Recent news of Pinduoduo has been widely discussed in China that Pinduoduo was hacked and exploited which may introduce millions of losses. Being widely discussed indicates from a side angle that Pinduoduo is a phenomenon company in China and is keenly focused by the mass. From nowhere to a current big name, Pinduoduo discovers the demand that exposed by the upgraded consumption trend occurred in traditional e-commerce bodies.
As discussed in a previous article, Pinduoduo is a fast-growing company and represents for a new force in e-commerce, but it is also criticized and judged by the outside because of counterfeit products sold through its platform. Even in the F-1 filing, Pinduoduo disclosed the risk of being reliable for counterfeit products through the platform.
Indeed, Pinduoduo took the market share with full speed and strength. According to a report from China Security’s R&D department (CSRDD, 中信建投证券研究发展部) published in August 2018, Pinduoduo’s active number in 2018Q1 was tantamount to Taobao (淘宝网) and JD.com (京东)’s 53% and 98% respectively, while Taobao was founded in 2003 and JD.com was established in 1998. Pinduoduo took over the market by providing cheap commodities and expanding the customer pool with group purchasing. Cooperating with Tencent, Pinduoduo boarded on WeChat ship that brings it customer flows with much lower costs comparing to other e-commerce giants like Taobao and JD.com – Pinduoduo’s CAC (customer acquisition cost) is RMB 24 (USD 3.51) and Taobao and JD.com’ CACs are over RMB 200 (USD 29.37) according to CSRDD’s report. Nevertheless, Pinduoduo’s GMV (gross merchandise volume) per capita is only 6% and 13% of Taobao and JD.com’s respectively, which is considerably determined by the products’ cheap price on its platform.
The cheap price is not equivalent to cheap quality, and this is what Pinduoduo’s CEO HUANG Zheng (黄铮) tries to tell. That Pinduoduo’s platform can provide low-price products attributes to its business model, which is discussed in a previous article. Price-sensitive customers have more incentive to use Pinduoduo if the price is the determinant factor. According to a report from Penguin Intelligence, Pinduoduo’s customer image indeed deviates from other e-commerce giants – more female customers, lower-tier cities and less education level.
The customer image from diffentment dimensions conforms to China’s demographic map. Lower-tier cities are labor outflow areas and usually geographically less open than top-tier cities. A major cause of labor outflow is the financial reason, and hence it is reasonable to infer lower-tier cities are more sensitive to price compared to large cities considering local economic development. Lower-tier cities also have scarce education resource issue that leads to a less education level in general than tier cities. Top-tier cities have more opportunities and are attractive to higher-education-level population, and inversely causes a gap in education level among different city tiers in a demographic map.
While most e-commerce players marching towards consumption upgrade, the consumption-level-yet-to-be-upgraded population is squeezed out from the main trend of consumption upgrade. Alibaba’s Tmall is an upgraded shopping platform comparing with its sister Taobao, JD.com conveys an image of a shopping platform that sells authentic electronics, and VipShop (NYSE: VIPS, 唯品会) is a platform selling big brands’ goods though with discounts. The consumption upgrade is a trend along with China’s economic growth, but the population that is unable to enjoy the trend is left by the upgraded e-commerce. Pinduoduo’s appearance came at a proper time to meet the unsatisfied consumption demand of its users, not too early or the demand was not even emerged, nor too late or it would be at a passive position in the market just like Taobao and JD.com does.
The cheap price is friendly to price-sensitive consumers, but the stereotype of “cheap” and counterfeit products truly have troubled Pinduoduo for a long time. Pinduoduo’s business partners are third parties and Pinduoduo’s entrance bar is welcoming more sellers. The non-selective entrance bar brings the regulation to an advanced complication. The quality control and regulation is more an afterward action from Pinduoduo’s side: for example, Pinduoduo sets restrictions in withdrawing limit and requests for a high amount of deposit to seller side. The afterward action can prevent further harm but not compensating incurred losses for users. To build a platform with no counterfeit product might still be a long way to go and a major obstacle on Huang Zheng’s dream to achieve “Costco + Disney” model.