The business model of Pinduoduo is quite simple. It provides a platform where consumers can shop for goods from different merchants. The success hinges on ability to attract both sides to join the platform.
The biggest advantage is remarkably low prices. The customers are always presented the two option when buying a product – the normal price, which is set by seller, and discounted price, which they can claim if they buy together with someone else as a group.
The discounts can be up to 90% off and the time to claim it is limited, but users can use WeChat to invite their friends, or also just join some strangers. The sellers in the end get their full price, so the discounts are covered by Pinduoduo.
Duo Duo Maicai
In August 2018, Pinduoduo launched a new grocery service Duo Duo Maicai. This is an extension of the existing services, integrated into the main app. The users can order fresh produce, meat, or other household items online, and then pick up the orders the following day at designated locations. This reduces the costs and logistical complexities with ‘last-mile’ deliveries, and thus allows to keep the prices down and allow for shorter delivery times.
Pinduoduo generates revenues from two sources:
- Online marketing services – the sellers pay to be more visible on the platform, they bid for keywords and advertising placements. This represents about 90% of all revenues, despite Pinduoduo claiming that their model is highly personalized to individual customers
- Transaction services – merchants pay fees on their sales
Target group and consumer engagement
Unlike other e-commerce platforms like Alibaba or JD.com, Pinduoduo’s primary target group is consumers from lower-tier cities and rural areas in China. These customers are more price-conscious and are attracted by large discounts, while the quality is secondary.
Pinduoduo is heavily focusing on user engagement and experience, rather than monetization. The shopping experience is like a game – you can unlock the special prices, new users get one-off offers, there is time pressure, but in the end you get items for cheap.
Pinduoduo is providing personalized recommendations based on data about your previous purchases, your searches and also based on what your friends are buying.
The team purchase also contributes to user acquisition and lower acquisition costs. The consumers are incentivized to share with their friends, which then share further and that’s how the user base is growing.
Agriculture, merchants and consumer-to-manufacturer (C2M)
Pinduoduo built an online platform that connects more than 5 million merchants directly with consumers. The agriculture is one of the industries with lowest rates of digitalization and many farmers do not have sufficient skills for online business. That’s why Pinduoduo launched a program called Duo Duo University to help farmers learn how to sell on the platform, and also equip them with skills and better understanding of e-commerce, finance, business operations and online marketing.
Pinduoduo provides merchants with insights about the customers and demand for products, which helps them tailor-make the products and also improve their inventory and supply chain efficiency. As the merchants are able to reduce their costs, they can provide low prices for customers.
Competitors in agricultural and fresh produce
Alibaba and JD.com both have business units in the grocery segment. They focus on the so-called hybrid model where physical and online shopping complements each other. They expand physical stores as well, recognizing that shopping is still an experience that people value.
JD Fresh is the fresh food business unit of JD.com, which offers high-quality fruits, vegetables, seafood, meats, and frozen products sourced from more than 2000 partners. JD Fresh is able to provide fast delivery with their largest cold chain logistics network in China. JD is also expanding into offline stores with opening 7Fresh stores. Customers who are less than three kilometres can also order online and get delivery to their home within 30 minutes.
Alibaba launched a grocery retail chain Freshippo in 2016, also known as Hema in Chinese. More than 200 physical stores also serve as distribution centers for online orders, and delivery is available within 3 kilometers. Freshippo is providing high-quality food and interactive shopping experience with technology mainly in top-tier cities, but also expanding and adapting to different segments. For example, Freshippo Farmers’ Market is providing fresh produce for more price-sensitive consumers. In lower-tier cities with increasing consumer demand, Freshippo set up Mini stores. Freshippo is also investing beyond food, to strengthen the brand and customer loyalty. The first Freshippo Mall was opened in Shenzen in 2019 and provides retail, entertainment, dining, but also education and cleaning services.
Logistics is Pinduoduo’s weak point
Pinduoduo is not directly involved in delivering the goods, and they ship the goods via third-party providers, including via competitors in the e-commerce space, such as Alibaba’s Cainiao. The only initiative Pinduoduo implemented is an e-waybill system to make shipping information more transparent so that the users are updated when the goods are shipped, and the system also helps to detect fraudulent activities.
Fast delivery is one of the key dimensions that e-commerce companies compete on. If we look at the competitors in the e-commerce market, we can see that the logistics is a weakness of Pinduoduo and other players are miles ahead.
Alibaba founded the Cainiao Network, the logistics provider that ensures delivery within 24 hours to any region of the country. They have a strong network of warehouses across the country and partnerships with number of delivery providers.
JD.com has developed own capabilities under JD Logistics. They own 30 smart fulfilment centers, over 800 warehouses and have their own fleet of drivers. They manage to deliver over 90% of orders on the same day.
Both Cainiao and JD are innovating and investing in developing automated delivery robots and drones.