Business

The Curious Explosion of Pinduoduo in Chinese E-Commerce Arena

Pinduoduo is the fastest growing e-commerce app in China’s history, which took out the competition ranking second among most used shopping apps, behind only to Taobao. Its strength? The customers from lower-tier cities and rural areas

As Chinese purchasing power increases year after year, internet penetration in the country is reaching the most remote areas as well.

According to the latest data from the China Internet Network Information Center, today, the number of Chinese internet users exceeds 802 million with a penetration rate of 57.7%. And since everyone loves shopping or, at least, needs to buy everyday supplies, the e-commerce’s spread across the country goes hand in hand with the increasing of the per capita income and the growing number of internet users.

On average, each Chinese mobile holder installs 44.2 mobile apps but for what concerns the e-commerce sector, Taobao – Alibaba’s most popular marketplace – ranks first.

However, although 601 million mobile annual active consumers buy on Taobao, its penetration rate in Tier 3 and 4 cities only reach 1.07% and 3.84% respectively. Third and fourth-tier cities will account for almost two-thirds of China’s annual consumption market though, which is expected to reach $9.7 trillion by 2030, according to Morgan Stanley.

So, where do lower-tier cities’ people shop online? On JD.com? Xiaohongshu?

They shop on Pinduoduo, the second most used e-commerce platform and the fastest growing app in the history of the Chinese internet that reaches 21.38% and 35.34% of penetration rate in Tier 3 and Tier 4 cities respectively.

Pinduoduo curious explosion - social e-commerce - cifnews

© Weibo. Although Taobao and JD.com are still the e-commerce market leaders, Pinduoduo is the app that benefits from the highest loyalty rate.

Pinduoduo 拼多多 – roughly translated as “buy more together” – was founded in September 2015 by Colin (Zheng) Huang – a former Google engineer – and his company, the Shanghai Dream Information Technology Co.

The Shanghai-based startup managed to become a Unicorn in just 21 months reaching $1.5 billion gross market value much faster than its older peers such as JD.com and Taobao.

The explosive growth of Pinduoduo is essentially due to two main factors. The first factor is the significant number of funds received, such as that of Tencent and IDG, which allocated an investment of $110 million in 2016. The second factor is the app’s ability to take hold in smaller cities.

Thanks to this fast growth, the founder became one of China’s youngest self-made billionaires and the 10th richest person in the country with $13.5 billion assets, according to Forbes’ list of the world’s billionaires.

In June 2018, less than three years after the launch, Pinduoduo’s monthly active users reached the figure of 195 million people, which represents 31% of monthly active users of the total Alibaba ecosystem.

Today, 343 million buyers use Pinduoduo for their online purchases and 60% of them live in the Dragon’s third-tier cities or below. Moreover, many international brands such as Huawei and Apple launched their flagship stores on the platform, further establishing the credibility of the company.

It works slightly differently from other marketplaces allowing users to participate in group buying deals. More than a simple digital shopping platform, it is actually a social e-commerce app, which uses a “team purchase” model and leverages social sharing on Chinese social networks, especially WeChat due to the easiness of Pinduoduo’s mini program.

This is a model that applies perfectly to the Chinese cashless society, where about 583 million people used mobile paymentlast year.

The use is simple. The consumer can buy an item at full price or get a discount if he invites other people to join the purchase. After paying, there are many ways to invite friends to the deal, not only WeChat but also QQ, QZone, QR code, image or with a voice note. Then, the discounted order is not shipped until the required number of people buys it.

Pinduoduo curious explosion - chinese rural areas - guilin - cifnews

© Pixabay. Guilin, Guangxi. China’s rural internet users are more active on e-commerce sites than their counterparts in urban areas due to the lack of offline alternatives.

As mentioned above, Pinduoduo’s success comes from those areas where the e-commerce industry has more room to grow compared to the saturated markets of Tier 1 and Tier 2 cities. Here, Colin Huang’s company leverages the absence of direct competition with e-commerce giants.

