Has Pinduoduo reached a growth turning point?

For a long period of time, the e-commerce industry did not take traffic seriously.

The most typical example is that in 2018, the leaders of the three major e-commerce platforms, as if they had made an appointment, collectively published the "traffic cloud theory" in public channels.

Jack Ma wrote in the official media magazine "Network Communication" that a good Internet company does not compete for traffic or quantity, but for quality and responsibility.

Liu Qiangdong emphasized in his speech: The Internet does not make money just by having traffic, the key is to rely on the supply chain.

Huang Zheng's words overturned the value of traffic: Tencent failed in e-commerce because they understood e-commerce as traffic × conversion rate = GMV, and traffic logic cannot succeed today.

However, the entire history of competition in the Internet is actually a battle for traffic, or water resources.

This is especially true in the e-commerce industry. Some people continue to look for water sources, such as Alibaba; some people continue to create water, such as Pinduoduo.

It is clearly built on traffic, but it has no respect for traffic, so it is destined to be slapped in the face.

The rise of Douyin and Kuaishou once again proves that “whoever has the traffic controls the world.” At the same time, its terrifying ability to kill time and the ever-expanding boundaries of live streaming e-commerce have already threatened the traditional e-commerce market.

Under the attack of traffic anxiety, e-commerce platforms have to pay more attention to water sources.

Among them, Pinduoduo's situation is the most special - it relies on social networking and started out by creating influencers. To anchor this path, we need to have the ability to produce water continuously.

The market is indeed valuing Pinduoduo based on this. As shown in the figure below, the stock price and Pinduoduo LTT (life total time, user lifetime time) yoy growth trend remain consistent.

Note: Total LTT = (average monthly usage time/monthly churn rate) * MAU; average monthly usage time ≈ total monthly usage time/MAU; monthly churn rate ≈ 1-DAU/MAU.

The logic of the market can be simply understood as follows: when the water volume rises rapidly, it means that the company is full of imagination, and investors will bet on it; otherwise, they will retreat.

In the face of competition and capital market scrutiny, Pinduoduo is much more honest with its body than its mouth.

It can be seen that Duoduo Video, which had been huddled under the personal center page, was strategically upgraded to a first-level entrance by Pinduoduo three months ago. Its weight is close to that of 10 billion subsidies and Duoduo Maicai, and its target is directly aimed at its ability to gather traffic.

To this end, Pinduoduo, which is well versed in "making money out of nothing", even made real money. As shown in the picture below, watch the short video, it really pays money.

In fact, Duoduo Video was launched in 2020. Why was it only "entrusted with an important task" at this time? Can it shoulder the heavy responsibility?

01Has Pinduoduo reached a traffic turning point?

Generally, in order to produce more water, the platform does the following things on the supply side:

Attract more people: This is actually driven by user scale.

Create a new small pool: For example, Taobao Special is a new pool that can attract users.

Make some innovations in the existing pool so that people can play in it longer and have more fun, anchoring the user stickiness and duration.

As long as these three cards have not been played, no matter which card is currently used to support performance, there is room for imagination for most investors.

As for Pinduoduo, it no longer has many cards to play .

As we all know, in the early days when the whole nation was dominated by various "price cuts" and fission offensives, Pinduoduo quickly captured users in the sinking market who had relatively ample time and accumulated the "traffic pool" of its own platform.

Moreover, by cleverly leveraging the WeChat channel, its initial cost of "creating water" was extremely small.

It can be seen that from 2017Q3 to 2018Q4, Pinduoduo's customer acquisition cost was the lowest compared to Alibaba and JD.com, and was even only in single digits from 2017Q3 to Q4.

Of course, the day will come when all users outside the Fifth Ring Road will be exhausted, and that is when Pinduoduo will first encounter the problem of insufficient "water source".

As a result, a "split personality" scene emerged - Huang Zheng said that "traffic logic does not work", but at the same time he talked a lot in the 2018Q2 conference call: strengthening users' trust in the Pinduoduo platform and steadily increasing the number of high-quality users are still the top priorities currently facing.

However, the cost of accumulating these new water sources - the circle of high net worth users - is not small.

In 2019, Pinduoduo launched a 10 billion yuan subsidy program, providing substantial cash subsidies for popular high-end products to benefit users. For example, brand products such as iPhone, Huawei, Nintendo, La Mer, SK-II, etc. can be obtained on Pinduoduo at prices lower than the market average.

