In 2020, social commerce in the west is just beginning to come into its own, with social networks like Pinterest, Facebook and Instagram responding to a clear trend from users towards generating sales and looking for product inspiration by giving them the tools to sell directly within the platform.

But in China, social commerce – the merging of social networking and online shopping functionality – has been the norm for years, with users taking it for granted that they can shop for products on the same platforms that they use to socialise, and vice versa.

Even in China, however, you could argue that no company has quite harnessed the “social” part of “social commerce” quite like Pinduoduo. Pinduoduo (拼多多), whose name loosely translates to “join together more more”, is a group buying app where shoppers can secure deals by purchasing items in groups – the more friends they can secure, the better the discount for everyone, and the faster Pinduoduo grows.

In the space of a few years, Pinduoduo has gone from being an up-and-coming disruptor and a steadily-growing threat to incumbent ecommerce giants Alibaba and JD.com to securing its place in the top three most valuable Chinese ecommerce companies – and as of 13th May, overtaking JD.com as China’s second-most valuable online retailer.

Pinduoduo’s rise to success hasn’t been without its bumps in the road, and the company is currently still loss-making, grappling with the challenge of expanding its business into new markets while retaining its hold on those markets (China’s less-wealthy ‘lower tier’ cities) that brought it such success in the first place.

However, five years on from its founding in 2015, it’s clear that Pinduoduo isn’t just a flash-in-the-pan – and it is taking steps to make sure it remains a force to be reckoned with. In the past six months, Pinduoduo has partnered with Amazon, introduced livestreaming to its platform and bought into a major appliance retailer in exchange for the right to sell its products at a discount.

Let’s take a closer look at how Pinduoduo does social commerce, the secrets to its success, and whether there’s anything that other companies – both within China and in the west – can learn from it.

How Pinduoduo does social commerce

Most social commerce ventures that we’ve seen 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 Shops feature to Facebook or shoppable Pins on Pinterest; or by launching a new platform that combines social features with ecommerce.

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.

A core element of Pinduoduo’s success has been its seamless integration with China’s omnipresent super-app, WeChat: Pinduoduo is an app in its own right, but it also exists as a ‘mini-program’ within WeChat, meaning that users can launch Pinduoduo, shop and share it with their friends all without ever leaving WeChat.

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

Image: Piotr Swat/Shutterstock

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. Pinduoduo’s app interface is also an inviting ‘social feed’-style experience consisting of user-tailored listings and promotions, unlike the search-based experience of many other online marketplaces. In-app mobile games and gamified promotions, like a Valentine’s Day group treasure hunt, also keep shoppers engaged and coming back to Pinduoduo.

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 that was previously almost completely overlooked by its more well-established competitors.

Tapping into a new market

In 2018, 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 like Alibaba and JD.com have historically catered mostly to affluent consumers living in China’s ‘first tier’ cities: major metropolitan centres like Beijing and Shanghai. These kinds of consumers have plenty of disposable income and a preference for luxury and imported goods, which Alibaba and JD.com sell at a high price on their platforms. But less well-off consumers from China’s second, third and fourth-tier cities have typically felt like Alibaba and JD.com have little to offer them.

Despite their more limited spending power, China’s lower-tier cities are a huge and (until Pinduoduo came along) virtually untapped demographic: according to Morgan Stanley, lower-tier (third tier and below) cities make up 59% of China’s GDP and a staggering 73% of its population. This is also a demographic who are only recently on the internet, and so depend on apps like WeChat as a source of information.

When it came along, therefore, Pinduoduo was perfectly placed to appeal to this huge demographic, and to steal a march on Alibaba and JD.com in the process. The app spread rapidly among consumers from lower-tier cities, many of whom are housewives responsible for shopping and budgeting for the entire family.

Smaller merchants and manufacturers also began to migrate their wares over to Pinduoduo to increase exposure. Again, more high-end marketplaces like Alibaba-owned Tmall are hostile to small businesses, as operation and advertising costs can account for nearly 30% of a product’s price. Pinduoduo, by contrast, only takes a 0.6% commission, plus some additional fees for marketing and advertising.

It also operates with a streamlined distribution process, partnering directly with product makers and shipping products directly from factories to its users. This allows Pinduoduo to cut out the ‘middleman’ and pass the savings directly onto the consumer – and has also allowed many manufacturers to expand into selling direct to consumer.

Even during the coronavirus-induced lockdown, which negatively impacted countless small businesses and caused delays to shipping and delivery, Pinduoduo managed to reduce its net loss from 2.4 to 1.7 billion yuan, and reported higher online marketing and transaction services income as well as an increase in monthly active users as locked-down consumers turned increasingly to online shopping to meet their needs.

Being a platform that deals primarily in cheap goods has caused its problems, of course. Pinduoduo has had a recurring problem with fake and low-quality products being sold on its platform, as well as other illegal items like pornography, knives and counterfeit license plates. However, the company has made a point of cracking down on them, taking down tens of millions of problematic listings and establishing a 24 million yuan compensation fund for its shoppers.

Pinduoduo is also beginning a gradual move away from cheap goods towards more high-quality and imported products – hence the partnership with Amazon in November 2019, which kicked off with promotions on overseas items like Nintendo Switch consoles and Australian baby formula.

