What is the Pinduoduo business model? A closer look

Remember the good old days when shopping was a fun family event? Moms would plan it days in advance, scheduling it with friends, detailed shopping lists in hand, full of anticipation on the new Sari stock that the shopkeeper has dutifully notified about, while we kids would just wait for the mid-event chaats and shakes we would get.

Shopping wasn’t supposed to be a solitary event.

Pinduoduo ("PDD") is trying to bring back the fun in shopping. Thanks to Pinduoduo's unique business model, PDD is China’s largest social e-commerce platform boasting of over 800m users and growing. Infact PDD’s GMV is growing faster than Alibaba 

Source: Company Report

Social commerce in China has a different connotation than India. The pack-leader in India -  Meesho is primarily converting housewives into mini-entrepreneurs and marketers and tapping into their personal networks as a channel of distribution.

Pinduoduo however has taken social shopping to the next level.

One of its key levers of growth is encouraging users to make ‘team purchases’ – which essentially means you are rewarded for buying a product with your friend in teams. This is obviously a customer acquisition flywheel as more people invite more friends on WeChat to buy more merchandise on bulk prices. An advanced Social Groupon?

PDD has gone a step ahead and has gamified the entire shopping experience with several multi-player games.

Who is Pinduoduo’s customer base?

From the very start, PDD was laser-focused on Tier 2 and Tier 3 cities. Even now, its users are predominantly female, living in Tier 3+ cities. This customer segment tends to pay less attention to brands and pursue more cost-effective products

But how did Pinduoduo rack up almost 850m users in the face of Alibaba and TaoBao in China?

Initially, it was the Spring Festival Gala in 2014 that set the ball rolling for PDD. So WeChat launched a red envelope shake contest wherein users could shake their phones for a chance to win red envelopes, cumulatively worth $80million. The content went viral and over 8 million Chinese participated in the event receiving over 40 million red packets. At this point, offline QR payment had yet to gain momentum in China, and certainly not in the tier 3 cities. PDD stepped in to offer group buying options for people to utilize the red envelops and within 2 weeks of going online, it had over 1 million users.

Since PDD emerged out of a merger with Pinhaohao, a fresh produce B2C platform in 2016 (Yes, the mergeable names were accidental) – the first version of the product enabled online grocery purchases. Enabling shopping for very low-ticket sized items such as a kg of fruits was the key differentiator. And this was 5 years ago where e-grocery startups had not taken over the world. The lower ticket sized actually ended up reducing the barrier for entry as more and more people were willing to try a small purchase when invited by friends. Ofcourse it helped that fresh produce has universal demand and high repeat value.

PDD also reduced the cost of decision making. For an e-commerce product, PDD does not have the concept of a shopping cart and encourages users to make multiple single purchases to encourage impulse purchases.  Users shouldn’t mull over the shopping cart and do a second-screening before paying a purchase order.

You can also play a price-chopping game where it is possible to get a product for free. All you need to do is to share the product link with friends and for every friend who clicks on the link within a set timeframe, you are rewarded with discounts.

What were the key enablers for Pinduoduo?

The universal adoptability of WeChat in China certainly helped.

But a key enabler has been the gamified experience which has contributed to the user experience. It’s not just that the platform also has games. All games are designed towards enhancing the shopping experience

One of the most popular games is Duoduo Orchard - Essentially a loyalty card made into a game where you reward people for engaging with the platform. So users get virtual water droplets for browsing certain product categories, purchasing from certain stores and the end goal is that you water the tree enough that it bears fruit. And unlike Farmville, you actually get a real pack of fruit from a farmer upon completion

Then there is the of Make More Money where browsing products will get you gold coins. After receiving gold coins, users can withdraw cash rewards, so they are encouraged to browse the displayed products. This improves the exposure of merchants. Pinduoduo charges merchants advertising fees according to different exposure levels

What is Pinduoduo’s business model?

Unlike Meesho, PDD’s model is largely advertisement revenue.  All merchants pay a nominal platform fees. But the bulk of revenues are through various avenues of advertising that PDD offers to its merchants through display ads, in-feed ads, search ads etc. Various metrics to pay for ads exist like:

  • CPM ads or Cost per Mille (1000) impressions wherein PDD displays hot-selling products in the top banner
  • CPC ads or cost per clicks
  • CPS ads where fee is charged based on transaction result

Why has this not been replicated in India?

I am trying to rack my brain hard on whether group-buying model can work in Indian Tier 2 and Tier 3 cities. Would people trust quality of unbranded items? Return rates are increasing quite a bit on Meesho. Would the discounts be significant enough to incentivize group participation? Would recommendations by friends really factor into a decision making on clothes or food?

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