An in-depth review of Pinduoduo’s rise

This article is an in-depth review of Pinduoduo, analyzing the reasons for its rise. This article reviews Pinduoduo from the context of the battle. This article is suitable for people who are interested in Pinduoduo.

More than three years have passed, and Pinduoduo is still one of the hottest Chinese Internet stocks, and its growth rate has not slowed down.

Unfortunately, there has not been much progress in the market research on Pinduoduo (whether bullish or bearish), and this article is still the best in-depth research on Pinduoduo ever (perhaps the only one).

Although the situation has changed a lot in the past three years, the core factors that have led to Pinduoduo's financial performance and stock price soaring remain unchanged. For this reason, we republish this article in the hope that it will be of some inspiration to everyone.

As of May 15, 2020, Pinduoduo's market value has exceeded US$70 billion, making it the fourth largest Internet company listed in the United States after Alibaba, Tencent, and Meituan.

Obviously, there is no force stopping Pinduoduo from moving forward until it surpasses JD.com in GMV, approaches Taobao, and becomes profitable around 2021. The question now is not whether Pinduoduo can become "mainstream", but how fast it can become "mainstream" and "conquer new territories" and how high the ceiling can be.

However, the market has not yet fully understood the logic behind Pinduoduo's rise. Even in the Internet industry, many people do not understand it except e-commerce professionals.

Most people attribute the rise of Pinduoduo only to "low prices", "low thresholds" or even "consumption downgrade"; others simply and crudely believe that Pinduoduo's low prices are entirely due to platform subsidies.

The above views are not only wrong, but also harmful - they will prevent us from correctly understanding new things and new trends and form incorrect mindsets.

In my opinion, Pinduoduo's rise to date is a battle that is very worth studying, and its importance and interest are comparable to the largest combined arms battles in human history: Operation Barbarossa, Operation Uranus, Operation Overlord, Operation Bagration, etc.

We must first understand the context of the battle at a high level before we can understand the causes and consequences of the battle, as well as the tactical execution of the warring parties in the process. Such an analysis is very difficult, but I can try to do it here, waiting for more experienced people to correct and supplement it.

Cause: Overview of the retail e-commerce market in 2016

By 2016, just before Pinduoduo's rapid rise, China's retail e-commerce market had basically fallen into the hands of two giants, Alibaba (Taobao) and JD.com. Traditional retail giants, such as Suning and Gome, have basically failed in their strategy of building large independent e-commerce platforms; Vipshop, Dangdang, NetEase Kaola, Xiaomi Youpin and others can only be relegated to vertical platforms.

In the eyes of most people, the competition between Alibaba and JD.com will be the main theme of the retail e-commerce market in the next five years or even longer.

There are many reasons why Alibaba and JD.com have gained control of the entire market, but the most important one is that they both attach great importance to the trend of mobile Internet, invested heavily in mobile (wireless) early on, and actively guided users to mobile terminals. For traditional retail giants, the saddest thing is that they have not had time to adapt to the trend of "Internetization", and are forced to deal with the more terrible trend of "mobile Internetization".

In fact, from 2013 to 2017, all Internet companies that adapted to the mobile trend welcomed a huge wave of development opportunities, those that adapted more slowly faced a decline in status, and those that did not adapt were marginalized or perished.

In the situation where the two giants coexist, JD.com believes that its strategic advantage is more obvious and that it will "surpass Taobao sooner or later" mainly based on the following reasons:

• JD.com’s self-operated model can more effectively eliminate counterfeit and parallel-imported goods, making it more attractive to the high-end market;
• The self-operated model naturally has operating leverage. Once the scale effect is formed, the subsequent growth will be like a snowball.
• JD.com has stronger fulfillment capabilities by building its own logistics system;
• JD.com can utilize WeChat’s traffic resources, but Taobao cannot.

Among the four reasons mentioned above, JD.com has never really made good use of the fourth one (WeChat traffic); the third one (self-built logistics) has also been proven to be not that important; the second one (self-operated model) also has its pros and cons.