This transition is proving tough for Pinduoduo, as its overhead costs have skyrocketed as a result of this shift in tactics, and in Q4 2019 Pinduoduo posted a much-higher-than-expected quarterly loss, causing its shares to nosedive by nearly 25%. But – despite the coronavirus crisis – it has since climbed back up to become the second-most valuable ecommerce company in China, and its recent deal with appliance company Gome shows it’s serious about expanding into new product categories.

The rise of Pinduoduo: How a group buying app grew to rival Alibaba

Can Pinduoduo’s ecommerce success be replicated?

China’s other major ecommerce companies, Alibaba and JD.com, aren’t taking the success of Pinduoduo lying down. Since Pinduoduo emerged as a serious challenger, both have launched their own apps aimed at shoppers in lower-tier cities: Alibaba’s, called Taobao Tejiaban (or ‘Taobao Special Edition’) was launched in March 2018, while JD.com unveiled Jingxi, a relaunched version of its existing app JD Pinggou, in September 2019.

Like Pinduoduo, Taobao Tejiaban offers a place for merchants to sell cheap goods in bulk with no commission, although there’s no group buying model – instead, the app offers cash rewards of up to 10 yuan (about £1.15 in GBP) for inviting others to use the service. It also integrates elements of gamification, rewarding users with virtual coins for completing certain tasks.

However, after an initial surge in popularity, interest in Taobao Tejiaban seems to have mostly died down. China commentary blog Sixth Tone also noted shortly after the app was launched that its deals were not particularly good value for money: a pack of marinated bean curd, for example, was selling on Taobao Tejiaban for only one yuan less than its listed price on Taobao.

JD.com’s Jingxi stands a much better chance of posing a threat to Pinduoduo, in part because it copies more of its features: Jingxi is also a WeChat mini-app with a group buying model aimed at price-sensitive consumers in lower-tier cities. It offers livestreaming and a one yuan group-buying deal for new users if they invite another friend to join the deal; for Singles Day 2019, Jingxi offered 100 million of these deals to draw in new customers, along with other flash sales promotions and discounts.

Image: madamF/Shutterstock

After WeChat added a Jingxi link to its interface on 31st October to kick off Singles Day promotions, the Jingxi app booked more than a million orders in the space of an hour, and sold almost 60 million items over the course of the day. Jingxi also offers some innovative new features including a ‘product trial’ service for high-end items like jewellery, mobile phones and electronic devices; and ‘My Car’, which recommends car accessories to consumers who input their car’s make and model, and shows them what other people with the same car are buying.

While it’s still early days, Pinduoduo will need to watch out for Jingxi, as JD.com isn’t going to take the theft of its status as China’s second-most valuable ecommerce retailer lying down.

Both JD.com and Alibaba have also been pushing heavily into rural markets in other ways, such as by launching an incubator program for influencers from rural backgrounds (Alibaba) and using drones to facilitate last-mile delivery in hard-to-reach areas (JD.com). (The use of delivery drones proved invaluable for JD.com during the coronavirus lockdown, particularly when it came to reaching households in Wuhan, the virus epicentre and a rural city).

Just as Pinduoduo has struggled with the costs of marketing to wealthy consumers in higher-tier cities, however, JD.com and (to a lesser extent) Alibaba have found it expensive to maintain their usual 24-hour delivery promise, which is a core part of the business model, in smaller outlying cities with a less developed infrastructure. In 2019, JD.com’s third-quarter net profit crashed by 80% due to the cost of delivering products to rural customers.

All of these efforts go to show just how much Pinduoduo’s rise – and its appeal to China’s rural consumers – has upended China’s ecommerce landscape.

What the west could learn from Pinduoduo

What about outside of China? Could another company succeed with Pinduoduo’s model elsewhere in the world, even without the unique features of China’s rural markets and the ubiquitous WeChat?

It’s possible that if Groupon had launched in 2020 – or 2018, or 2015 – it would have seen more success than it did in 2008, thanks to the ubiquity of smartphones and social media making it much easier to share with friends and group together to get discounts.

However, without the key ingredients of a ubiquitous super app and a huge untapped market in the form of China’s rural consumers, it wouldn’t necessarily achieve the same scale. But while Pinduoduo is a very Chinese success story, that doesn’t mean that there aren’t lessons that business in the west can learn from Pinduoduo. Here are four that I think we can take away:

1) Go where your rivals aren’t

Despite how powerful Alibaba and JD.com already were when Pinduoduo launched in 2015, it was able to do well because it found a way to serve a market that the two ‘titans of ecommerce’ had completely overlooked – and keep people coming back.

2) Don’t be afraid to form partnerships

Tencent, the parent company behind WeChat, was an early investor in Pinduoduo, and it’s fair to say that the social commerce platform would have had a much, much tougher time growing without WeChat. But it did grow – and now is more than able to stand on its own two feet.

However, Pinduoduo is still forming partnerships with the likes of Amazon and Gome, realising that this puts it in a better position to challenge its major rivals.

3) Give people a reason to share

This is an important lesson for any social-network-esque business trying to attain a critical mass of users – if people have a reason to share, then half your work is done for you.

4) Make it fun!

Pinduoduo’s gamified components and its AI-tailored feed turned shopping into a fun discovery experience for its users, which kept engagement and time in the app high. One big lesson from China’s successful businesses is that they’re not afraid to mash up different elements of gaming, shopping, socialising – anything goes as long as the resulting experience is fun and addictive.

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