How did Pinduoduo rise? An article explains the underlying logic of its traffic

The three words "Pinduoduo" are synonymous with traffic growth.

A net increase of 500 million users in three years, such a rocket speed has only happened to WeChat in its early years. On the evening of May 22, 2020, two rivals, Alibaba and Pinduoduo, released their financial reports on the same day. It seems that the growth of both sides is going smoothly, but one figure that neither company is willing to publicly compare is that the number of users of Pinduoduo and Alibaba's e-commerce system is only 100 million apart.

The subtext of this indicator is that it is only a matter of time before Pinduoduo catches up with Alibaba, it just depends on how long it takes.

After the release of the first quarter 2020 financial report, Pinduoduo's market value soared by more than US$80 billion. JD.com once lagged behind by 10 billion US dollars.

But in other dimensions besides headcount, Pinduoduo is far behind Alibaba and JD.com.

Alibaba’s annual GMV exceeded 1 trillion US dollars, JD.com’s size was 2 trillion yuan, and Pinduoduo’s size just exceeded 1 trillion yuan.

In terms of annual user spending, Alibaba leads with more than 8,000 yuan, JD.com is around 6,000 yuan, and Pinduoduo is at the bottom, with users spending 1,842.4 yuan a year.

Speaking of income levels, Pinduoduo's revenue in 2019 was 30 billion yuan, which is only a fraction of Alibaba's.

Although it has the second largest number of e-commerce users in the country, it has achieved GMV volume, revenue level, and annual user spending that are disproportionate to that amount. How did Pinduoduo develop its unique pattern of staggered growth? Why can't Alibaba's attack and JD.com's imitation stop Pinduoduo's progress?

These two questions actually point to the same answer - the underlying logic of Pinduoduo's traffic.

Because of its underlying traffic logic, this company not only achieved its first traffic surge due to the melee between Alibaba and JD.com that year, relying on the traffic advantage of WeChat; it also achieved its second traffic surge when strong competitors were hesitating.

Huang Zheng's underlying traffic logic bid farewell to the traditional e-commerce logic, but it also put the company into a contradictory structure of rapid growth in headcount and slow growth in size.

Pinduoduo is like a black box that expands at the speed of light. We can only see it growing rapidly. Will it rely on a completely new logic to erode the former giants, or will it be swallowed up by this logic?

01. Pinduoduo owes Alibaba a thank-you letter

In the well-known story, Pinduoduo's success was due to the traffic of WeChat.

But when it comes to Pinduoduo's first explosive growth, the one who should be thanked the most is actually Alibaba.

Canalys once gave a statistical report that the total annual shipments of China's smartphone market reached 459 million units in 2017, a 4% decrease from 2016. This is the first decline in China's smartphone market since it peaked.

Don't be scared by the word "downward". Thinking about it from another perspective, those two years were the peak of smartphone shipments, and a large number of new users emerged. These users were previously isolated from the Internet and were even marginalized in e-commerce. They need services and products that are in line with their own behavioral habits and consumption capabilities. The question is who will provide it?

Alibaba and JD.com, the first and second ranked domestic companies, had no intention of paying any attention to it at that time. Because they were fighting fiercely. An unconfirmed statement is that JD.com's momentum was so strong after its listing that Jack Ma once sounded the alarm internally, saying that if JD.com's momentum was not dampened now, it would be difficult to hold it back later.

Therefore, Alibaba used the power of its platform to block JD.com and strive to cater to people who are upgrading their consumption. The traffic of Taobao and Juhuasuan is tilted towards Tmall, and the "choose one of two" policy suppresses the growth of JD.com's clothing category; efforts are made on Tmall Supermarket and Cainiao Network to narrow the experience gap with JD.com. At the same time, it promotes the concept of "new retail", conquers cities and harvests offline traffic.

It turns out that this strategy works.

In the calendar year of 2017, the GMV of Alibaba’s retail platform surged 30% year-on-year to 4.635 trillion yuan. This is a strong rebound after the growth trough in 2016. The media used the phrase "the elephant dances again" to describe Alibaba's recovery.

Tmall’s performance was particularly outstanding. That year, its size exceeded the 2 trillion mark, and its scale increased nearly 10 times in five years, occupying almost half of Alibaba's retail platform. Its GMV of 210.86 billion is almost catching up with Taobao's 252.59 billion. In 2017, Tmall's growth rate reached 43.9%, while Taobao's was only 20%.