With such "spending of money", we can see that after Q3 2019, the cost of acquiring customers continued to rise.

Fortunately, the effect is good. At the end of 2019, Huang Zheng proudly stated in a conference call: "At the current growth rate, we will soon surpass our competitors."

About a year later, as expected, Pinduoduo's annual number of active buyers surpassed JD.com and Alibaba, becoming the number one in the industry.

Naturally, user scale drive is the source of Pinduoduo's "water creation" at this stage.

But as mentioned above, Pinduoduo is no longer economical in attracting new users, and as the user base grows further, it will only become more difficult to grow in scale. It can be seen that since Q3 2019, Pinduoduo's MAU growth rate has shown signs of decline.

The user scale-driven card can no longer be played .

However, limited traffic growth is clearly a danger signal in the fiercely competitive e-commerce field. As shown in the figure below, affected by this, Pinduoduo's platform revenue growth rate continued to slow down from 2019Q1 to 2020Q1.

Once the performance growth story loses its "sexiness", its attractiveness to investors will be discounted.

Of course, the factors that affect revenue presentation are not only the total water source of the platform, but also the consumption level and the take rate, as shown in the following figure:

However, in terms of take rate, average order value, etc., Pinduoduo has been restricted by various constraints in the past two years and has been powerless. In contrast, its breakthrough direction for increasing revenue is still focused on water sources.

For example, the 2020Q2 conference call mentioned: The monetization rate is not the KPI we examine, nor is it the focus of optimization. The top priority is to enhance user stickiness and continue to cultivate high-quality merchants.

The reason why we focus on user stickiness is not difficult to understand - after all, the user scale drive has reached its peak and it is difficult to go further. There is no sign of building a small pool. The only option left with room for operation is the third one - let users play for a while and have more fun.

02Duoduo Maicai plays the role of "water storage", but it lowers ARPU

In 2020, two new traffic trends emerged under the catalysis of the epidemic: one is live streaming e-commerce, and the other is community group buying.

Pinduoduo has completely different attitudes towards these two trends:

Due to Huang Zheng's simple definition of "tool attributes", the live streaming business has not yet been listed as a strategic product and focused on.

The strategic level of Duoduo Maicai concerned Huang Zheng, who had retired at that time. When the management was hesitant, Huang Zheng gave the order to "go all out", and later in his anniversary speech, he classified Duoduo Maicai as a long-term business.

So why is there such differential treatment? Isn’t live streaming’s ability to gather traffic sexy enough?

This is obviously not true. According to the 47th "Statistical Report on the Development of China's Internet", as of the end of December 2020, the scale of online live broadcast users in China reached 617 million.

Among them, the scale of e-commerce live streaming users reached 388 million, ranking first among all online live streaming segments.

With the surge in traffic, according to the e-commerce big data database "Dianshubao" of the China Internet Network Information Center, the GMV of Taobao Live in the first half of 2020 reached 300 billion, exceeding the GMV of the live broadcast business in the whole year of 2019.

In fact, Pinduoduo itself is also benefiting.

It added a live broadcast page in January 2020, and mentioned in the 2020Q2 conference call: More and more businesses are using live broadcasts to enhance their stickiness with customers.

A more credible answer will be revealed at Pinduoduo’s fifth anniversary celebration in 2020.

At the meeting, Huang Zheng elaborated on his original intention and said: We were the originator of community group buying. We started with agricultural products and proposed concepts such as community sites and forward warehouses. With the epidemic, consumers have the need to buy groceries online again, so we decided to do grocery shopping. Buying groceries is a good business, a hard business, and it is also a touchstone for us at Pinduoduo.

To put it simply, we (Pinduoduo) have the genes and are better at community group buying. So, what is the specific situation?

It can be seen that when Pinduoduo entered the market, it was faced with a situation where "strong competitors such as Meituan Youxuan and Chengxin Youxuan were on the side", and it was not easy for Duoduo Maicai to succeed.

In order to surpass the laggards, Pinduoduo's investment is almost regardless of cost.

That summer, Pinduoduo recruited thousands of employees, including several senior executives, to work on the front line of Duoduo Maicai.

Some project-related personnel described that in the beginning, they would often hold a meeting in the morning to decide on the regional person in charge, and then buy a plane ticket to rush over in the afternoon; one employee was transferred to Duoduo Maicai and returned his rental house in Shanghai on the same day.

