For most of us in the marketing and technology industries, the term ‘social commerce’ is a byword for ‘a bit of a flop’.

The initial dreams of a perfect harmony between social networks and ecommerce have gradually faded into a reality of unsuccessful Buy buttons and niche communities that failed to catch on, and with the exception of some recent positive press in Mary Meeker’s Internet Trends Report for 2018, that doesn't show much sign of changing.

At least, in the west. In China, it’s a slightly different story. The world’s largest ecommerce market is currently being disrupted by a fast-growing new app called Pinduoduo, which has discovered a highly successful recipe for making ecommerce social.

Pinduoduo’s model, which combines low prices with group discounts that users can lock in by rounding up their friends on social media, has seen it quickly rise to the ranks of China’s top ecommerce companies, threatening ecommerce titans like JD.com and Alibaba.

Despite being less than three years old, Pinduoduo already has more than 300 million users, is ranked by Cheetah Mobile as the second-most popular ecommerce app in China (behind Taobao), and was valued at nearly $15 billion in a recent round of funding.

So what is behind Pinduoduo’s incredible success as a social commerce app? Can it be sustained? And is it a unique phenomenon – or a model that others can follow?

Pinduoduo is ranked #2 in Cheetah Mobile's ranking of China's most popular ecommerce apps, second only to rival Taobao for penetration and weekly open rates.

How Pinduoduo does social commerce

Most social commerce ventures that we’ve seen so far in the west, in spite of their name, are geared towards individuals. The ‘social’ part comes from either integrating ecommerce features into an existing social network, such as by adding a ‘Buy’ button to Twitter, Facebook or Pinterest; or by fusing social and ecommerce features on a new platform.

Pinduoduo, by contrast, has found a way to make commerce truly social. The app allows customers to lock in low-price deals by rounding up a certain number of their friends to purchase the same item.

Pinduoduo integrates seamlessly with China’s most popular chat app, WeChat, thanks to its “mini program” functionality, which allows users to open up other apps within the main app, using different programs without ever leaving WeChat.

In this way, consumers can use WeChat to access Pinduoduo, and also to share product links with their friends, locking in deals and spreading the word about the app at the same time. These deals can involve discounts of up to 90%, as well as cashback incentives and even free products for loyal customers.

Mary Meeker Pinduoduo

Mary Meeker's Internet Trends Report 2018 featured Pinduoduo as an example of 'socialising' product discovery, as users can refer their friends to reduce the price of products.

For anyone who used Groupon in its early days, Pinduoduo’s model will sound familiar – and comparisons have often been drawn between the two. However, there are a couple of key differences between Groupon’s take on group purchases and Pinduoduo’s.

Groupon’s vouchers required much larger numbers of people to sign up to each deal, forcing its users to wait around for strangers to join their group, and giving them limited control over the whole process. In addition, when Groupon launched in 2008, social media and smartphones weren’t widespread, making email the most common way to spread the word about vouchers – not exactly efficient.

Unlike Pinduoduo, Groupon also wasn’t an ecommerce vendor in its own right, but instead relied on retailers and restaurants to propose and agree to the discounts it offered on their behalf. This meant it had to lower the risk for businesses participating in its service, adding an extra layer of friction. All of these factors caused Groupon to later abandon the ‘group discount’ model in favour of a marketplace format.

WeChat’s ubiquity and flexibility has allowed Pinduoduo to spread like wildfire among Chinese consumers, who are eager to snap up a good deal. Many Pinduoduo users have reported being introduced to the app by their WeChat friend circle.

By basing its model on social sharing, Pinduoduo turns its customers into brand ambassadors, and rewards them well for it.

With that said, the social element is only half of the reason for Pinduoduo’s immense success. It has also managed to tap into an entirely new market of consumers which have so far been overlooked by its more well-established competitors.

Tapping into a new market

China-focused tech publication Pandaily wrote of Pinduoduo that, “The lure of Pinduoduo is not its low prices, but the satisfaction of getting a good deal”.

