Date
18 August 2018
Founded in September 2015, the company plans to raise up to US$1.63 billion in a US listing. Photo: Reuters
Founded in September 2015, the company plans to raise up to US$1.63 billion in a US listing. Photo: Reuters

Pinduoduo taps social networks to challenge e-commerce giants

China is now the world’s leader in e-commerce activities, with firms like Alibaba Group Holding Ltd. and JD.com Inc. undertaking hundreds of millions of buying and selling of products online each day.

But apart of Alibaba’s Taobao and Tmall platforms as well as JD’s online shopping sites, there’s another e-commerce player that is making its presence felt in China’s vibrant e-commerce space: Pinduoduo.

While its bigger rivals are focusing on the major cities, Shanghai-based Pinduoduo is going after lower-income consumers in smaller, inland cities.

The strategy appears to be working. The startup’s gross merchandise volume exceeded 100 billion yuan (US$14.98 billion) last year, a milestone that took Taobao five years and JD.com 10 years to reach, according to Reuters.

Founded in September 2015, the company plans to raise up to US$1.63 billion in a US listing, which would make it the second-biggest US float by a Chinese firm this year.

Pinduoduo plans to sell about 85.6 million American depositary shares in an initial public offering at a price range of US$16 to US$19 each, valuing the loss-making startup at US$20 billion to US$24 billion, higher than its US$15 billion valuation in April.

Tencent Holdings and Sequoia Capital, two major shareholders of Pinduoduo, would subscribe up to US$250 million worth shares in the IPO.

Pinduoduo may be a latecomer in China’s e-commerce arena, but it is trying to compensate with its aggressiveness.

Riding on the WeChat communications tool, Pinduoduo enables consumers to group together to increase the discounts offered by merchants.

The company has gained 103 million monthly active users of its mobile platform as of the end of March, compared with Taobao’s 430 million and JD.com’s 140 million.

Pinduoduo is exploiting WeChat’s vast user base in China to scale up its business in a short period of time. With more than 1 billion monthly active users in the country, WeChat offers the best channel for operating internet-based services.

Social interactions among WeChat friends allow the business model to thrive in the e-commerce space. Pinduoduo offers a group discount for a purchase if the number of buyers reaches a certain level, a strategy used by Groupon in the United States.

For example, if a piece of clothing is originally priced at 50 yuan on another platform, you can buy it for only 40 yuan if you gather a certain number of buyers for the products.

This incentive prompts consumers to contact their WeChat friends in order to buy the product at a lower price. The strategy is known as the customer-to-business model.

Some industry watchers say the C2B model is creating trouble for Alibaba’s Taobao platform, which is based on the customer-to-customer model.

Social networking is proving to be Alibaba’s weakness, while it is the strength of Tencent in view of its WeChat platform.

The friend lists on Tencent’s WeChat and QQ platforms are now seen by sellers as valuable tools to promote their products.

In fact, the social commerce element in Pinduoduo’s business model provides users with the psychological satisfaction of getting a good deal, rather than just buying a product at cheaper price. It enriches the buyer’s shopping experience.

And in their desire to get a good deal, the consumers themselves are sharing Pinduoduo’s product links, thus boosting the popularity and success of the site.

Prices are cheaper. In the C2B model, products are sold in bulk. Layers of distributors are eliminated by connecting consumers directly to the farmers and manufacturers.

The platform has scaled up quickly and has expanded its product range to include all the household items you can think of, groceries, as well as fashion, beauty and electronics products.

Pinduoduo is still a loss-making enterprise. It recorded a loss of 201 million yuan for the first three months of this year, while revenue reached 1.38 billion yuan, up from 37 million a year earlier.

With such a strong volume of transactions, Pinduoduo is likely to break even and make a profit soon.

– Contact us at [email protected]

CG

EJ Insight writer

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