Analysis of Pinduoduo’s business model, products and usage

Pinduoduo is a platform e-commerce company with a business model similar to that of offline shopping malls/small commodity cities. The platform provides sales scenarios for listing products on shelves and charges B/C-end merchants. Its revenue comes from store rents, transaction commissions, and advertising and marketing fees.

Currently, Pinduoduo's annual GMV is 198.7 billion yuan, the number of annual active users is 295 million, the latest annual report revenue is 1.7 billion yuan, the latest annual report net profit is -500 million yuan, and the monetization rate reaches 1.23%. Compared with Alibaba's 3.66% and JD.com's 5.61%, Pinduoduo's monetization rate is the lowest. ( Data source : Guojin Securities Research Institute)

From the perspective of improving the platform's business goals, this article explores how to promote the consumption behavior of individual users (new and old users) from the product and operation ends, and advance to promoting the fission of consumption behavior of user groups, rather than just the fission of user scale, thereby achieving the improvement of platform GMV.

1. Development Status

1. Product Introduction:

Pinduoduo is a mainstream mobile shopping app in China. It was founded in September 2015. Users can initiate group purchases with friends, family, neighbors, etc. to purchase goods at a lower price. Aims to gather the strength of more people, buy better things at lower prices, and experience more benefits and fun. On July 26, 2018, Pinduoduo went public in the United States.

2. Current situation

2018 TOP10 e-commerce companies and their market share

2. Introduction to business model:

1. E-commerce model:

Pinduoduo is a platform-based e-commerce company with a profit model similar to that of offline shopping malls/small commodity cities. The platform provides sales scenarios for listing products on shelves and charges B/C-end merchants. Its revenue comes from store rents, transaction commissions, and advertising and marketing fees.

2. Business logic:

Pinduoduo is an e-commerce platform that serves buyers and sellers. For buyers, Pinduoduo provides product display and selection, and buyers make purchases. For sellers, sellers enter the platform and Pinduoduo provides platform services.

Pinduoduo's profit model mainly comes from charging for online marketing services and collecting commissions related to transaction volume, so the important indicators that should be paid attention to are: GMV and monetization rate . GMV refers to the total amount of orders placed by users, which is the ability of an e-commerce platform to gather traffic and convert traffic into orders. The monetization rate is the ratio of the GMV of an e-commerce platform converted into advertising fees, service fees and other monetization methods. It is an indicator to measure the traffic monetization ability of an e-commerce platform.

Business logic analysis

From the perspective of increasing profitability, there are two aspects: one is to increase GMV, and the other is to increase operating income.

①GMV = number of users × unit price or = number of orders × unit price , gather traffic on the buyer side, create a shopping atmosphere of "buy together, get cheaper", promote buyer sharing, obtain low-cost traffic, and achieve rapid growth in buyer traffic.

② On the seller side, operating income = number of merchants * single merchant tariff , which also requires traffic aggregation. Therefore, we lower the threshold for sellers to enter, waive entry fees, provide traffic support for new merchants, and complete store opening review within 2 working days to attract a large number of sellers to enter.

3. Profit model:

Regarding operating income, it can be divided into online market services + product sales (terminated after Q1 2017) according to business segments. The online market service fee includes marketing service fees: search advertising , celebrity stores, banner advertising, scene promotion , and commissions (0.6% of the value of sales).

4. Monetization tools : search promotion , celebrity stores, banner ads, scene promotion

(Source: Guojin Securities Research Institute)

① Search promotion: a promotion and marketing tool launched by Pinduoduo to serve merchants. Merchants can use search promotion to rank their products higher, gain priority display opportunities in front of users, and drive traffic to their product stores.

② Star Store: A new promotion method launched for corporate stores. Merchants who successfully apply for brand words and submit creative ideas can create a star store promotion plan after they are reviewed and approved.

③ Banner advertising: With advantageous resource positions, based on picture display and with precise targeting as the core, it helps merchants to promote their stores and products. The main promotion positions are the second and third frames of the banner carousel on the APP homepage.

④ Scenario promotion: Scenario promotion creates a different combination of targeted conditions and resource positions.