Similarly, when it comes to giving "big pie incentives", they are also very generous and inhumane. According to LatePost, in 2021, Pinduoduo carried out two rounds of general salary increases and stock incentives for Duoduo Maicai employees: ordinary employees received stock incentives of no less than 100,000 yuan and a general salary increase of 30% each time; provincial and regional leaders received between one million and ten million yuan depending on performance and mergers.

With such investment, although a stable supply chain and logistics system has not yet been established, Duoduo Maicai has become one of the top two companies in the industry within a year.

In the traffic arena, a vacuum has indeed been created. According to the 2020Q3 conference call: The launch of Duoduo Maicai creates synergy with the main site, increasing user activity on the APP through high-frequency grocery shopping behaviors.

As reflected in the data, we can see that Pinduoduo's user stickiness in 2020 significantly outperformed Alibaba and JD.com.

The year-on-year growth of LTT (user lifetime time, user time/churn rate) has recovered, driving a surge in the platform's total "water source", which turned upward in 2020Q2-Q3. This was reflected in the stock price, with Pinduoduo's stock price nearly doubling during the same period.

If this were a fairy tale, it would have a happy ending when the difficulties were overcome and expectations were fulfilled.

But unfortunately, this is the business world, where one move can affect the entire body, and reversals such as the two sides of a coin can happen at any time.

For example, as the scale expands, the rampant discounts on Duoduomaicai and the low average order value have affected the growth of the platform's ARPU.

As shown in the figure below, from Q2 to Q4 of 2020, Pinduoduo's ARPU growth rate continued to decline rapidly.

However, the increase in ARPU was limited, resulting in a break in Pinduoduo's "profit path". This will naturally affect the attitude of the capital market.

For example, after the 2020 financial report, Keban Capital downgraded Pinduoduo's rating from overweight to industry weight, and the reason given was:

The company's 370% gain in 2020 was driven by strong revenue growth and multiple expansion. However, due to fierce competition in community group buying, this expansion has become unsustainable, and new catalysts are needed to further drive stock prices to rise significantly.

Under the anxiety of growth, Pinduoduo's strategic focus has shifted away from "making water" and towards improving consumption levels.

According to the 2021Q2 conference call: We will continue to increase the number of products, continuously increase the depth and breadth of product selection, and increase product categories and price ranges. We believe that as user choices increase, ARPU will continue to grow.

So, what is the effect?

03 Paying more attention to consumption level than to “making water”, “losing both the wife and the army”

Pinduoduo’s loyal users may have observed a change in the past two years - Pinduoduo is becoming "Tmall-like" .

The most intuitive manifestation is:

In the past, Pinduoduo mainly promoted special sales at 9.9 yuan. In addition to fresh fruits and vegetables, people mostly rushed to buy cheap daily consumables, such as paper towels, garbage bags, etc. These products had low technical content and were mostly white-label.

Now, there are more branded products with clear differences. For example, products such as Apple, Huawei, DJI, Switch, Estee Lauder and L'Oreal.

This is a microcosm of Pinduoduo's branding, and behind it is the vision of increasing average order value and alleviating growth problems.

In the words of Pinduoduo Chairman Chen Lei (2021Q4 conference call): Some brands see the opportunity first, and the brands that come in first see relatively high returns, which drives more brands to try.

But the results seem to be different from what was expected.

With the launch of 1P (self-operated) business, the introduction of the "official cooperation flagship store" entrance in the "10 billion subsidies" channel, and the improvement of the service standards for 10 billion subsidies merchants, there has been progress in the entry of brand merchants into the platform.

For example, data shows that in May 2021, the number of newly established official flagship stores of brands increased by more than 10 times year-on-year.

However, further comparison reveals that there are very few well-known brands among the brands that have settled in.

Pinduoduo itself is clearly aware of this. The communication minutes in August last year mentioned: There has been some improvement in the introduction of small and medium-sized brands, but there has been no fundamental change in the leading brands. Many of the stores that have settled in are not official flagship stores, but dealers.

The reason why the top brands are reluctant to join was actually very clear as early as when Pinduoduo and Tesla had a dispute (there have been many related discussions, which will not be discussed here):

Users’ demand on Pinduoduo is a sufficiently low price, which is contrary to the brand’s own demand to maintain its price system.

This point was also mentioned in Pinduoduo’s communication minutes: brands are unwilling to lower prices, and the conversion rate on Pinduoduo is not very good.