However, the first point (better quality control and higher-end positioning) makes sense. Taobao was initially a market dominated by C stores, and later gradually expanded to small and medium-sized B stores, but its coverage of high-end brands and high-end consumers was still insufficient.

In response to this, Alibaba’s answer is: to give Tmall (formerly Taobao Mall) a higher status and more resources; the “branding” and “high-endization” of Taobao e-commerce is actually “Tmall-ization”.

From 2013 to 2017, Alibaba's greatest business success was the growth of Taobao Mobile and Tmall. Since 2015, Tmall's GMV growth rate has been higher than that of the Taobao system as a whole every quarter (note: estimated value, Alibaba no longer discloses the overall GMV of the Taobao system); in the just-concluded 2019-20 fiscal year, Tmall's GMV is likely to have reached the same level as or even surpassed Taobao.

The “Tmallization” of Taobao e-commerce is not only a response to JD.com’s challenge, but also has strong practical financial significance:

• Taobao has no commission, but Tmall has commission income.
• High-end brands that have settled in Tmall have higher average order values ​​and more sufficient marketing budgets, thus achieving a higher overall monetization rate.
• Tmall brand flagship stores’ enthusiasm and ability to participate in various promotional activities are also far higher than Taobao C stores and small and medium-sized B stores.

In a nutshell, the core growth logic of Taobao e-commerce and JD.com around 2016 was "consumption upgrade". The core advantage of e-commerce over offline retail is no longer price (although price still has an advantage), but comprehensive "user experience".

Consumers are willing to pay higher prices for higher-end brands and better experiences. Therefore, in the retail e-commerce market, the Taobao system as a whole has "moved upward". In this process, C stores, small and medium-sized B stores and vertical B stores at the grassroots level have been sacrificed to a certain extent. And this is the first reason for Pinduoduo's strong rise from 2016 to 2019.

The "Exodus" of mid- and low-end merchants: they finally settled in Pinduoduo. Taobao was and still is China's largest retail e-commerce platform, with a solid traffic base and complete infrastructure.

However, within the Taobao system, various resources are quietly concentrating on the top—from C stores to B stores, from small and medium-sized B stores to brand flagship stores, from low-end brands to high-end brands, and from high-end brands to KA (core customers). Moreover, this process is gradual and is still in progress as of 2019.

Traffic within the Taobao system is divided into two categories: the first category is "paid", mainly through advertising and direct traffic; the second category is "free", which is the traffic allocated by the platform through algorithms and follow-up relationships. Obviously, low- and mid-end merchants cannot compare with high-end brands in terms of "spending"; in terms of "free traffic", the Taobao system's algorithm is also increasingly inclined to "prioritize large stores".

In general, Taobao's traffic distribution follows the following priority chain:

• The store-type Tmall store is higher than the Tmall flagship store, the Tmall flagship store is higher than the Tmall exclusive store, the Tmall exclusive store is higher than the Tmall franchise store, the Tmall franchise store is higher than the corporate C store, and the corporate C store is higher than the individual C store.
• Merchants in the entire Taobao system are divided into seven levels based on their size and brand (note: not the "diamond" or "crown" levels understood by consumers). Level 7 (mainly KA) has the highest weight, followed by level 6, and the traffic that can be allocated to levels 1-5 is already very small.

Therefore, the mid- and low-end merchants in the Taobao system had to find a new way out - not to abandon the Taobao system. Even today, not many people dare to completely abandon the Taobao system; but to find a way to "have three burrows" outside the Taobao system.

They considered JD.com, but its self-operated model, inefficient advertising mechanism, and DAU/user time far lower than Taobao reduced its appeal. They considered WeChat merchants, but WeChat merchants lacking formal transactions and standardized mechanisms are only stopgap measures.

They also considered WeChat official accounts and mini-programs, but WeChat does neither centralized traffic distribution nor centralized operations; moreover, mini-programs did not really see big development until the end of 2017, which was too late.

