Why Pinduoduo is the Fastest Growing Chinese App Ever

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With an impressive 13.85% YoY growth, the Chinese app Pinduoduo is the leading Chinese app for social e-commerce and is the second largest e-commerce app behind Alibaba’s Taobao.  Founded just three years ago in 2015 by former Google software engineer Colin Huang, the company’s gross merchandise value (GMV) was RMB 141.2 billion (US$21 billion) with a gross revenue of RMB 1.74 billion (US$263 million) in 2017.  This represents an astounding 245% growth rate when compared with 2016.  Despite continued net losses (RMB 292 million (US$44 million) in 2016 and (RMB 525 million (US$79 million) in 2017), Pinduoduo is thriving in 2018surpassing Jing Dong’s daily active user rate in January and just last week they announced that they will file for a $1 billion US IPO.

Pinduoduo’s success can be attributed to their less traditional approach to ecommerce with a huge emphasis on price and volume sold.  While most Chinse ecommerce apps target young middle/ upper class citizens in tier one or tier two cities, the majority of PDD’s user base (around 80%) is made up of older women in tier 3 and tier 4 cities.  This user base is known to beincredibly price elastic and consequently PDD is best known for their low prices and group deals: every item listed on the app has an official price and a lower discounted group price.  To get this lower price a user needs to share the deal with others who also agree to buy the product.

This ability to order in bulk gives manufacturers the ability to sell directly to customers causing goods on PDD to be priced around 60-80% lower than on other platforms.  This is because the middlemen are eliminated and producers are willing to accept smaller profit margins in exchange for increased volume. PDD’s system also creates a unique feedback loop as cheap prices attract more buyers and more buyers allow goods to be sold at even lower prices.

Another aspect of PDD’s strategy that has been critical to its rapid growth and expansion is their marketing strategy centered around the idea of creating buzz and sharing deals with friends and acquaintances.  As an example, one of the features on PDD’s app allows users to bargain on another user’s behalf.  Every time a friend agrees to help you “bargain”, the price of the item decreases and can even go to zero if enough people are willing to help.  Another feature on PDD is a lottery system where users can pay an entry fee of RMB 0.01 to join a lottery to have a chance of winning a certain product.  If you win the lottery you purchase the good for RMB 0.01 and if you lose your entry cost is refunded.  Essentially there is no cost to the consumer for joining the lottery.

All of these strategies, as well as giving money and free products to people who invite friends to the app, are designed to create buzz, get more people to join the app, and promote brands.  The entire marketing strategy operates around the idea that producing a good is relatively cheap (advertising and retail prices are high) so giving away free items to people who share your item with friends or with people who participate in a lotteryis a cheap way to advertise and market your brand.  This design creates buzz around the app and around the products being offered on the site at low costs.  In one move it encourages both consumers and producers to use PDD’s services.

Although PDD’s strategy has been incredibly successful, there are some small issues with its model.  Among all of the deals, PDD’s marketplace also attracts a lot of poor quality goods, and the company has been forced to set up an RMB 150 million fund to compensate users who report issues such as damaged goods, rotten fruit (fruit and other produce is incredibly popular on PDD), or issues with returns.  Even though they don’t target the same exact demographic, PDD’s success has also put it in direct competition with Taobao.  Although 50% of users that uninstalled the Taobao app installed PDD within a month, 78% of users who uninstalled PDD went on to install Taobao and people who change phones are more likely to install Taobao or JD over PDD.

Despite some small hiccups (and current net losses) the future of Pingduoduo seems very promising.  PDD is targeting a large and previously untapped market demographic and is gaining users and growing at unprecedented rates.  Current losses should notbe concerning, now successful companies such as Amazon also posted losses for years before increasing volume finally allowed them to become profitable.  PDD should see the same pattern.As their user base grows, their volume of sales increase, and they work out the small issues that they have encountered, PDD is likely to become incredibly successful.  Currently Taobao still holds significantly more of the market share and has around three times more daily active users, but PDD is only three years old and three years from now who knows where the companymight be.

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