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Pinduoduo growth strategy - $0 to $60B valuation in 3 years (12 min read)

Pinduoduo – a Chinese e-commerce offering a wide range of products, from groceries to electronics. The trick is that it allows forming shopping groups to get the best deals. It went public through an U.S. IPO, raising $1.6 billion.

?Strategy & Tools

Pinduoduo History Timeline

  • Sep 2015 – Pinduoduo has been founded by Colin Huang, a former Google engineer, as his 4th startup.
  • Mar 2016 – Pinduoduo received an undisclosed A round from IDG and Lightspeed China.
  • Jul 2016 – series B financing for over $110 million, raised from Baoyan Partners, New Horizon Capital, and Tencent (WeChat and QQ owner)
  • 2017 – Pinduoduo’s GMV (gross merchandise value) has surpassed $14.7 billion
  • Q1, 2017 – switching from a direct sales model to an online marketplace for third-party merchants. That marked for growth
  • 2018 – the GMV rose to $38.5 billion and has reached over 343 million active users
  • Apr 2018 – another financing round, raising $3 billion at a valuation of nearly $15 billion. Tencent joined as a returning investor
  • Jul 26, 2018 – going public through an IPO, raising $1.6 billion at a $60 billion valuation

Who founded Pinduoduo?

The fouder and the owner of Pinduoduo is Colin Huang (also by the name of Huang Zheng), a Chinese billionaire and a businessman born in 1980. Colin Huang net worth is estimated to be $22 billion as of January 2022.

Target group

Huang wanted to fill a market niche that has been underserved by Alibaba and JD, the two biggest Chinese ecommerce businesses. He went for an underserved market in rural parts of the country and in small towns. 

There, a large portion of the internet infrastructure is held on WeChat which serves for finding information, social networking, and any other daily thing. The target group is relatively new to the internet.

Pinduoduo Business model

In 2019, Pinoduoduo stated that 90% of their revenue comes from „online marketing services”, that includes keyword bidding and selling advertising placements like banners, links, and logos. That means the more merchants there are and the more they spend on advertising, the healthier is the revenue of Pinoduoduo.

The Pinduoduo business model, which is based on the C2B approach on the other side, allows shortening layers of distributors. Customers are connected directly with manufacturers, so they can get products cheaper while manufacturers still get higher profit margins.

How did Pinduoduo start?

Pinduoduo started by buying sold items for direct sales, but this turned out to be inefficient. In a report for investors, the startup’s team stated that switching to making an online marketplace for third-party vendors had made a mark for the high-growth trajectory.

Pinduoduo growth strategy – Group deals

The core element of the Pinduoduo growth strategy are group deals, similarly to Groupon. Users can form groups and get deals of up to 90% cheaper, for everything from bedsheets to PCs. Minding the target group, the most popular products are everyday products. For example, when tissue paper was sold at $1.90 for 10 boxes, 6.4 million units were sold. 

How does Pinduoduo promote – Social integration

Since WeChat is considered as ‘the internet’ in the target group, the social integration and ease of sharing deals are very effective for spreading the word about the platform.

That also works because the items are promoted by users to their friends and groups, which also represent similar income levels and consumption preferences.

Making online shopping an experience

Pinduoduo is for online shopping, but it changes the experience towards making shopping more social. The deals are a base for a conversation on WeChat or QQ, sharing them with friends, and playing together  – in lotteries, for coupons, etc.

Pinduoduo growth strategy – Lotteries

A part of the Pinduoduo growth strategy is also their lottery feature in the platform that looks similar to the ordinary group buy. Users have to pay around 0.1 RMB ($0,0015) to enter the lottery, and then they can play if they invite a certain number of users. Then, the invited users also follow the same path. If they don’t win, they get a refund and a coupon to encourage them to buy more within the platform.

Pinduoduo growth strategy – Coupons

Another aspect of Pinduoduo growth strategy that maximizes the revenue are coupons. They are very short time-limited, for example for 2 hours. Receiving such coupon puts a pressure on the buyer to use it.

Bargains

Some products can be bought for free. You can invite a friend to negotiate a bargain for you two – the price gets lower for every new person, eventually making the product free.

How does Pinduoduo promote – Products for shares

Another way of making the product viral is getting products for free. Or, from the platform’s perspective, paying users for user acquisition. In order to get the products, you just need to refer the app to your friends, so they install it, log in with WeChat, and follow Pinduoduo Official Account.

For 1 friend, you get a box of candy. For 9 friends, 1.3 kg of nuts. That’s also some incentive.

Why is Pinduoduo so successful – Newsfeed UX

Pinduoduo’s UI is more like a news feed, rather than a typical shop. That’s one of the reasons why Pinduoduo is so successful. Thanks to that, certain products get more visibility and have a higher potential of going viral, which plays an important role in the Pinduoduo growth strategy. Contrary to their competition, Pinduoduo focuses on promoting a few bestsellers, rather than the wide array of products.

Network effect

All of the Pinduoduo’s features are engineered for growth and going viral. This proves to be working perfectly and when doing this on this huge market of China, the numbers get huge pretty quickly.

Problems

Pinduoduo is used the most by women in the so-called low-tier cities that are price sensitive. That means the initial growth can be led by low prices that are appealing to this target but cheap products also mean more complaints about quality. Therefore, retention is a serious challenge for the platform.

Pinduoduo earnings

Pinduoduo reported more than 21 billion yuan revenue for the third quarter of 2021, which stands for about $3,37 billion. As for the stock market, Pinduoduo does pretty good. Although it fell about 40% by the end of 2021, the company scored 162% up (as of December 2021) in comparison to what it was at its beginnings.

?Psychology

Social proof

Pinduoduo growth strategy relies heavily on social proof. The products are shared within groups of friends, which makes it more personal. Having something referred by others makes you more likely to try it, especially if the recommendation comes from your friend.

FOMO

The lottery and coupons act on the fear of missing out. Users are told that they have to buy the products now or the bargain might be gone. That might shorten the decision process in order to avoid missing out on an opportunity.

Goal Gradient Effect

The closer to the goal, the more motivated to accomplish it are the people. This means that whenever a deal got traction, it was more likely to succeed as it got closer to the target number of supporters.

Bandwagon effect

Sometimes people are doing something just because others are doing it too. With Pinduoduo, it’s obvious that seeing your group of friends sharing one thing will make you join them.

Reward bias

People are more willing to perform an action if they are promised a reward. Here, almost any user interaction is rewarded, especially if it contributes to the platform’s growth. If you refer friends, you get discounts or free products. If you play the lottery, you can win an item. Similar patterns are all over the platform.

Bargain mentality

People are hunting for discounts just for the thrill of spotting a bargain. This is why a platform that promises up to 90% discounts is so popular.

?Window of Opportunity

Building products for people with higher spending power is often the first choice of founders – you can charge more, you can offer higher quality and get fewer complaints, and you can acquire fewer customers to achieve satisfying revenue. 

However, that leaves the larger portion of most markets underserved, and the real opportunity might be just waiting there. Pinduoduo business model relies on that, and the other finding is rather obvious at this point – designing a product to go viral from the ground up can work wonders. Groupon did it first, and Pinduoduo has just followed its path.

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