In lower-tier cities and rural areas, households have a lower income and a lower educational level but the internet penetration in those towns and villages grows year after year together with the purchasing power.

The consumers’ expense here is also different from more developed cities as the average order on the platform is $6, against $30 on Taobao and $60 on JD.com.

To reach these regions, Pinduoduo not only plays with the traditional behavior of bargaining but it has also allocated an over $505-million-investment to help farmers selling their perishable agricultural goods on the platform, also thanks to the improvement of Chinese transport, which now allows efficient and fast connections between different cities.

This investment has also led to the creation of a brand-new grocery shopping trend in bigger cities, that of buying fresh food directly by farmers through the app.

Pinduoduo’s users are not only adults but they are also predominantly female constituting the 70% of total users, a figure that shows a greater interest by people who traditionally look after the household, especially in smaller cities.

In China, in fact, many 大妈 – “big mothers” – are still the ones responsible for the management of the entire family’s spending.

The users also behave differently in Pinduoduo app compared to other major e-commerce platforms’ users. While on Taobao or JD.com customers find products to buy through keywords search, Pinduoduo’s consumers check the special deals available on the platform every day.

The discount app, in fact, leverages a large use of artificial intelligence to meet the users’ demand avoiding the system which usually highlights popular brands over smaller stores.

Actually, the app’s consumers are particularly interested in the bargaining approach and studies revealed they are more likely to buy expensive products with a high discount rather than cheaper products with no discounts. In addition, the invitation system works as a sort of recommendation from friends.

Therefore, the appeal of Pinduoduo is surely the satisfaction of taking advantage of a great deal instead of the lower price of products. So this explains its virality and addiction in lower-tier cities where salaries are still lower compared to first-tier ones.

However, the app does not work only on group deals. Like many other successful e-commerce platforms, Colin Huang has built a complete ecosystem of short-term-coupons, red envelopes, lotteries, and free products in exchange of friends invitation or sharing. All of this comes with customers’ personalized messages and a check-out system that allows automatic payment.

Pinduoduo curious explosion - shanghai - cifnews

© Unsplash. Shanghai. Chinese social commerce helped to shape a brand-new online shopping trend, which is now witnessing a high imitation rate by foreign companies.

Colin Huang belongs to that group of Chinese entrepreneurs who started their career in the US Silicon Valley and then returned home to launch extraordinary hi-tech companies.

His experience in the digital landscape together with a forward-looking approach made him build a completely different kind of marketplace, which managed to become one of the largest e-commerce apps in China in record time.

He targeted and unlocked the most neglected market, that of low-income households with comparatively lower education levels, which, however, holds the greatest potential in China and which made Pinduoduo stand out among all the other online shopping apps.

“The future of the Chinese digital economy is not to give a Shanghai resident the life of a Parisian, ” said Colin Huang. “The future is to provide handkerchiefs and fresh fruits to those living in the province”.

In order to reach the most remote potential customers, the Shanghai-based company focused on basic commodities starting from selling fresh fruits to including all the kinds of items such as groceries, beauty, and electronics.

Pinduoduo’s model is very different from that of Taobao and other peers, which usually focus on the products’ quality targeting the emerging Chinese middle-class. Moreover, differently from the other platforms, while focusing on daily needs, Pinduoduo favors local producers instead of large international brands.

The figure of online shoppers in China already exceeded the population of the United States in 2014 and it is now expected to grow to over 750 million by 2020. Although the market is going to be even larger than today and the room for growth of e-commerce platforms is going to be even wider, staying stable and successful in this arena might be difficult for classic e-commerce sites.

Nevertheless, Pinduoduo found the best formula to keep users hooked to the app thanks to the wise use of the sharing-with-friends potential. Therefore, the former Google engineer was not only able to find and attract the most fruitful niche but he also managed to create a viral environment for his marketplace to grow.

Pinduoduo’s history of records might not stop here.

Categories: Business, China, Company, ECommerce

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