Pinduoduo (PDD) Business Model
Pinduoduo (PDD) Business Model
When Pinduoduo launched in 2015, there was little room for a new e-commerce platform
in China. Two major e-commerce platforms JD and Taobao/TMall (sub brands of Alibaba)
dominated the online commerce in China, much like Amazon dominates in the US. During
that same year, JD and Taobao generated a combined $433B of gross merchandise value.
And yet, five years later, Pinduoduo is defying expectations, skyrocketing from a start-up
to a 57-billion-dollar-company with an active buyer base of 585 million that generated
over $144B of Gross Merchandise Value in the past 12 months. In 2020, it is China’s second
largest e-commerce platform on an active user basis after Alibaba.
The core of the Pinduoduo experience is team purchase, where buyers form a group in
order to receive discounts from suppliers. The user experience, as laid out in the graphic
below, is as follows: (1) for each item, merchants decide two prices—one for individual
purchase and one for team purchase. If the user opts for a team purchase, he or she may
either (2.1) initiate a team purchase or (2.2) join an existing team purchase. If the user has
initiated a team purchase, he or she may use social platforms such as WeChat to
proactively encourage friends to join their team (3.1) or more passively wait for other
buyers to join the purchase on the Pinduoduo platform (3.2). A team needs to be formed
within 24 hours to have the order confirmed. Once the team is formed, the purchase is
confirmed, and the product is shipped within 48 hours.
Nearly all Pinduoduo transactions are completed using team purchase. In the early days,
the size of many groups was large (e.g., 10+), but as Pinduoduo has scaled, the group size
requirements have declined. Team purchase is beneficial to both buyers and
manufacturers; buyers benefit from better prices for goods they want, and sellers benefit
from increased demand and better visibility of future demand. In addition to driving down
prices, team purchase helps solve the “trust deficit” of retail in China’s developing cities,
where more than 80 percent) of retail is unorganized and consumers rely heavily on social
recommendations to initiate transactions.
Pinduoduo’s team purchase is often compared to Groupon in the US because they both
enable a form of group buying. But the models are actually very different. First, Pinduoduo
deals are designed by sellers, but initiated by consumers (i.e., users must create or join a
group of a certain size to access a deal), whereas Groupon deals are designed and
managed by sellers. Second, Pinduoduo’s team purchase is used for everyday goods (e.g.,
fruits/vegetables, apparel) that are valuable to consumers vs one-off
products/experiences that haven’t sold well elsewhere. Third, products on Pinduoduo are
offered by geographically diverse merchants from across China and increasingly from all
over the world. This is in contrast with Groupon where mostly the local sellers have
leverage to drive customers to their stores/locations. This results in a much stronger
consumer value proposition as users are getting discounts on goods that they might need
to purchase anyway vs letting sellers dictate discounts by aggregating demand on low-
value goods or excess inventory.
To maximize this effect, Pinduoduo launched in the fruits and vegetables category. This
was strategic for two reasons: 1) incumbents were focused on non-perishable items, so
competition was limited and 2) fruits and vegetables have lower order value but are high
frequency goods, which means users had a reason to use Pinduoduo regularly. When
potential buyers saw a great deal, they would forward it to their neighbours and friends
via WeChat to create a team of 10+ buyers to be able to purchase the product. In return,
the group initiator would get produce for free as they helped Pinduoduo acquire 10
incremental users. Because team purchase drove organic sharing of the product,
Pinduoduo was able to grow its user base very quickly. Only one month after launching
their first party application in January 2016 (transactions prior to this happened via
WeChat), Pinduoduo already had over 10 million customers. Only four years later,
Pinduoduo has grown to 585M active buyers. To compare, Alibaba crossed the 500M
active buyer threshold in 14 to 15 years after launching its consumer facing marketplace
vs just four years for Pinduoduo. The take-away for startups is that the team purchase
model is significant because it enables behaviours associated with offline commerce (e.g.,
sharing products or ideas with friends, browsing a shopping mall with friends) in an online
setting. Team Purchase helped Pinduoduo grow quickly and create a unique
recommendation engine based on users’ social interactions. While Team Purchase may
be unique to China today, we expect social e-commerce to be global. New commerce
platforms that can leverage social relationships will accelerate the offline to online
transition, and if you are able to tap into groups of social relationships vs one-to-one
relationship, the faster your platforms will scale. PDD has one of the most powerful
network effects in the world (Reed’s law: The value of a group-forming network is
proportional to number and the ease with which groups form within it. Think Slack,
WhatsApp Groups -- they all grew exponentially as they could tap into groups of social
relationships)
While Team Purchase was the main reason for Pinduoduo’s rapid growth, a significant
enabler of Pinduoduo’s virality was the widespread use of WeChat as a platform in China.
Tencent (WeChat’s owner) is a large investor in Pinduoduo, and as a result was happy to
let Pinduoduo grow on top of their ecosystem. We think it is highly unlikely that Facebook
would allow a social commerce application like Pinduoduo to be built on top of Messenger
or Instagram in the US. That said, messaging is fragmented in the US, so this is not an issue
for US-based social e-commerce companies.
Users visit Pinduoduo without any specific intent, much like visiting a real-world
shopping mall. In a shopping mall, the time that a consumer spends at the mall directly
correlates with the amount he or she buys. As such, Pinduoduo has gamified the
experience to maximize the amount of time a user spends on the app irrespective of
whether they make a purchase or not. The primary features/experiences that have
incentivized sharing and usage are Daily Check-Ins, Price Cuts, Card Programs and Mini
Games. Social commerce does not just mean connecting user accounts to Facebook. It
means investing in creating physical world experiences online—specifically bringing the
fun of shopping offline to online platforms. We will walk through how Pinduoduo has
implemented this below.