However, Pinduoduo’s low prices are still a big lure in and of themselves – especially for Chinese citizens living in its less affluent cities.

Major Chinese ecommerce companies tend to focus their attention on the increasingly wealthy consumers in China’s big cities, appealing to them with luxury goods at high prices. These kinds of products are much less likely to appeal to ordinary workers in third- and fourth-tier cities, who find shopping websites like Tmall (owned by Alibaba Group) too expensive.

Tmall Burberry

Alibaba Group websites like Tmall promote luxury goods, whereas Pinduoduo's customers prefer to search for a bargain.

This is also a demographic who are only recently on the internet, and so depend on apps like WeChat as a source of information. According to consultancy Analysys International, nearly 60% of Pinduoduo’s users are from third-tier cities and beyond.

“The Pinduoduo model is based on social media and has wider reach into a lot of new Internet citizens,” Jason Ding, a partner at consultancy Bain & Co., told Forbes. “Alibaba is trying to serve more high-end customers, but there are people who don't want to pay for premium, but value."

For the same reason, smaller merchants and manufacturers are starting to migrate their wares over to Pinduoduo to increase exposure. Again, with companies like Alibaba much more focused on high-end products, China’s small businesses are left to look elsewhere for an ecommerce partner.

Pinduoduo’s value products haven’t come without some complications, however. The platform has been plagued by fake and shoddy goods, with a Pinduoduo spokeswoman telling Forbes that the company took down 10 million problematic listings in 2017, and has set up a $24 million fund to compensate users.

This could be a problem for Pinduoduo’s presence on WeChat if the company can’t keep on top of things, as in the past, WeChat has shut down hundreds of mini programs for selling counterfeit goods.

However, Pinduoduo has stated that it is handling the problem.

Can Pinduoduo’s ecommerce success be replicated?

China’s big retail companies aren’t taking the success of Pinduoduo lying down. In March, Taobao (a part of Alibaba Group) launched its own app aimed at selling bulk goods at cheap prices: Taobao Tejiaban, or Taobao Special Offer Edition.

Taobao Tejiaban also has a social component, in that users can earn cash rewards of up to 10 yuan (about £1.17 in GBP) by successfully inviting others to use the service.

However, Taobao’s deals may not come close to Pinduoduo’s for value: China commentary blog Sixth Tone found that “some deals on Taobao’s new app weren’t particularly cheap, or even exclusive” – such as a pack of marinated bean curd that was only one yuan cheaper than its price on Taobao.

What about outside of China? Could another company succeed with Pinduoduo’s model elsewhere in the world? Maybe. If Groupon had launched its group discount service in 2018 instead of 2008, it’s quite possible that it would have seen more success.

The western world doesn’t have a single, universally dominant chat app in the same way that China does – while WhatsApp or Facebook Messenger might come close in terms of ubiquity, neither of them boasts the same flexibility that WeChat offers, with payment functionality, social sharing and mini programs all integrated into one app.

However, the well-established presence of social media and smartphones could still enable a group discounts app to catch on and scale much more effectively than it did in 2008.

There might also not be an obviously underserviced market in the western world that compares to China’s lower-tier cities, but that doesn’t mean that there isn’t demand. Even now, no businesses have really stepped up to fill the niche left vacant by Groupon – many companies offer group deals, but not at scale or as their primary business model – leaving it open as a potential opportunity for the right start-up to snap up.

Despite Pinduoduo’s many initial successes, the company is still young and faces challenges around monetising its service. The cheapness that has attracted so many users to the app means sales margins are slim, and nor does Pinduoduo charge merchants a fee for listing their products on the service. While the app might be hugely popular, it won’t matter if Pinduoduo can’t turn that popularity into profit.

But if its model does prove sustainable, watch this space – we might just see some more entrants into the world of social commerce.

For more on innovative social media, join us at the Festival of Marketing in London, 10-11 October, with 10 stages (including one dedicated to social) and some amazing headliners.

Rebecca Sentance

Published 13 June, 2018 by Rebecca Sentance @ Econsultancy

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