(Source: Guojin Securities Research Institute)

In the last link of business logic and profit model, we can compare the important indicators of Alibaba, JD.com and Pinduoduo to evaluate the current situation of Pinduoduo:

In terms of annual GMV, Pinduoduo reached 198.7 billion yuan, while Alibaba was 24 times that of Pinduoduo and JD.com was 6.5 times that of Pinduoduo.

The monetization rate of Pinduoduo reached 1.23%, compared with 3.66% of Alibaba and 5.61% of JD.com, Pinduoduo's monetization rate is the lowest;

The monetization rate is closely related to the number of merchants and the efficiency of monetization tools. This article mainly discusses the buyer side, the part of improving GMV, where GMV = number of users per order value, or = number of orders per item, because the number of orders per item is related to the purchase frequency, price range, and promotional methods of the main categories. Since the product is in the development stage, it should be based on the perspective of the number of users per order value. Therefore, the following article mainly discusses the functional design and operational methods to increase the number of users and promote purchases from the product and operation sides.

3. APP product analysis (buyer side):

1. Product demand analysis and Y model:

Product demand analysis Y model mentioned in " Everyone is a Product Manager "

① User needs: user demand scenarios, the first depth of demand - views and behaviors

② User goals: The purpose and motivation behind user needs, which is the second level of demand (the company and product goals also need to be considered)

③ Product function: product solution

④ Human needs: Human nature, or values, is the third depth of needs and the essence of needs.

Source: Everyone is a Product Manager

Try to use the Y model to conduct a demand analysis on Pinduoduo: Generally speaking, the surface demand of users is to buy cheaper things. In fact, the consumption concept of Pinduoduo users is to like things with high cost performance and discounts (the consumption concept of Pinduoduo users is mentioned in the user survey, see Part 3-5-② of this article). The user's goal is to pay a lower amount of money to get the goods. The essence is to create an atmosphere where buying is getting a bargain. The solution provided by the product is to allow users to get discounts through various group buying methods.

Pinduoduo Demand Analysis Y Model

2. Product logic:

The essence of Pinduoduo is social e-commerce, and the basic logic of the product is

Product logic analysis

As a social e-commerce platform, Pinduoduo requires three elements in the purchase process: shopping intention, shopping friends, and variable discount incentives. Therefore, we have listed different situations under these three elements. The problems that need to be solved are:

① The intention to shop is clear and they need help from friends: The solution provided by the product is to stimulate consumers to buy, so there is a function of group buying/bargaining and sharing, so that friends can help them buy things at a more favorable price;

② For those whose shopping goals are not clear, they need to be guided to browse more to find what they want to buy;

③ Those who have no shopping goals, but hope they will come next time; ④ Those who have not established friendships in Pinduoduo.

Pinduoduo Demand Analysis

3. Product structure:

Pinduoduo has five main sections: home page, recommendation, search, personal center, and chat. When users choose to purchase goods, they can choose between passive and active choices. The homepage and recommendation section are passive choices, while search is an active choice. We can find that Pinduoduo has cancelled the search box on the homepage because Pinduoduo is essentially a group buying e-commerce platform that requires various discount activities and discounts on popular items to stimulate users to make shopping decisions quickly. Unlike Taobao , which needs to play the role of a shopping guide, it focuses on in-site search, product screening functions, and word-of-mouth ranking. The difference in this part is also reflected in the results of user research (III-5-⑥)

Pinduoduo product structure, version IOS4.9.1

Pinduoduo Home Page/Recommended Channel

Search, chat, personal center section

4. Core functions of the product:

①Homepage:

The homepage is mainly filled with various discount topics, the more important ones are limited-time flash sales, daily clearance sales, 9.9 yuan specials, and daily half-price purchases.

front page

②Personal consumption related gadgets:

5. User Research

①Who are they?

User portrait : Among Pinduoduo users, the proportion of users from third- and fourth-tier cities (or below), young people, and women is higher than that of Taobao and JD.com . Pinduoduo users have lower educational backgrounds than traditional e-commerce users (Taobao/JD.com) . Low-educated users (high school or below) are 12.2% more than Taobao/JD.com users, while highly-educated users (bachelor degree or above) are 13.5% less than Taobao/JD.com users.

②Pinduoduo users’ consumption perspective:

59% pursue "discounted" products. More Pinduoduo users are not "low-price oriented" in the traditional sense, but tend to shop for cost-effectiveness and discounts.

