Why did Pinduoduo’s methodology fail?

As e-commerce competition becomes increasingly fierce, major platforms have followed Pinduoduo's low-price strategy and refund-only policy in an attempt to attract consumers. However, this model is not a long-term solution and may have a negative impact on merchants and consumers. This article will explore how e-commerce platforms can build confidence in their own models, and how to leverage their strengths and avoid weaknesses in the competition to provide consumers with a better shopping experience.

Not long ago, Lance, the manager of the original furniture brand OKENSHO, shared a dramatic business detail: his store had a cowhide sofa that sold for more than 20,000 yuan. After receiving it, the buyer directly applied for a refund. Lance spent more than 10 days providing evidence and communicating, and finally the Xiaohongshu platform determined that the evidence was successful.

However, on another e-commerce platform, he had an order with a furniture factory as the delivery address, which seemed to be from a competitor. The user immediately initiated a refund after receiving the goods. For such a high-priced product, the platform customer service did not even ask the merchant and directly approved it.

Lance said this is why he continued to choose to do business on Xiaohongshu.

In the past year, the "lowest prices across the network" and "only refunds" have made e-commerce giants other than Pinduoduo crazy, but small-scale trendy e-commerce companies such as Dewu, lifestyle e-commerce Xiaohongshu, and discount e-commerce Vipshop have been calm. However, judging from a series of recent signals, the e-commerce giants who were lost in Pinduoduo's "magic" seem to have finally calmed down.

Whether it is the strategic shift from low-price worship back to GMV supremacy, or the tactical correction of "refund only", it is just the beginning. In the game between all parties, it is expected that there will be more adjustments. The e-commerce competition will enter a new cycle.

Before that, we focus on two points: Why did Pinduoduo's methodology fail, and how did the e-commerce giant build confidence in its own model?

01 The Pinduoduo model cannot be learned

Taobao, which was previously frequently criticized for being "becoming more and more like Pinduoduo," finally seems to have calmed down.

Starting from August 9, Taobao will officially optimize the "refund only" strategy, enhance merchants' after-sales autonomy based on the new experience points, and reduce or cancel after-sales intervention for high-quality stores.

▲Taobao’s new “refund only” policy

The new strategy is obviously more "granular": for merchants with a comprehensive store experience score of ≥4.8 points, the platform will not actively intervene through Wangwang and support only refunds after receiving the goods, but will encourage merchants to negotiate with consumers first. For merchants in other segments, the platform will grant different degrees of autonomy based on the experience score and industry nature. The higher the experience score, the greater the merchant's disposal rights.

At the same time, the refund appeal process has been optimized. After the merchant files an appeal, the platform will ask a third-party testing agency to conduct random inspections on the products. If the inspection passes, the platform will compensate the merchant for the loss.

Taobao has put small businesses like Lance in a cage by adopting the one-size-fits-all "refund only" policy.

This step is more like a microcosm of the e-commerce war. Starting in 2023, Taobao, JD.com, Douyin, and Kuaishou have successively started to learn from Pinduoduo's model. Each company first built an "absolutely low price" mentality around price power, relying on 10 billion subsidies, white-label and industrial belt merchants, and automatic "price comparison systems"; then in December 2023, they began to copy Pinduoduo's radical measure of "only refunds" around customer experience.

Now it seems that these measures are more like being forced to follow up in an emergency, in order not to lose out in voice and avoid consumers' minds becoming rigid. As for whether they can stabilize the market and drive the expected growth, I believe the data has verified it.

At least from the perspective of actions, now is the stage of collective correction. According to "Late Post", Douyin e-commerce has recently adjusted the priority of its business goals. "Price power" is no longer in the first place, and GMV growth has become its focus in the second half of the year. Taobao merchants also learned from the Taotian closed-door meeting that since last year, the system of allocating search weight according to "five-star price power" has been weakened and changed back to allocation according to GMV. Specifically in terms of business indicators, this year Taobao's assessment focus has shifted to GMV (transaction amount) and AAC (average consumption amount), and no longer pursues high DAC (order volume) brought by low prices.

The periodic pullback means that in order to cope with the pressure of Pinduoduo's model sucking away consumer orders like a black hole, other e-commerce giants' strategy of understanding Pinduoduo and becoming Pinduoduo ultimately failed.

JD.com is the only company that has not given in yet. Judging from the "refund only" policy, JD.com's self-operated business, product categories, user level, and relatively restrained restrictive terms mean that it and the merchants in its ecosystem will be less affected by the "refund only" policy. As for the low-price strategy, there is reason to believe that this is something JD.com will not give in to.

After all, JD.com’s challenges are different from those of other companies. When other companies want to compete for users, they highlight that their prices are the same as or cheaper than Pinduoduo. What Liu Qiangdong wants to tear off is the label that buying things on JD.com is more expensive.