It is precisely because of the inclination of traffic towards brand merchants and the sales of high-priced goods that Alibaba’s GMV was pushed up that year. Taobao was marginalized internally and had to give blood transfusions to Tmall. At that time, Tmall felt like it couldn't find any rivals even with a telescope.

However, when they were reaping the rewards of their victory in the battle against JD.com, a blind spot appeared. Alibaba completely ignored the emergence of a large-scale new consumer group and failed to provide corresponding services, resulting in the double loss of merchants and users on the Taobao platform.

None of this came without warning. A subtle change is that the proportion of Alibaba's packages in the entire network has declined significantly since 2016. The total number of packages in the entire network is increasing, while that of Alibaba is decreasing. This increase and decrease means that someone has filled the vacancy left by Alibaba.

The successor is Pinduoduo. To some extent, it was Alibaba that gave up the market and Pinduoduo took advantage of it to take the lead. Ali unintentionally created his own worst enemy.

On the merchant side, as Alibaba caters to consumption upgrades and purifies platform merchants, especially Juhuasuan, which has been weakened, a large number of mature Taobao merchants have transferred their resources to Pinduoduo, which not only has a low threshold for opening stores, but also is given considerable traffic support.

On the user side, Pinduoduo has explored a set of social gameplay to reach new consumer groups. WeChat is undoubtedly the super app with the most extensive user base, and is the most important tool for Internet companies to reach the lower-tier markets. The popularity of WeChat payment, one-yuan treasure hunt, and group purchases of thousands of people are crucial to Pinduoduo's accumulation of original traffic.

It is said that during the craziest period in the early years, Pinduoduo attracted nearly 100 million users at a cost of 0.1 cent per fan. At that time, the average customer acquisition cost in the industry was around 300 yuan.

This led to Pinduoduo's first growth peak in Q4 2017. During the quarter, Pinduoduo's net increase in active buyers was 87.1 million, and the total number of users reached 244.8 million.

Such wild growth has a strong historical background, and the industry window no longer exists. Moreover, for Pinduoduo, the importance of these means has declined now and in the future.

02. Pinduoduo still owes Apple a thank-you letter

Few companies can experience a second surge in traffic, but Pinduoduo did it. In 2017 and 2019, Pinduoduo experienced two rounds of surge in user numbers, and the growth curve showed a very obvious double-peak shape.

In July 2018, Pinduoduo went public, and the platform was criticized and controversial for counterfeit goods and copycat brands, and user growth entered a downward channel. Even with heavy investments in marketing, the status quo has not changed. At its lowest point, the net increase in users in a single quarter was only 24.8 million, nearly halving. During an earnings call, Pinduoduo was questioned by investors on how management would improve marketing efficiency.

For Pinduoduo, which survives by telling growth stories, there is no growth to speak of, which is frightening. Moreover, the platform has been constantly questioned for rampant counterfeiting, which involves its reputation and foundation.

In difficult times, Pinduoduo took the hand of a noble in distress.

In September 2018, Apple launched the 10,000 yuan iPhone Xs, but sales were dismal, only one-tenth of the iPhone X's sales in the same period of 2017. What’s fatal is that the dealers have a large backlog of inventory, which feels like a heavy blow to their hands.

While Apple is in trouble, Pinduoduo sees this as a rare opportunity.

On June 18, 2019, Pinduoduo launched a 10 billion yuan subsidy campaign, and the prices of thousands of items hit historical lows. Most products are joint actions between the platform and merchants, which is equivalent to the platform exchanging traffic for merchant sales.

Among them, Apple suffered the most obvious price impact. On Pinduoduo, Apple's pricing is 200 to 500 yuan cheaper than on JD.com, Taobao, and Suning.

Pinduoduo even reduced its advertising efforts, and used all the funds to subsidize Apple phones.

Caixin reported that the official subsidy for each machine was as high as 1,000 yuan. In the end, the cumulative sales of iPhoneXs series on Pinduoduo platform reached 1 million units.

High-end brand Apple phones are sold at the lowest prices on Pinduoduo. Invisibly, Apple's brand positioning and user mind have become the best endorsement for Pinduoduo's reputation. Buyers born in the 1980s and 1990s have become the core driving force behind Pinduoduo's secondary growth, and the traffic influx this time is from users within the Fifth Ring Road who previously looked down on Pinduoduo.

Huang Zheng is both focused and resolute in implementing the strategy.

Alibaba and JD.com once again replicated the 10 billion yuan subsidy. The price war seemed to be full of smoke, but no one really remembered what Alibaba and JD.com subsidized.