③Where are they from? (Conversion between channels )

Before users used Pinduoduo, online shopping accounted for the largest proportion of their main shopping channels (61.9%), and it also attracted some users who mainly shopped offline (13.7%).

④What do they buy?

In 2018 , the top three categories in terms of sales on Pinduoduo were food, mother and baby products, and women's clothing, which are mainly high-frequency consumable products . They are characterized by low trial costs, high consumer tolerance for low quality, and low demand for brands.

The top ten categories and their proportions of Pinduoduo’s sales in 2018

⑤Why do they buy? (Platform operation methods; consumer shopping needs)

——From the perspective of platform operation , the most attractive thing for consumers is that group buying with acquaintances is cheaper and they can recommend things to each other . The second most attractive thing for consumers is that they can invite friends to help bargain and help get free orders.

——From the perspective of user demand : the first reason driving consumers to consume on Pinduoduo is that it is cheaper, followed by stockpiling . In addition, 24.8% of users buy products they have never used on Pinduoduo. It can be seen that Pinduoduo has created new shopping needs and is essentially integrated into the long-tail consumable brands.

⑥How do they buy it? (Shopping habits)

On traditional e-commerce websites, most users have clear shopping purposes and trust stores, but on Pinduoduo, users mainly rely on browsing and guided shopping . Currently, more than half of Pinduoduo users have the habit of purchasing from the area on the homepage that contains "cheap/discount" guide words .

Judging from the results of the user survey, Pinduoduo's target user groups are selected (third- and fourth-tier cities and below, young, mostly female, and less educated) , their purchasing motivations (consumption tends to favor discounted, cost-effective products) , and the sources of users (mainly online shopping, but also mainly purchasing through offline channels). Through the platform's main categories ( high-frequency consumables) , the main product sections and floor designs (activity topics that are mainly passively selected) , and a variety of discount methods (bargaining with friends, sharing red envelopes, group buying among acquaintances, etc.) , the selected user needs are met.

4. Operational Analysis:

Pinduoduo is a social e-commerce. In addition to continuously optimizing the purchase funnel and improving the purchase conversion rate like traditional e-commerce, it also drives the growth of the number of users through sharing recommendations and mutually beneficial relationships among users . Therefore, a coordinate axis is established, with single users, consumption promotion, and more users listed as three directions: X, Y, and Z.

On the XY side, we need to encourage more consumption from individual users .

On the XZ side, it is necessary to achieve the goal of user fission through mutual benefit, sharing and linking among users.

Analysis of Pinduoduo’s growth model

From the line's perspective:

1. On the X-axis , users need to be divided into new customers and old customers. New customers refer to users who have not paid for orders on Pinduoduo;

2. On the Y-axis is the purchase funnel. The key steps of purchase are roughly divided into: look, select, place an order, and pay. In this process, what the platform needs to do is to optimize the purchase funnel and improve the conversion rate.

① Look - mainly users browse products, which can be divided into three situations: no purchase intention/purpose, purchase intention but unclear goal, and clear purchase goal.

② Selection: Factors that influence the user selection process may include but are not limited to price, discount, quality, brand, reputation, product attributes, etc. Pinduoduo often stimulates user consumption through cash coupons, special prices, 1 yuan purchases, limited-time flash sales, half-price purchases, 9.9 yuan, etc. Therefore, we can see from the results of user surveys that Pinduoduo users have different shopping habits from Taobao/JD users. They are more likely to buy from areas such as "flash sales/special sales/clearance sales/free orders" (Taobao/JD users mostly buy from direct searches, sales, reviews, etc.)

③ Purchase decision and order placement - After making a purchase decision, users usually place an order directly, selecting relevant product attributes, quantity, address, etc. However, Pinduoduo provides another way to play. In the bargaining channel, before placing an order, users can share it with other users and ask other users to help bargain, thus achieving the effect of sharing Pinduoduo and product recommendations.

3. On the Z axis , users are also divided into new customers and old customers. Pinduoduo uses user incentives to guide existing users to attract new customers.