The branding effect is not satisfactory. We can see that Pinduoduo's average customer spending in 2021 was only 40 yuan, a decrease of 9 yuan compared to 2020. It is clear that "the harder you work, the more sad you feel."

Pinduoduo attributed this result to the fact that the timing was not right. The 2021Q4 conference call mentioned that it would take some time for brands to open stores on the platform, as it was not something that could be done overnight.

However, the feedback from increased consumption levels is not all bad news.

As shown in the figure below, the average annual order volume per person on Pinduoduo increased to 70 orders in 2021, a significant increase compared to 49 orders in 2020.

And this is actually thanks to buying more vegetables.

According to iResearch Consulting, before the epidemic, about 57.3% of fresh food e-commerce users purchased fresh food on the app more than once a week, 69.1% during the epidemic, and 67.2% after the epidemic.

Against this demand background, coupled with Pinduoduo's traffic shift in 2021 - such as the "10 billion subsidies" continuing to implement a zero commission policy for agricultural products; holding the "Agricultural Products Festival" to support the upward trend of agricultural products, etc., the repurchase rate has improved significantly.

However, as mentioned above, the average customer spending on fresh food is lower. After offsetting these two factors, we can see that Pinduoduo's ARPU increase in 2021 was also average.

The price is that the single-piece model becomes more mediocre. After all, if e-commerce wants to make money, increasing the average order value is a must.

After working for a while but seeing no significant improvement in consumption levels, Pinduoduo wanted to go back to the above-mentioned "water-making" logic, but found that it didn't work.

The live streaming e-commerce market has been almost completely divided up by Douyin, Kuaishou, and Taobao, while Pinduoduo has a very low presence due to the "decisions" of its management.

For example, data from iResearch Consulting shows that the total volume of live e-commerce in 2021 is approximately 1.9 trillion yuan, the GMV of Douyin's live e-commerce is expected to be 1 trillion yuan, and that of Kuaishou in the first three quarters was 439.8 billion yuan. The sum of the two is almost equivalent to Pinduoduo's total GMV in the first three quarters (1.58 trillion yuan).

What is more serious is that the user profile of these fast-growing new e-commerce models shows that users in third-tier cities and below account for more than 50%, which is exactly the core of Pinduoduo .

However, in the community group buying sector, the growth momentum has been halted under regulatory and competitive pressure.

According to LatePost, Duoduo Maicai's GMV in 2021 was 80 billion, but its original target was 150 billion, which is equivalent to only half of the completion.

The ability to "create water" has been hindered, and it can be seen that Pinduoduo's user stickiness continued to decline in 2021.

Not only did it drag down the platform's total LTT, but the capital market also changed immediately. As shown in the figure below, in 2021, Pinduoduo suffered the worst decline among e-commerce platforms, with a drop of 70%.

Note: From September to October, stickiness rebounded briefly, affected by the closure or contraction of a large number of community group buying platforms, which released demand space for Duoduo Maicai's business, but it soon fell.

To sum up, Pinduoduo is not good at controlling consumption levels. Not only is the effect of its efforts limited, but the market is actually anchored on its ability to create water.

Considering that Pinduoduo's user stickiness has reached 0.65, there is limited room for improvement - you should know that the user stickiness of WeChat, which you open every day, is only around 0.8;

Next, user time may be the core of the platform's "water source" growth - during the same period, Pinduoduo's user time was only 23 minutes, compared with Douyin and Kuaishou's more than 120 minutes, there is a lot of room for improvement.

It is not difficult to understand why Duoduo Video, which focuses on user time, has enhanced its strategic position. So, can Duoduo Video shoulder the responsibility of “creating water”?

04Anchoring user time duration, how certain is Duoduo Video?

"Pinduoduo's vision for the future is to be a combination of 'Costco' and 'Disney', integrating high-cost-effective products and entertainment."

This is the blueprint that Huang Zheng drew for investors in his letter to shareholders on the eve of Pinduoduo's listing.

Previously, whether it was about increasing user stickiness or improving consumption levels, it all revolved around the Costco story. And Duoduo Video seems to mean that Pinduoduo is really going to adopt the "Disney" model .

As shown in the figure below, after Duoduoshi upgraded to the first-level entrance, you can see a single-column information flow mode when you click it. The content is also mainly entertainment, which is highly similar to the mode of Douyin.

