Pinduoduo and the winning strategy of online purchases made social

Pinduoduo online social

When hearing the expression “social commerce”, the image of billions of products being sold through social media network, such as Instagram and Tik Tok, might come to mind. However, what might not be as obvious, especially for Western consumers, is the practice of online purchases made social. This is what Pinduoduo has been doing since 2015.

The Chinese marketplace was born with a focus on agricultural products, but today offers a range of products including electronics, health and beauty and fresh products. Since August 2020, it also offers next-day delivery services of groceries to selected pick-up points. When COVID-19 disrupted the agricultural offline supply chain in 2020, Pinduoduo also enabled Chinese farmers and local grocers to directly sell their fresh produce to shoppers at lower prices.

Crucially, Pinduoduo encourages shoppers to team up on bulk purchases to secure bigger discounts. When opening the Pinduoduo app, users are presented with the option to initiate a team purchase and invite friends and family by connecting directly with them through social media such as WeChat. The more people that participate in the purchase, the lower the price of items is, and this in turn encourages buyers to share what they are buying with their network. The caveat is that the group purchase has a fixed number of buyers required, and if that number is not met within 24 hours, the social purchase is cancelled, and money is refunded to whoever has already paid its part.

The concept is simple but has been rather successful. According to eMarketer, as of July 2021 Pinduoduo controls 13.2% of the China’s e-commerce market, placing it right behind major players Alibaba (with 47.1% market shares) and JD (owning 16.9% of the total Chinese e-commerce market). Looking back at 2020, the platform recorded 788m annual active users in 2020, whereas Alibaba in comparison had 779m active users through the year.

Such an impressive pedigree did not seem to match the company’s operating profits until recently: according to data available, in Q2 2021 ending June 30, 2021, finally Pinduoduo’s operating profit turned positive, totalling CNY1,997.5m ($309.4m or €260.4m), up 21.8% year-on-year from an operating loss of CNY1,639.6m ($231.8m or €207m) in the same quarter of 2020. Operating loss in Q2 2019 totalled CNY1,490.4m ($217.1m or €190.8m), compared with operating loss of CNY6,636.2m ($1,002.9m or €860.3m) in the same quarter of 2018.

Overall, operating loss totalled CNY10,799.7m in FY2018 ($1,570.2m or €1,371.4m), CNY8,583.2m ($1,233m or €1,097.5m) in FY2019 and CNY9,380.3m (€1,169.3m or €1,363.9m) in FY2020.

 

Source: Company accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Part of this success is due to the fact that the company has been decreasing its sales and marketing expenses as a percentage of its revenues, going from 102.5% in 2018 to 90.2% in 2019, and further decreasing to 69.2% in 2020. When looking at 2021, such expense as a percentage of total revenue is also down for the third consecutive quarter, at 47% of total revenue in Q2 2021. As mentioned, Pinduoduo’s difference is the integration of social components into the traditional online shopping process, in turns creating a virtual ‘word-of-mouth’ advertisement process with no extra costs involved. Furthermore, its marketplace operating model allows it to avoid the costs, risks and capital requirements associated with sourcing merchandise or holding inventory.

Pinduoduo expects costs and expenses related to the onboarding of new merchants and maintaining the platform to continue increasing as it grows the business and attracts more buyers and merchants to its platform. However, moving forward it plans to leverage substantial economies of scale to achieve cost savings, as the expenses associated with the operation of the platform as well as operating expenses do not increase at the same pace.

In China, social commerce now accounts for over 13% of all online sales compared to just 4.3% in the U.S according to Fast Company, so it is not unreasonable to think that Pinduoduo is pursuing a winning strategy in a fast-evolving market, as demonstrated by its financial results and the market shares of the Chinese e-commerce market it possesses.

Source: Transport Intelligence, October 25, 2021

Author: Caterina Ciccone

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