said Lu Cheng.

According to Cheng, Pinduoduo has already become a major player among e-commerce platforms by 2017, and has also become increasingly tough in its rules. “In other words, it has enough sellers already.” The next step would be for Pinduoduo to spend media budget in hot video programs to build brand awareness and reputation.

Controversial industrial reputation

From zero to a monthly GMV of $6.3 billion (40 billion yuan), Pinduoduo has obviously made a huge achievement that most companies have failed to reach. However, Pinduoduo has a very controversial reputation within the industry.

“This success may be temporary,” said an ex-Alibaba executive. It is obvious that Pinduoduo has to develop its quantity first and manage the quality after, in order to survive in this ferocious market. So, it is destined to encounter all the barriers experienced by Taobao, like protecting against fake products, interest equilibrium of platform rules, logistics and services, and finally how to increase the average basket. “This will be a painful process. At the time for Taobao, e-commerce was still not mature, which made it easier to segment users. The same would cost greatly for Pinduoduo now.”

“I think Pinduoduo can make a big business. Before we had also launched Pintuan, which was a very small counterpart, but they still dedicated efforts to competitive analysis and priced against us.” Furthermore, Huang expressed that he had a sense of crisis when the company gained a monthly GMV of several billion yuan. He still had a start-up mindset, meaning that he was looking at a scale of trillion,” said Xiao Li. “Its final success should be attributed to the macro trend, and Pinduoduo is the bird with the strongest wings in this trend.”

In less than two years, Pinduoduo‘s daily order volume has surpassed that of JD. However, the other side of this social commerce is low-price-driven hit products and fake goods.

According to the statistics of China E-business Research Center, Pinduoduo has a complaint rate of up to 13.12 percent, highest among the industry. In its well-known question and answer platform, searching the keyword “Pinduoduo” will return mostly complaints of product quality and the returning process.

On top of that, the business model of group purchases has very low user loyalty, and many users uninstall the apps. The “China Mobile Internet Database Report” issued by QuestMobile pointed out that, among comprehensive e-commerce platforms app uninstallation rates last November and December, 78 percent of Pinduoduo‘s lost users went to Mobile Taobao, followed by DJ (21.5 percent), VIPshop (14.7 percent), Tmall (6.0 percent), and Mogujie (4.8 percent).

Pinduoduo‘s developmental milestones are the following:

This article originally appeared in Sina Tech and was translated by Pandaily.