In this process, Pinduoduo has gradually become the core choice for low-end and mid-end merchants to "Exodus". It has almost all the conditions that these merchants need:

• With SKU (single product) as the core, no shopping cart, no store operation, focus on selling goods, and reduce the operation and promotion pressure of merchants;
• In the early days, there were almost no high-end brands, and the focus was on standard products and white-label products. All traffic was equivalent to that of merchants below level 5 in the Taobao system.
• The WeChat group buying model provides a huge single product shipment volume, meeting the needs of standard product and white-label merchants to make small profits but quick turnover and to make single popular products as large as possible;
• What’s amazing is that Taobao merchants were originally unable to effectively utilize WeChat scenarios (they could only use Taobao passwords), but in the early days of Pinduoduo, 100% of the scenarios were WeChat scenarios, which did not conflict with the original Taobao shopping scenarios.

Merchants pursue lower traffic acquisition costs and lower overall burden rates (or monetization rates for platforms), just like water flows to lower places, this is an irreversible trend.

Moreover, what Pinduoduo can provide is not a little low-cost traffic, but a huge amount of low-cost traffic; not the hot-selling logic of one or two single hot-selling products, but the hot-selling opportunities of many single hot-selling products every day. As long as there is a substantial gap in customer acquisition cost and burden rate between Pinduoduo and Taobao, the process of Pinduoduo absorbing merchants will not end.

There is no doubt that WeChat infrastructure plays a key role in supporting Pinduoduo. Without WeChat, Pinduoduo would not have been able to rise. JD.com has not made good use of WeChat's traffic entrance, and it is still the case now; this is not only because JD.com is unwilling to rely too much on WeChat, but also because it has never been familiar with the "social" and "fun" ways of playing on the Internet.

After Tencent invested in Pinduoduo, Pinduoduo is no longer at risk of being banned by WeChat (although there are still some restrictions on inducing sharing). The question is: Why did Pinduoduo's rise begin in 2016, and not earlier? After Pinduoduo itself became a top APP, where is the role of WeChat? The key to the problem lies in WeChat's two major infrastructures - WeChat Payment and Mini Programs.

Mini programs played a very important role in the early days of Pinduoduo (before 2018). Although Pinduoduo is now trying hard to induce users to use its official app, most users still use both the app and the mini program. The role of WeChat Pay has been overlooked by many people - it is even more important than the mini program.

Without WeChat Pay, Pinduoduo might not have developed from the beginning. In third-tier and lower cities, as well as outside the fifth ring road of first- and second-tier cities, there are a large number of people who do not have Alipay accounts and WeChat Pay cards, mainly middle-aged and elderly people.

Through actions such as grabbing red envelopes, they have accumulated a certain amount of cash in their WeChat payment accounts, but lack ways to spend it. Pinduoduo attracted these seed users in the early days - for them, buying a pair of discounted shoes in a group is the same as grabbing a red envelope of more than ten yuan in a group.

Of course, after buying things on Pinduoduo, these people often become loyal e-commerce users, linking their cards to WeChat and registering for Alipay.

Therefore, rather than saying that Pinduoduo has siphoned away Taobao users, it is better to say that it has expanded the user base of the entire e-commerce industry. We have reason to believe that a large portion of the new buyers on Taobao and JD.com after 2016 were educated by Pinduoduo.

Since then, some people have always believed that for consumers, Pinduoduo is "primary school", Taobao is "middle school", and Tmall and JD.com are "university"; they will eventually "graduate" from primary school. This view has some truth, but it is extremely incomplete and has been falsified by facts.

To this day, WeChat remains one of Pinduoduo's most important shopping scenarios: seeing group buying information in a WeChat group or personal conversation, clicking on it to launch the Pinduoduo APP and then completing the order may still account for 30-50% of Pinduoduo's overall customer orders.

Pinduoduo’s shopping logic is different from Taobao’s: the latter is “the desire to buy arises while browsing the store”, while the former is “directly aroused by a certain SKU”. “Shopping logic” is suitable for those stores with large scale and rich operating resources, while “direct logic” is suitable for small and medium-sized stores.

