Pinduoduo One Year On
After Pinduoduo’s 2018 IPO we discussed how the platform had changed the ecommerce landscape in China, growing quickly into the third largest ecommerce group and potentially the greatest threat to Alibaba’s dominant market position. A year after going public all signals suggest the upstart mobile app is delivering more for consumers, merchants and shareholders. In a mere four years, Pinduoduo has matured from being viewed as an ecommerce gimmick into leading the charge against the big two – Alibaba and JD.com.
The Pinduoduo Network Of Users
From the outset it appeared Pinduoduo focused on achieving critical mass in order to benefit from the network effect. Sharing features, utilising WeChat and an intense focus on virality were at the heart of the app. Achieving scale in the fiercely competitive environment of Chinese ecommerce was a hurdle too high for most ecommerce platforms wanting a slice of the Alibaba and JD cake. Many of the platforms with potential to break in were instead swallowed up by the big players. Even Amazon withdrew completely from the Chinese market after failing to make significant inroads.
Pinduoduo recognised critical mass could be achieve in China without the top tier cities. Through innovation they found a way to position an ecommerce offering which appealed to the right consumers and just as importantly, the right merchants. Merchants in lower tier cities typically used the fragmented ecommerce landscape of the WeChat ecosystem. With the lack of integration with Taobao (and all Alibaba services) and general lack of strong alternative, Pinduoduo stepped in to capture the space. In doing so, ecommerce in China was redefined from the bottom-up.
More Savings, More Fun
Pinduoduo built a fun, consumer-centric shopping experience over the top of a new distribution channel for agricultural produce and low-value items merchant’s relished using, and then focused on rapidly growing market share. A $1.6 billion IPO after only three years of operation and it was clear to see the formula was a success. But the direction of growth after another year was not expected by many, especially at such an early stage in maturity. Most forecasts were concerned with Alibaba encroaching into PDD territory which would eat away at the app’s market share. Few forecasts anticipated that it would be JD and Alibaba under threat in top tier cities. Pinduoduo’s second quarter earnings call sent a shockwave to investors which thought the battle for affluent top tier consumers was only between the big two.
Value For Everyone
Management at PDD have emphasised the shopping experience is meant for all cities in China and is not a preserve of the lower tier cities. Figures back this up, with around half of total GMV being extracted from Tier 1 and Tier 2 cities. This was due largely to the successfully 6.18 shopping festival enjoyed by the company, with promotions targeting what is thought to be non-core consumers hitting the mark. Meanwhile, Alibaba’s 6.18 self-promotional content trumpeted general successes in rural areas and the shopping festival’s focus on lower tier cities.
Since Pinduoduo’s IPO, both Alibaba and JD have declined in share value, whilst PDD has seen double-digit growth. The Alibaba Group is still vastly bigger and is impacted by many factors outside of PDD, including intense rivalry with Tencent in important markets such as digital payments and has suffered more than other domestic rivals from the US-China trade war. Notable during earnings calls from PDD is the emphasis on remaining ‘laser-focused’, which goes against the grain of ecosystem building pursued by Alibaba, Tencent and ByteDance.
PDD vs JD
In terms of monthly active users and daily active users, Pinduoduo has overtaken JD. Alibaba still has around twice as many MAU across all ecommerce platforms. JD still wins out over the upstart in terms of GMV, although this looks set to change by 2021 at projected growth rates. PDD is still a platform geared towards low-value items, however, they are pricing up and working with manufacturers to develop new brands. CEO Zheng Huang has spoken extensively about the opportunity for brands to develop on the platform which will grow into recognisable global brands. The focus on brand building by merchants also includes manufacturers, which sell directly to consumers through the app, in key categories such as agriculture. The concept of brand building is viewed by the company as a form of consumer insurance policy – a recognisable brand creates the perception of greater quality and therefore consumers are willing to pay a premium.
Direct From Manufacturers
Pinduoduo’s focus on merchants and manufactures developing brands and offering exclusive products is more akin to a media platform producing original content as a means of service differentiation. This approach moves the platform away from the perilous position of being locked into a race to the bottom with low-cost rivals, or potential new entrants. Converting app users from only purchasing low value items into higher spending consumers buying a range of goods will drive total GMV upwards as the growth in number of active users inevitably stabilises into a slower phase.
The Future Of Social Commerce
Whilst rising number of users and GMV shows the vibrancy of the platform, it does not necessarily convert into revenue for Pinduoduo. Merchant fees are relatively low in comparison to listing on Taobao or JD, the company’s main revenue driver is selling ad space to merchants. More consumers equal more revenue for merchants. More merchants equal more revenue for Pinduoduo. The interdependence of each party is obvious. But in this equation is also the limited ad space for the platform to sell as the number of merchants rises. Taobao and JD operate as most ecommerce platforms do, with users searching for items and being delivered recommended listings. Digital ads can therefore be pushed based on the user profile but also be directed by the current search term.
Pinduoduo has deliberately deemphasised search, making the app ‘browsing-centric’. This restricts one critical piece of information for making digital ads relevant to the user’s current experience. Less searching also limits the platform’s understanding of user behaviour, as a search query represents stronger purchasing intention or interest than viewing an impression or even clicking a pushed product listing. Increased pressure on ad space and a platform culture of users not-searching could potentially lead to poorer user experiences if the pushed content fails to deliver items which delight.
WeChat’s cautiousness in digital advertising reflects this fear, as Tencent have strongly favoured user experience over an advertiser friendly experience. Assisting merchants in creating their own brand will take the burden off of the platform in pushing content, similar in the way listings are highly targeted by location, which provides natural segmentation in ad space. But the most valuable app real estate will quickly become over-saturated as more merchants are attracted to the platform. Pinduoduo will need to ensure digital ads do not become a layer over the top of the fun shopping experience layer. This would lower consumer engagement and therefore cause a fall in the value of ad space across the entire platform. Pinduoduo have proven to be adept in developing social commerce, now an understanding of the nuance of digital advertising within their own network of users is needed to keep the shopping party going.