In comparison, Taobao's "Guangguang" and JD's "Guangguang", which also carry short video content, use a double-column information flow format, and the content is mainly grass-planting, and the overall effect is still "e-commerce atmosphere".

Note: From left to right: Duoduo Video, Jingdong’s Shopping, Taobao’s Shopping.

One is a fully immersive experience, the other is selective. Which one is more entertaining and time-killing? Kuaishou has given the answer by switching from double columns to a single column.

This makes Pinduoduo's story space more exciting . But on a practical level, why do users watch videos on e-commerce platforms?

The answer has been partially mentioned above. In order to attract users, this company that has always been known for "making money out of nothing" - such as the magical incident of "60,000 people unable to buy a Pinduoduo mobile phone" - has really spent money.

According to survey statistics, Duoduo Video has set up two incentives to retain users.

Incentive method one: every time a user clicks to watch a video every day, they can receive cash directly transferred to WeChat. This allows users who have suffered from "price cuts" to be upgraded to VIP treatment.

Of course, VIP treatment is limited to the first 10 videos or so watched each day, and the profit each time is about one cent.

Then watch the video again and you will enter the second incentive method: complete tasks to accumulate gold coins, and the end point is a large cash red envelope - 20 yuan for a single withdrawal.

Such real money, although the amount for a single user is not large, it is still a considerable expense when combined with a user base of hundreds of millions. Is it really cost-effective for Pinduoduo to buy volume in this way? Just do the math and you’ll know.

The rewards of the above-mentioned incentive method 2 seem very generous, but when it comes to cashing them out, Pinduoduo returns to its familiar formula.

For example, you need to operate continuously on the site, including but not limited to browsing, searching and placing orders. The specific items are as follows:

Even after all this trouble, users still rarely get their money.

As shown in the figure below, some netizens reported that it took them two years to finally withdraw 20 yuan, which also included gold coins as rebates for shopping orders; but more users gave up halfway because they could not persist.

But Pinduoduo got what it wanted - the number of times the APP was opened increased, user time increased, and user conversion improved.

For example, we take 10 days as an example, and the calculation of the investment and return of Duoduo Video shows:

Within 10 days, Pinduoduo spent only about 1 yuan to increase the time users spend on the platform by about 2.2 hours and the number of times they open the APP by at least 10 times.

At the same time, as long as users place an order within 10 days, the money they spent can be recovered.

Note: 1. Cost: Incentive method 1, the deterministic cost per user is about 1 yuan. The second incentive method is that since it is difficult to withdraw cash under this model, the cost is not taken into account.

2. Gains: Incentive method 1, user duration: 40 seconds/video * 10 videos/day * 10 days = 4000 seconds, more than 1 hour; number of APP openings: at least 10 times.

Incentive method 2: based on a take rate of 3.5% and an ASP of 40 yuan, the revenue per order is approximately 1.4 yuan; duration: 7 minutes * 10 days (the second incentive method) = 70 minutes; number of logins: 10 consecutive days of login, the number of logins per day may exceed 8 times.

As expected of the company that “understands decimal points best in the universe”, its ROI is clearly controlled.

It should be noted that the majority of users on the platform are low-end users with plenty of free time, which means that it is not a problem to use this tiny "hook" to successfully harvest user time that far exceeds the cost.

In this way, Pinduoduo is equivalent to connecting to a traffic plug-in, and the water pool is replenished again, which does have room for imagination.

summary

Whether Huang Zhengcheng admits it or not, the essence of Pinduoduo's e-commerce business has always been traffic thinking - producing water and then selling it, maneuvering between several indicators, anchored by its own water-making ability. This is also the coordinate system used by the market to value it.

For water makers, the ceiling often comes from water source depletion and no water to sell. If user growth reaches its peak, it will affect market confidence. However, the cards of "creating water" are not only driven by the scale of users, but also by stickiness, duration, etc. As long as all the cards are not played, there is room for "growth relay".

Now, the only driving force behind Pinduoduo's "water creation" is user time. Relying on the "fancy tricks" of Duoduo Video incentives and squeezing out the total user time (LTT) that a single user can provide, the traffic growth story seems quite attractive.

However, the deeper you go into the traffic business, the more difficult it is to judge and grasp it, and the higher the uncertainty, so investors need to be cautious.

Author: Table outside and inside (ID: excel-ers)

Source: Zhang Ranran, He Jinyi