02 Why is refunding only a "same path, different destination"?

In the view of NoNoise, replicating Pinduoduo represented only by refunds is not a different path to the same destination, but rather "the same path but different destination".

Pinduoduo started out with low prices and white-label merchants. The controversial "refund only" policy did not bring excessive impact to the platform. On the contrary, the "refund only" policy can effectively drive out low-quality merchants and improve consumer experience.

To put it bluntly, for Pinduoduo, refunds alone are not only an after-sales policy, but also a means of platform ecological governance.

This is completely different from the original intention of Amazon, the originator of "refund only" in the e-commerce industry. When Amazon added the refund only service to its after-sales policy in 2017, it explained that this was a highly demanded intentional feature by sellers. In many cases, it can help sellers save on return shipping and processing costs, reduce buyer return dissatisfaction rates, and improve store ratings.

As a global e-commerce company, Amazon is well-known for its user experience, but when looking at this service alone, the first consideration is still "cost". Leading US retailers such as Walmart and Target also have "refund only" services, but there are detailed regulations on triggering conditions and product categories. Everyone claims that users are supreme, but the core is still a cost assessment.

On the other hand, domestic e-commerce giants follow the "refund only" policy more to improve user experience. However, the ecosystems of each company are not exactly the same. Take Taobao as an example. Jack Ma once said that the original intention of founding Taobao was to make it easy to do business in the world, and merchants are the basic base of Taobao. After 21 years of sifting, the huge, diverse and relatively mature merchant ecosystem has also become Taobao's core advantage.

Taotian’s key revenue comes from customer management fees (traffic advertising and transaction commissions) on the merchant side. In the first quarter of 2024, this part of revenue reached 63.574 billion yuan.

The ideal situation for Taobao's transformation is to win back users with price power and user experience, provide momentum for merchants' business growth, and then earn more advertising fees and commissions from merchants. However, if merchants' interests are squeezed because of being too pleasing to consumers, the original business closed loop may be flawed, and "refund only" happens to have such a risk.

Under what circumstances will "refund only" become a bottom-line clause urgently needed by consumers outside the Pinduoduo ecosystem? For example, a large number of inferior merchants or immature merchants suddenly flood the platform, or the platform's after-sales system itself is imperfect. However, judging from the e-commerce stages that Taobao, JD.com, JD.com, Douyin, and Kuaishou have gone through, at this time, the platform seems to need Pinduoduo's "refund only" more than consumers.

In the business system, a service clause that involves balancing the interests of multiple parties is neither right nor wrong. However, if the rules themselves are general, their specific binding force depends more on human nature and civilization, and the rules will need to be repaired and adjusted later.

In the United States, the test of human nature caused by returns and refunds alone is almost driving large retailers crazy.

According to a 2017 survey by the National Retail Federation, about 11% of returns were considered malicious. By 2023, this figure rose to 13.7%, and the losses caused to merchants by return fraud and abuse of return rules were about $101 billion, so much so that the National Retail Federation classified malicious returns as "a major problem in our industry."

▲According to the National Retail Federation, fraudulent returns accounted for 13.7% in 2023

Even though the US ranks among the top ten in the world in terms of per capita GDP and is considered a developed country, it is still common to take advantage of the rules to make profits. A foreign media investigation found that Amazon has long believed in a system that prioritizes pleasing customers, including easy returns, but this policy hurts merchants who account for the majority of its online sales. Merchants said that people often send junk goods back to sellers and claim that they are returns, and there is usually almost no penalty.

For example, a seller of household goods received a "return" package containing a TV set-top box and an old soap.

Amazon is also aware of the growing problem and is patching its policies in 2023. According to the new rules, if a buyer returns more than five times a month, the platform will determine whether the buyer is abusing the return policy. Once marked, the buyer will be added to Amazon's blacklist and will be charged a return fee or simply not allowed to return the goods.

Looking back at the domestic e-commerce ecosystem, is it possible that the "wool party" has less damage to the normal order? I believe that the platform has its own data to make a judgment. At least from the merchants' reactions, the impact does exist. As consumers, we are also worried that the cost paid by merchants for the wool party will eventually be transferred to the goods.

In summary, we believe that it is imperative for e-commerce platforms to correct their “refund only” approach.

First of all, it is based on strategic considerations. Taking Taobao as an example, returning to the GMV orientation means that Taobao Tmall must consolidate its position as the preferred platform for brand management and attract more brands to settle in. White-label merchants contribute low prices and richness to the platform; while brand merchants can provide higher customer unit prices, more advertising budgets, and better financial report data. According to Alibaba's first quarter 2024 financial report, the number of new merchants settled in Tmall increased by 60% year-on-year in the quarter. To reduce the worries of new merchants, it is also necessary for the platform to provide a more friendly settlement environment.

