Many of China’s proverbs concern money and one of the most famous of all relates to its corollary, haggling for a better price: 嫌货才是买货人. In English it translates as, “The people who bargain with you are the people who will buy your goods.”
One of the country’s other great truisms revolves around the need to maintain ‘face’. Hence in pre-industrial days, people with goods to buy or sell from the same village would typically walk miles to designated market areas out in the countryside where they could haggle without being wuqing (i.e. be unfeeling). This was not something they could do on their own doorstep where they were friends and neighbours and renqing (favours) were more important: if I do a favour for you, I expect one in return.
Now one company has honed these concepts for twenty-first century shoppers and is making a lot of money in the process. Pinduoduo (PDD), which means ‘lots of groups’ in English, is one of China’s newest unicorns (it was founded in 2014).
It is fast generating the buzz that Alibaba once did. Indeed so worried is Alibaba by its progress that the e-commerce giant launched a rival offering to PDD last month called Taobao Tejia.
PDD’s C2M business model is very simple. It offers consumers the opportunity to buy direct from factories through WeChat, Tencent’s dominant messaging app, but with a twist. Each product has an official price and a discount price if users get their friends to join them in a group to buy together.
PDD has further refined the social commerce concept by taking viral marketing to its extreme. Its app has a leader board showing the most successful groups. Discount coupons rapidly appear and disappear to encourage quick sales and consumers can use one-click-pay to facilitate speedier purchases.
Back in December, Walkthechat (an agency which helps companies optimise their WeChat services) rated PDD as the fastest growing app in the history of the Chinese internet. It also cited Cheetah Mobile’s rankings for e-commerce apps: these ranked Taobao number one for the whole of 2017, with PDD right behind it in the number two spot, ahead of longer-established rivals like JD.com and Vipshop.
PDD CEO and founder, Colin Huang Zheng, is not shy about explaining why it has gone from strength to strength. In an interview with Bloomberg last April, he confidently predicted that PDD would overtake the NASDAQ-listed Vipshop in customer numbers within eight to 12 months. At the end of 2017, it was almost there with 114 million monthly active users (MAU) compared to Vipshop’s 129 million, JD.com’s 250 million and Taobao’s 532 million.
Huang says PDD is gaining market share because it is targeting less wealthy consumers. According to Analysys figures, 64.7% of PDD users are in tier-three cities or below. Most are female, older than 40 and extremely cost conscious.
As Huang told the domestic media: “Our focus are ordinary folks, not those living on Beijing’s fifth ring road. When we talk about consumption escalation it’s not about facilitating Shanghainese people to live like Parisians but enabling people in provinces like Anhui to have kitchen towel and good food to eat.”
The ex-Google engineer is fond of recalling a lunch he once had with Warren Buffett who impressed on him the virtues of simplicity and common sense. As a result, PDD’s best selling product is Kexinrou tissues, with an average price of Rmb1 per pack. Users can also customise the product and one thing the factory which makes them has learned is that they tend to prefer smaller tissue sizes.
Some analysts have criticised PDD’s business model. Wang Xiaoyan, an analyst with 86 Research, tells Forbes that it has not quite got its monetisation strategy right and points out that the average customer spends just $50 on PDD per year compared to $1,300 on Taobao and $500 on JD.com.
However, as a Chinese axiom has it 微利经营促销快，薄利广收如潮来 (small profits but quick turnover soon lead to big profits). Huang also says that PDD appeals to consumers’ desire to feel like they’re gaining an advantage over others by negotiating a good price. The app is customised to feel like a game, feeding into Huang’s background with another start-up, which offers role-playing games on WeChat.
Financial analysts believe that e-commerce entrants like PDD and XiaoHongShu (Little Red Book) – an app which helps people to shop and swap tips on foreign products like cosmetics – will underpin revenue growth at China’s biggest logistics companies like ZTO. They will allow the logistics players to develop more diversified income streams.
Huang says one of PDD’s greatest strengths is its combination of the winning elements from both Alibaba’s and Tencent’s business models (social and selling). “These two companies don’t really understand each other,” he told Bloomberg. Unlike PDD, “they don’t understand how the other makes money”.
Few doubt the continuing strong growth trajectory of China’s broader e-commerce sector. Overall, China still only has a 56% internet penetration rate compared to 82% in the US. And its existing users have a much higher propensity to shop online. PWC’s 2017 report Total Retail noted that 61% of Chinese consumers begin their shopping experience on Alibaba’s platforms compared to 39% of Americans on Amazon.
This is another reason why analysts think PDD has a much higher chance of success than Groupon, which had to contend with an era when there were no one-click payments and discounts were mailed physically rather than electronically. But it has not been all plain sailing. China E-Commerce Research Centre also reported that PDD attracted more complaints than Taobao and Tmall combined in 2016.
A scan of netizen comments shows that many are unimpressed by the level of fakes on the site, the fact it does not seem to allow consumers to post negative product reviews and the frequent mishaps with deliveries.
Yet, as one netizen concludes, “You get what you pay for in life so why is anyone surprised.”
In recent media interviews, PDD highlights the fact it removed 10 million listings in 2017 and has set up a $24 million fund to compensate users. At the moment the company’s investors are less worried by these problems and are more focused on its growth trajectory.
Banyan Capital, for example, joined the $8 million series-A round in 2015. One year later, PDD raised $110 million through its series-B round, valuing the company at $1.5 billion.
And just this week another $3 billion fundraising led by Tencent (alongside Sequoia Capital China) saw PDD enter ‘super-unicorn’ territory with a valuation of $15 billion, or nearly 10 times it was worth less than two years earlier.
Huang himself is someone who appears to feel as much at home in the US as China. After growing up in Hangzhou in a family of factory workers, he went to the University of Wisconsin-Madison in the US before joining Google in 2004 where he worked as an engineer on search engine optimisation.
He returned to China in 2006 to set up an e-commerce platform that targeted consumer electronics, which he subsequently sold in 2010. He then established two new businesses: the previously mentioned gaming company and another one, which helped companies to market their services on Alibaba and JD.com.
He decided to retire in 2013 at the age of 33 after developing an ear infection, but later had the idea for PDD. Last year, he also told Bloomberg that his biggest hero is Benjamin Franklin because of the sheer number of things he’d achieved in life. Huang wants to do the same.
Another of his heroes is Steve Jobs and Huang tells the domestic media they have many things in common.
Jobs returned to Apple because he had something to prove and not because he needed the money. Money is not Huang’s motivation either.
“You could praise Jobs or you could insult him, but one thing you couldn’t do is ignore him,” Huang says. “My aim with Pinduoduo is to make sure that you can’t ignore me either.”
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