Tencent-backed e-tailer Pinduoduo’s meteoric rise to become a potent force in China’s e-commerce market has culminated in an imminent initial public offering (IPO) at the Nasdaq Stock Exchange, where it is set to raise $1.63b – the second biggest Chinese U.S public float this year so far – offering its share at $19 apiece.
US-headquartered venture capital GGV Capital has recently released a report: detailing the phenomenal rise of this Shanghai-based shopping platform and the driving factors that led to its success.
According to the report, Pinduoduo’s (PDD) founder Colin Huang incubated PDD in his own gaming startup Pinhaohao in 2015 and the two startups only merged in 2016. One year later, PDD’s gross merchandise value (GMV) already surpassed $15b and have continued to grow up to $21b. The company’s annual revenue was $278m, made over 4.3b annual orders, spread across the accumulation of more than 300 million active buyers over the past 3 years.
Its latest valuation prior to this IPO stands at $15b in April 2018 after raising more than $1b in funding.
Unlike fellow backer – Sequoia Capital, Tencent – at 18.5 per cent ownership – actually contributes a significant amount of PDD’s traffic from its WeChat app. In fact, PDD users rely primarily on WeChat to form ‘shopping teams’ on PDD to reap huge discounts by group buys as seen by a comparison of monthly active users among other e-commerce platforms in China by the diagram below.
How does this group buy discount work?
The user interface of PDD allows consumers to form shopping teams with their friends, while merchants also get to aggregate demand for the goods, in order to offer massive discounts. Different from Groupon, it actually allows users to team up with their friends -mainly via WeChat- as opposed to random strangers; offers synchronous social shopping, making the process cheap and fun with a gamified product design.
Some of the ‘gamification’ features came about from the gaming startup that includes lucky draws, limited-time offers, daily check-ins to win cash rewards and even the option to invite friends to pay and win a discount.
Similar to its approach to be an online discounter but different from Groupon, PDD targets lower tiered Chinese cities, so as not face competition with Alibaba & JD.com head-on. Additionally, rather than being the higher-end Chinese platforms, PDD offers cheaper daily necessities as compared with other platforms to attract the less well-off in the lower tier Chinese cities, as seen in the diagram below.
The more than 1 million active merchants on PDD’s platform, on the other hand, do not have any upfront costs and are free to set the prices. They present their products in terms of stock keeping units (SKUs) instead of their relatively unknown brands which tend to get minimal traffic on Alibaba’s Taobao. An SKU is a number assigned to a product by a retail store to identify the price, product options, and the manufacturer of the merchandise.
All these benefits of value shopping; free time for gaming & goods comparisons, and the joy to share with friends have fit very well with the married, middle-aged women who live in lower-tier Chinese cities.
The report revealed that this pool of users actually forms a massive market in itself, as seen by the figure below.
With 60 per cent of PDD’s users are in third-tier cities or below, with 70 per cent of them being women, PDD is poised for huge growth potential.
PDD’s Revenue Model
The growing DAUs definitely boosted PDD’s revenue streams from its online marketing services (68%) and commission fees charged (30%).
PDD’s sharp rise amongst China’s e-commerce giants
In line with the potential of its business strategy, over the past 1.5 years, PDD has grown very quickly, even beating online retailer JD.com in 2018 in terms of daily active users (DAUs). But, overall, Alibaba still accounts for the largest number of DAUs on its e-commerce platform.
Despite the opportunities for growth, product provenance and the importance of ensuring quality as a platform is extremely difficult when the prices are already so low. In this year alone, PDD is facing a backlash from unhappy merchants when PDD clampdown on those that put up suspicious listings and is also currently embroiled in a New York (NY) lawsuit.
A Forbes article also hinted at the possibility that these rampant fake goods issue might dampen PDD’s Nasdaq IPO – stalling the dizzy success of the rise of this potent giant.