From the perspective of face:

1. On the XY side , it is divided into two situations: promoting new users to try the product, and promoting old users to return/repurchase . The four steps mentioned in "Addicted" to make users addicted are trigger, action, reward, and investment. In these four links, functions and gameplay are designed to constantly trigger users, simplify consumption decisions and paths, design varied gameplay and rewards, use games to increase user investment, improve repurchase, and encourage repeat purchases. (For an introduction to the relevant theories of "Addicted", you can review my reading notes of "Addicted")

2. On the XZ side , there are three common situations: new users attract new users, old users attract new users, and old users attract old users . (There are four common fission methods: relationship scenario driven, interest driven, game related, honor/other fission)

In general, from the perspective of the entire growth model , the events constituted by the three aspects become : promoting the consumption behavior of individual users (new and old users), and designing gameplay during the consumption behavior to attract other users (new and old users) through preferential incentives, thereby achieving fission of user group consumption behavior, rather than just fission in user scale.

Analysis of Pinduoduo’s growth model

Among them, on the XZ side, the results of user fission can be compared through the single user acquisition cost (yuan), and the single new active user acquisition cost is defined as: 18Q1 marketing expenses/(18Q1 annual active users - 17 end of annual active users). It is calculated that the single new user acquisition cost of Alibaba, JD.com and Pinduoduo in 18Q1 is 206.51 yuan, 376.34 yuan and 24.34 yuan respectively. Alibaba's customer acquisition cost is 8 times that of Pinduoduo, and JD.com's customer acquisition cost is 15 times that of Pinduoduo. During Pinduoduo's wild growth, the spear of social e-commerce helped it acquire a considerable number of users at a very low cost.

The cost of maintaining a single active user is defined as: 2017 marketing expenses/number of active users at the end of 2017. It is calculated that the cost of maintaining a single active user for Alibaba, JD.com and Pinduoduo in 2018 is 53.01 yuan, 51 yuan and 5.49 yuan respectively. Alibaba's user maintenance cost is 10 times that of Pinduoduo, and JD.com's user maintenance cost is 9 times that of Pinduoduo.

Therefore, the user fission gameplay has brought Pinduoduo extremely low customer acquisition costs and extremely low user maintenance costs, which is of great significance for increasing buyer traffic.

Source: Guojin Securities Research Institute

5. Summary of factors affecting Pinduoduo’s growth:

6. Issues that should be paid attention to in the future:

1. Quality issues:

As a platform-based e-commerce, Pinduoduo needs to establish a mechanism to control quality. At present, we can also see that the anti-counterfeiting rules on Pinduoduo are also very clear, such as "ten times the penalty for fake products" and 7-day returns and exchanges. However, quality issues always affect the reputation of the platform, and if it wants to upgrade in the future, quality issues will always be a hurdle. I will not emphasize the importance of quality here.

2. Retention issues:

Retention is a problem for Pinduoduo.

From the perspective of user split growth, Pinduoduo's user scale has been driven by sharing and reciprocity among users. At present, it is more common for old users to bring new users, which requires consuming the old users’ social currency. Can the old users maintain their popularity? In addition, when old users bring their social circles into Pinduoduo, the number of new users around them becomes fewer and fewer. Will the increase in users encounter a bottleneck?

Judging from the increase in user usage, will users continue to be interested in the design of discount gameplay and discount incentives?

3. Upgrade issues:

Pinduoduo first selected users from third-tier and fourth-tier cities and below, most of whom are young and female. In the next 2-3 years, or even longer, they will face upgrades in consumers themselves. Their shopping needs may develop to varying degrees in accordance with Maslow's social needs and respect needs. In this regard, we need to continue to observe where Pinduoduo's users come from. Other e-commerce platforms? Or did it convert users from offline channels? Can the product positioning and tone meet user needs in the medium and long term? For this user group, should we focus on expanding Pinduoduo's penetration, or should we deeply explore the value of this user group?

In addition, more than 40% of Pinduoduo's users still come from first- and second-tier cities. What are their consumption concepts and demands? If Pinduoduo needs to expand its user base in first- and second-tier cities, how should it do so?

Can the above two aspects be solved through consumption upgrades in the future? On the current Pinduoduo homepage, we can already see the launch of the brand pavilion and some arrangements for consumption upgrading, but this is not the main direction at present. As for the timing of promoting consumption upgrading, it still needs to be evaluated based on user research and market trends.

Source: YK_Self-discipline and freedom