▲Image source: Tmall headlines

The second is probably the realization of the limitations of big data analysis. According to the Wall Street Journal, Amazon, Walmart and other companies use artificial intelligence to decide whether it is economical to process returns. If cheap or oversized items will incur high shipping costs, it is more cost-effective to simply refund. There are clear reference values ​​in this algorithm.

However, domestic AI faces the following challenges: determining whether a product matches its description, or judging whether a transaction is right or wrong based on past product reviews, given the lack of product category restrictions and opaque triggering conditions. The rougher the rules, the more difficult it is for AI. This may mean that businesses are biased towards consumers, making it difficult to do business.

Third, new policy pressure. The Interim Provisions on Anti-Unfair Competition on the Internet will be officially implemented on September 1. Article 24 of the Provisions is considered to have drawn a clear bottom line for orderly competition on platforms.

Platform operators shall not use service agreements, transaction rules and other means to impose unreasonable restrictions or impose unreasonable conditions on transactions, transaction prices and transactions with other operators within the platform. This mainly includes the following situations:

(1) Forcing operators on the platform to sign exclusive agreements;

(2) Imposing unreasonable restrictions on the price, sales objects, sales areas or sales time of commodities;

(3) Unreasonably setting restrictions such as deducting deposits, cutting subsidies, discounts and traffic resources;

(iv) Using service agreements or transaction rules to impose other unreasonable restrictions or attach unreasonable conditions on transactions of operators within the platform.

As for the "low-price strategy" of homogenization across the entire network, I believe that there will be a clearer distinction in the future. After the "absolutely low price" lowers the average customer price, the pressure on the e-commerce platform's GMV growth rate to decline will increase sharply. This is collective pressure.

Furthermore, Pinduoduo's absolutely low price is the result of a whole set of mechanism designs. It is not as simple as simply introducing white-label merchants or industrial belt merchants. This mechanism allows merchants to compete with each other by giving up traffic channels, and ultimately consumers get absolutely low prices.

Without institutional guarantees, other e-commerce platforms can only imitate in form. Even if they can level the prices in the short term, they can only rewrite their "genes" if they want to maintain low prices in the long term.

03 New cycle of e-commerce competition: Playing to one’s strengths is more valuable than avoiding one’s weaknesses

From a year-long study of Pinduoduo to the demystification of Pinduoduo, a new consensus is forming in the industry – low prices are important, but low prices are not the only thing.

The price war is just the beginning of Beethoven's "Symphony No. 5". It is rapid and cold, sounding the alarm of "reshuffle knocking on the door". What follows is the second half, from panic to determination, from gloom to grandeur.

In the future, major e-commerce platforms will still need to expand their competitive advantages in terms of product categories, experience, and service differentiation. Just as Taotian’s top management recently emphasized, “We must know our strengths and weaknesses.”

In the current retail environment, emphasizing differentiation is often more like correct nonsense. When companies face growth pressure, competition pressure, and capital market pressure, it is particularly difficult to make difficult and correct choices.

As for bystanders, it seems unfair to evaluate the development of a company based on the results of a quarter or a node, and then to promote or criticize it. In the history of business, too many great companies have repeatedly crossed the line between life and death, and finally got out of the bottleneck and became great. Of course, in addition to luck, these companies have a strong determination and will not lose their composure due to external changes.

Just like now, it is more valuable to play to one's strengths than to avoid one's weaknesses - for the industry, it will avoid endless involution. After all, a healthy business ecology cannot be based on zero-sum game; for customers, it is a process of close connection through providing unique value, which is also the underlying driving force behind the counter-cyclical growth of retailers such as Sam's Club, Costco, Aldi, and Pangdonglai.

For example, Taotian, which is undergoing rapid changes, has recently focused more on leveraging its strengths: optimizing "refund only" is just one of its actions. In addition to canceling the 618 pre-sale and modifying the core index of search weight - from store competitiveness to product power priority; on the basic "merchant" side, Taotian provides larger-scale financial and logistics support. Qualified merchants can enjoy extremely fast payment services to reduce cash flow pressure; provide logistics subsidies and freight insurance discounts, such as providing merchants with multiple subsidy coupon packages during the delivery stage; and provide merchants with free AI tools to improve marketing efficiency.

The actions to "please" merchants continue to escalate: starting from September 1, 2024, Tmall will cancel the platform's annual software service fee: new merchants joining from September will not need to pay; Tmall will refund merchants who have paid annual fees in batches according to settlement rules; Taobao also has preferential policies for setting basic software service fees for sellers.

I believe that in the future, other e-commerce platforms will upgrade their "strengths" and give up competing with Pinduoduo.

It’s a good thing that the industry has finally calmed down. Even if the competitive environment changes rapidly, it is difficult for consumers to abandon an ecosystem that makes consumers the ultimate beneficiaries.

Text｜Jian Feiran and Sun Jing