Daily check-ins
The daily check-in is a feature, prominently featured in the centre of the home page. It
encourages daily usage by rewarding users with redeemable points each time he or she
checks into Pinduoduo. The user experience is laid out in the image below. First, the user
clicks the yellow icon to administer a check-in. Each time the user checks-in, they are
granted a small amount of money and/or credit. Over many months (and many check-
ins), these rewards accumulate. In the example below, the user has accumulated 26.6
RMB of rewards. To cash out in the form of a no minimum spend voucher, the user has to
reach a certain minimum value (i.e., 30 RMB).
The daily check-in is a simple yet brilliant feature that encourages users to engage with
Pinduoduo on a daily basis. While each check-in does not generate revenue for
Pinduoduo, the product experience eventually ties back to commerce if/when users
redeem their vouchers. This theoretically should yield a higher customer lifetime value for
Pinduoduo.
Price Chop
Price Chop is a feature that allows users to get products for free by sharing a custom link
with their friends. The feature is outlined in detail below. Once in the Price Chop section
of Pinduoduo, the user selects the goods that they want for free. Upon selection, a 24-
hour timer begins. To get the item for free, the user must share their link with as many
friends as possible. Every friend that clicks on the link and engages with Pinduoduo (no
purchase required) drives an incremental discount for the initiator. If you don't reduce
the price to 0 within 24 hours, you don't get the item for free, and you have to start all
over again!
The product mimics the experience of “levelling” in a massive online multiplayer game
like World of Warcraft, whereby it becomes harder to level up as you graduate to higher
levels. In the case of Pinduoduo, the difficulty is customized based on the user (i.e., easier
for low-engagement users) and the item (i.e., expensive items are more difficult to chop).
Additionally, similar to levelling, as you get closer to 0 (i.e., a higher level) each
incremental friend that engages with your link grants smaller and smaller discounts.
Similar to Daily Check-In, Price Chop encourages users to engage with Pinduoduo, and
eventually ties the engagement to an order on the commerce platform. But unlike Daily
Check-In, Price Chop incentivises users to share Pinduoduo with their social network. So,
in addition to increasing customer lifetime value, Price Chop also helps Pinduoduo to
efficiently acquire customers via user-user sharing of the product.
Card Program
Pinduoduo’s card program is designed to encourage users to share the product amongst
friends and to save money via vouchers/special discounts. Pinduoduo has created several
different cards that either (1) encourage certain user behaviours or (2) provide utility to a
Pinduoduo user. The three most popular cards are the Free Pass Card, the Black Brand
Card and the Brand Card.
The Free Pass Card is similar to a loyalty program where users can enjoy a “team purchase
discount” without having to join a team. Users usually get one Free Pass Card after making
two purchases on Pinduoduo.
The Brand Black Card encourages users to leave reviews on the platform by offering them
a discount on branded products in return. Pinduoduo gives users a Brand Black Card after
they have posted two to four reviews on the website. This is important as consumers rely
on reviews and recommendations from previous buyers when making purchase decisions.
The Brand Black Card incentivises a good user behaviour that makes the platform better
for the entire user base.
The Brand Card aims to promote Pinduoduo’s branded products. Consumers get a Brand
Card after they have made a purchase on Pinduoduo. They can share their brand cards
with friends via WeChat to attract their friends to browse and buy branded products from
Pinduoduo. It is an effective way to encourage users to buy branded products they would
not normally buy because the recommendation/card was sent to them by a trusted friend.
This is also important because Pinduoduo has historically been used to primarily buy non-
branded products. The Brand Card is an effective incentive mechanism to increase
Pinduoduo’s branded product market share in China.
Mini Games
Pinduoduo wants users to engage with the platform as often as possible, and they want
the experience to mimic real-world shopping. As such, they want users to engage with the
app to have fun, even if it does not immediately translate into a purchase. Pinduoduo now
hosts in-app games to help drive up daily time spent on the platform. The first popular
game on Pinduoduo was Duo Duo Orchard. Think of Farmville except now the rewards are
real physical goods. The game is simple—a user creates and nurtures a virtual fruit tree to
eventually yield a real box of fruit shipped to his or her address. It already has more than
11M DAUs!
Though not multiplayer, Orchard has social cooperation aspects that drive up network
engagement as well. Once users choose a tree to create (e.g., mango, lemon, macadamia
nut), they need to nurture the tree with water and fertilizer. The more you shop on
Pinduoduo the more water droplets you receive to nurture your tree. To encourage more
interactions with friends, you can also share the water droplets. Team purchases and
sharing product links enables users to obtain special tools like a water can, decorations
for your orchard, or bags of fertilizer, which accelerate the growth of your tree. Pinduoduo
is expanding its in app game selection. It recently launched DD Bank, a piggy bank game
where users accumulate exchangeable coins over time.
Games like Duo Duo Orchard and DD Bank are ingenious because progress or “levelling”
is tied to behaviours that drive financial goals for the company. By encouraging users to
play games on Pinduoduo, they are able to create a win-win-win situation for merchants,
consumers and themselves. More specifically, merchants see more volume, consumers
have fun and receive unique discounts, and Pinduoduo generates revenue..