Context

The Chinese e-commerce market is dominated by large players such as Alibaba and JD.com who hold nearly 75% of the total market share. Newer players often struggle to enter the market due to intense competition, but a new player called Pinduoduo has managed to claim the third spot in the e-commerce market and is the fastest growing e-commerce app in China (see figure 1 and 2). In a short period of time, Pinduoduo acquired a market share of roughly 5% (Financial Times, 2018) and achieved 100 billion RMB annual merchandise sold in two years after launch (Graziani, 2018). Data from December 2017 indicate that 50% of all users that uninstalled Taobao (owned by Alibaba) moved to Pinduoduo (Dailypanda, 2018), marking Pinduoduo is a potential threat if left unchecked.

Introduction – Pinduoduo and its business model

Pinduoduo was found in September 2015 in Shanghai by former Google engineer Zheng Huang and is a third-party social commerce platform that focusses on connecting manufacturers, suppliers and retailers with end-consumers in the B2C market. The platform earns revenue from collecting commission fees and online marketing services including advertising. Pinduoduo’s platform distinguishes itself from its competitors by providing users the option to conduct “team purchases”. The concept of team purchase is similar to Groupon’s “group buy” (see blogpost of Hsuchiachenjenny (2014) for a brief introduction). Users can invite friends through other social media platforms to create a “shopping team” and order discounted items together in bulk (see figure 3 and 4). Team purchases allow consumers to receive discounts as much as 90% off on products ranging from T-shirts to smartphones. The platform sold more than 4.8 million umbrellas at 10.3 RMB (1.51 USD) per piece and 6.4 million units of tissue paper at 1.29 RMB (0.19 USD) per box (Lee, 2018). Users mainly benefit from Pinduoduo due to getting products at a lower price, while suppliers are enabled to benefit from reducing inventories and generating revenue from aggregation of demand.

Pinduoduo’s unique value: user engagement – more than just financial stimuli!

Pinduoduo uses financial stimuli to encourage consumers to help them expand the user base. For instance, convincing one person to install the app and sign in with WeChat will be rewarded with a box of candy and convincing nine people will grant you 1.3 kg of nuts (Graziani, 2018). While financial incentives motivate people to act, academic research (Burtch, Hong, Bapna & Griskevicius, 2018) argue that including social norms are more effective at motivating intensive effort. The social norms refer to “the prevalence of a behavior in a relevant population, such as the number of individuals who already have written reviews” (Burtch, Hong, Bapna & Griskevicius, 2018). Their study pointed out that financial incentives encourage people to write product reviews, while social norms are better to stimulate people to write longer reviews. A combination of financial benefits and social norms are posed to be the best driver of quantity and quality of writing reviews.

Drawing the link with Pinduoduo, we see that the company incorporates the concept of social norms in its business model. Pinduoduo’s application is gamified and includes a public leaderboard that ranks people based on the money they have made out of inviting friends and displays the number of friends they invited. This aspect allows its users to compare themselves with other people and creates a social motivating factor that goes beyond a mere financial stimulus. The appeal of Pinduoduo lies not merely in its low prices but comes from the satisfaction and the pleasure one receives from getting a good deal (Pandadaily, 2018). Therefore, the inclusion of a social motivating factor alleviates its dependence on the constant input of money to incentivize its users. Instigating users to act as brand ambassadors motivated by both financial and more importantly social benefits is a major success factor that allowed Pinduoduo to establish a large user base in a short period of time.

Are Pinduoduo and Groupon the same?

At the time Groupon emerged in 2008, social media and mobile was less entangled with people’s daily lives than in the current situation. Desktop usage, email newsletters, and credit card payments posed limitations on Groupon’s social commerce potential. In 2013, Groupon has dropped its group buy feature and has lost its status as a social commerce platform. The main difference with Groupon’s business model is that Pinduoduo’s business model leverages the social ecosystem in a more effective way. Tencent has been a principal shareholder of Pinduoduo since February 2017 and facilitated the integration of Pinduoduo’s platform with its own social media. Integration with WeChat (an all-inclusive social media app sharing characteristic of Facebook, Twitter and Whatsapp with Paypal functionality) allows fast and real-time communication between users and enables users to make payments with little effort. At this point of time, it is evident that Pinduoduo has surpassed Groupon’s ability to leverage the social ecosystem to establish the consumer base that it has now.

The challenges ahead

Viewing Pinduoduo’s success in motivating users to spread the word and persuade their friends in using the app, the company however reported an annual loss of 525 million RMB (77.5 million USD) in 2017 (Fung Business Intelligence, 2018). The current strategy is focused on a push strategy and faces high costs in building brand awareness of the platform. The platform is however plagued with fake products similar to its rival Taobao and JD.com (Lee, 2018). Other questions concern to what extend product suppliers are willing to tap into the platform, as the platform highly focuses on price and pays little attention to brand awareness of its suppliers (Fung Business Intelligence, 2018).

Summary

Pinduoduo raises the traditional e-commerce platform to the next level by incorporating social media. Users may benefit from getting lower prices for products, but in return need to find friends to join them. The platform also encompasses social norms (e.g. public ranking system) for users to expose themselves and improve community building, while simultaneously gamifying the concept and adding a fun aspect. While the ability of its business model is rather successful, there are challenges that it needs to overcome to guarantee the sustainability of its business model. This is however a topic for another discussion.

Sources

Burtch, G., Ghose, A. and Wattal, S. (2013). An empirical examination of the antecedents and consequences of contribution patterns in crowd-funded markets. Information Systems Research, 24(3), pp.499-519.

Financial Times (2018). Ex-Google engineer set for big payday after Pinduoduo IPO. Retrieved from https://www.ft.com/content/05408022-8a2b-11e8-b18d-0181731a0340

Fung Business Intelligence (2018) Group-buying platform – Pinduoduo. Retrieved from https://www.fbicgroup.com/sites/default/files/CNE_Pinduoduo.pdf

Graziani, T. (2018) Pinduoduo: a Close Look at the Fastest Growing E-commerce App in China. Retrieved from https://walkthechat.com/pinduoduo-close-look-fastest-growing-app-china/

Hsuchiachenjenny (2014) Business case Groupon. Retrieved from https://consumervaluecreation.com/2014/05/18/groupon/

Lee, E. (2018) https://techcrunch.com/2018/07/26/the-incredible-rise-of-pinduoduo/

Pandadaily (2018) Alibaba’s Worst Nightmare: Pinduoduo Becoming the No.1 E-commerce App in China. Retrieved from https://pandaily.com/alibabas-worst-nightmare-pinduoduo-becoming-the-no-1-e-commerce-app-in-china/