The logic behind Pinduoduo's continued growth: white-label products + repeat purchases Those who are bearish on Pinduoduo will insist that: Although Pinduoduo has advantages in all aspects, as of the beginning of 2020, these advantages have been exhausted and the ceiling of growth has arrived.

They tend to attribute Pinduoduo's price advantage entirely to the "10 billion yuan subsidy", believing that once the subsidy is cancelled, Pinduoduo will become a "smaller version of Taobao". The above view fails to understand a basic fact: Pinduoduo's 10 billion yuan subsidy is mainly applicable to "big brands", while most of the cheap goods on it are "white brands", that is, goods that do not need subsidies.

The key question is: What is "white label"? Please recall: when you enter any e-commerce platform and open the search box, you may enter two keywords.

The first is a brand word, which is a specific brand (or sub-brand) name;

The second type is category words, which is the name of a product category.

• If a brand occupies a high degree of consumer minds and mainly gains sales through brand word searches, we call it a "big brand" - for example, Evian mineral water, Nintendo Switch game console, Guerlain Little Black Dress perfume, Nike Air Jordan sneakers, etc.
• If a brand does not directly occupy the minds of consumers, but mainly obtains sales through category word searches, we call it "white label" - for example, white labels account for the vast majority of standard products such as power strips, paper towels, and ordinary socks. Most bulk commodities such as agricultural products can also be classified as white labels.

The advantage of white-label products is that they provide acceptable product quality at an absolutely low price. For standard products, the quality and function are basically the same, and users do not expect any brand value.

As economic growth slows, more and more users are returning to the "cost-effective" route instead of blindly pursuing "consumption upgrades." The rise of white-label products almost overlaps with the rise of Pinduoduo and Kuaishou e-commerce, and the two are a perfect match.

The logic of "white-label vs. big-label" also explains why Pinduoduo and Tmall's GMV grew simultaneously and their market positions rose simultaneously from 2017 to 2019: young consumers have developed a split consumption habit, that is, "save where you should save, and spend where you should spend";

They divide personal consumption into two parts: "self-pleasure consumption" (pursuing big brands, IP, freshness and design) and "basic consumption" (pursuing low prices and cost-effectiveness). The more money saved on the latter, the higher the budget the former can get.

However, Pinduoduo cannot only have white-label products - otherwise it would be limited to the level of "an enlarged version of Juhuasuan". It must build an integrated e-commerce platform from low-end to high-end to provide a one-stop choice for some users. Therefore, it needs to invest huge subsidies for "big brands".

Is this subsidy worth spending? The key lies in repurchase. Our previous grassroots surveys and crawler data show that the repurchase rate of users who bought Pinduoduo-subsidized iPhones during the Double Eleven period is quite high. The 10 billion yuan subsidy plays an "inducing" role: at first, you buy an iPhone for the absolute low price, and you are still wondering "Is Pinduoduo selling fakes?" After receiving the product, you find it's not bad, and even if you want to return it, the customer service will agree to it very quickly.

In this way, a middle- and high-end white-collar user who originally disdained Pinduoduo was pulled into Pinduoduo and began to pursue all kinds of goods with endless joy. Of course, there are many ways for white-collar users to be "pulled into" Pinduoduo, such as low-priced fruits and group shopping with parents. The effect of the 10 billion yuan subsidy is the most obvious, but even without the 10 billion yuan subsidy, the "white-label" products on Pinduoduo would still be just as cheap.

Taobao e-commerce counterattack: Juhuasuan, Taobao Special Edition, etc. Since 2017, Alibaba has realized the long-term potential threat of Pinduoduo to Taobao and has tried to curb it from all aspects, but the effect is not significant. There are many reasons, both subjective and objective:

• Taobao e-commerce has been on the road of "branding" and "high-end" for a long time, and it is impossible to return to the state before 2013. Allocating more traffic to white-label and C-store merchants means a lower monetization rate. As a listed company, Alibaba must strive to achieve a balance: retaining mid- and low-end merchants while ensuring continued profit growth.
• Alibaba is a huge system, and many new businesses are in the stage of spending money. These businesses will rely on the financial resources provided by Taobao e-commerce for a long time. If Taobao sacrifices profits, the ammunition provided to new businesses may be in short supply.
• In any case, Taobao cannot break into the WeChat ecosystem, which is one of Pinduoduo’s “base camps”. Even if Taobao successfully reoccupies a large part of the low-end and mid-range market, it cannot completely eliminate Pinduoduo, but can only turn the offensive and defensive battle into a tug-of-war.
• Since the GMV of Taobao's e-commerce is much larger than that of Pinduoduo, if similar "big-brand subsidies" are to be provided, it may have to pay several times the subsidy cost (calculated according to the ratio of subsidy expenditure to GMV).

In any case, Alibaba has tried many countermeasures. Taobao Special Edition + Juhuasuan is a logical choice, and the launch of Taobao Special Edition as an independent APP is also a good choice.

Of course, there is another option, which is to separate the Tmall platform and divide it between the high-end and low-end e-commerce of the Taobao system - this possibility is very small, because Taobao and Tmall have long developed to the point of being inseparable. For Pinduoduo, there should be no suspense that GMV will exceed 1.5 trillion in 2020 and 2 trillion in 2021; the real challenge will only begin after that.

Because, by then, Pinduoduo's GMV scale will be truly "comparable" to Taobao (the user scale is comparable now). Pinduoduo will inevitably face growing pains: should it build its own "Tmall" and move upward like Taobao did in the past, or continue to follow the path of "white-label products as the main and big-brand products as the auxiliary"?

Perhaps, by then, the breakthroughs in new technologies and scenarios will have already created some new retail e-commerce formats? In short, the battle between Taobao and Pinduoduo has just begun, and it will become more and more intense. It seems that Taobao cannot contain Pinduoduo; but in the long run, it will be very difficult for Pinduoduo to break through the scale of Taobao.

According to my personal experience and impression, among all Chinese Internet companies, Pinduoduo is the most controversial one. Until two or three days ago, someone seriously complained to me that Pinduoduo's business model is unsustainable and even harmful because it violates the overall situation of "consumption upgrade" and purely relies on subsidies to exchange customers, etc.

It is still common to compare Pinduoduo with Luckin Coffee. It is certainly possible and necessary to question Pinduoduo.

However, I would like to say to Pinduoduo's skeptics: they may not understand China well enough, especially China, where the economic environment has become increasingly complex since 2017, and where consumer differentiation and sinking have been very obvious. China is also struggling to find the next stage of growth propulsion after the demographic dividend has been exhausted and the economic development model has entered a bottleneck period.

They did not see the unremitting pursuit of low-cost traffic and single hot-selling products by the majority of white-label merchants, did not see the schizophrenia of the majority of consumers between "self-pleasure consumption" and "basic consumption", and did not see how important saving a few dollars is to both suppliers and demanders.

They did not see how part of China's huge overcapacity in the manufacturing industry was put back into operation because of Pinduoduo, did not see how the money consumers saved on Pinduoduo could eventually be used in other consumer areas, and did not see the huge catfish effect Pinduoduo had on the retail e-commerce market that had already formed a "steady state."

What they fail to see is that China has never been the country that is reflected on Weibo, where "everyone pleases themselves and is glamorous and beautiful"; nor is it the country that is reflected on Zhihu, where "the average person has a 985 degree, an annual salary of one million, and they just got off the plane"; nor is it the country that is reflected on Douban, where "everyone has read Kafka and everyone likes Haruki Murakami"; nor is it the country that is reflected on Xiaohongshu, where "the number of people who show off that they have bought a Ferrari in one year is more than the annual production of Ferraris"

If they are unwilling or even unable to understand the real China, I simply cannot understand how they can adapt to such a China and do their professional work well.

Author: Pei Pei, leader of the Phantom Thieves WeChat public account: Internet Phantom Thieves