Among the hundreds of billions in subsidies, only Pinduoduo has a strong presence. This was a sneak attack by Pinduoduo to penetrate the user circle. Pinduoduo's rebound growth was only possible because Alibaba and JD.com concentrated their forces on the lower-tier cities and Huang Zheng moved within the Fifth Ring Road.

Most importantly, although Pinduoduo has increased its investment in sales and marketing expenses year by year, the cost of acquiring new users has always been the lowest among major e-commerce platforms.

In Q4 2019, Pinduoduo's sales and marketing expenses reached a historical peak, with an investment of 9.268 billion yuan in exchange for 48.9 million users in a single quarter. Even if all expenses are counted as user acquisition costs, the figure is 189 yuan. However, the costs of Alibaba and JD.com are between 300 yuan and 400 yuan.

However, Pinduoduo also includes expenses such as agricultural product logistics subsidies in sales and marketing expenses. So strictly speaking, Pinduoduo's actual cost of acquiring users is even lower.

Pinduoduo has not given up its plan to continue to occupy traffic territory. Not to mention the possibility that Alibaba's e-commerce users may be poached, theoretically the 900 million WeChat payment users are all Pinduoduo's target group.

03. Pinduoduo

logic

Li Zhaohui, an investor of Pinduoduo and partner of Tencent Investment Management, said that from an economic definition, Pinduoduo has only done one thing: absolute cost advantage.

This sentence not only means that Pinduoduo obtains traffic at the lowest price, but also that Pinduoduo can sell goods at the lowest price on the entire network. The same products at lower prices are the reason why users cannot refuse Pinduoduo. As a result, more users flock to the platform, and a positive cycle is formed.

The core question is why Pinduoduo’s products can be sold at such a low price. Behind this lies the platform’s mysterious traffic distribution rules.

The gameplay created by Alibaba is that if merchants want to capture more traffic, the fastest and most effective way is to place advertisements and participate in bidding rankings. In other words, merchants' willingness and ability to purchase are the core rules of traffic distribution. The result is that merchants' costs are pushed up, commodity prices remain high, and the platform's transaction volume and revenue territory continue to expand.

If we use this logic to measure Pinduoduo, the conclusion will be very bad. Low price means low quality, or the platform has to invest a lot of costs to subsidize merchants.

Pinduoduo’s traffic distribution rules are completely different from those of Taobao. It is a user-driven and recommendation model. Because users naturally like the lowest price for the same product, the lower-priced products are easier to be distributed by traffic.

The core reason why Alibaba cannot replicate this is that Pinduoduo’s own cost of acquiring traffic is very low. In addition, Pinduoduo mainly recommends products in the form of information flow, and search traffic accounts for less than 40%. Even if merchants put in bidding rankings, the effect is limited.

Instead of spending money on advertising, it is better to directly reduce the price of the product. This is the default rule under which Pinduoduo operates: low prices attract more traffic, more traffic spreads costs, and merchants have the motivation to further lower prices. The result is that the traffic cost of opening a store on Pinduoduo is lower than doing business on Taobao. For users, the goods they buy are always at low prices, and the prices can even get lower and lower.

In essence, Pinduoduo is forcing reforms in the back-end supply chain through mass customization demands at the front end. Use a semi-planned economy to promote a semi-market economy on the supply side.

The familiar formula and taste remind people of Zhang Yiming and his App Factory.

Zhang Yiming and Huang Zheng, two super traffic distributors in the mobile Internet, both meet user needs through precise recommendations through algorithms. It’s just that Zhang Yiming uses the likes of the majority of people as the fulcrum. The more people like the information, the easier it is to distribute. Huang Zheng’s fulcrum is the lowest price for the same product. The lower the price, the more the platform recommends it.

A side effect of Toutiao’s algorithm is that content that most people like may not necessarily be good content, and valuable information that a few people like may not necessarily be discovered. Similarly, the result of Pinduoduo's gameplay is that low prices have spawned a large number of popular single products, and the on-demand customization model also means that the platform's product selection is limited.

When it comes to business numbers, this means that although its user base is twice that of JD.com, its GMV is only half of JD.com, and it is far behind Alibaba. The platform cannot make more money from it. Pinduoduo is truly about making friends instead of making money.

Zhang Yiming is not too worried about this. On the contrary, information flow recommendations are a reshuffle of advertising placement. Toutiao products have become the mobile product matrix with the strongest ability to attract money due to the precision of their algorithms. This also gives confidence to many startups engaged in information flow, especially companies like Qutoutiao, which have the ability to generate considerable revenue from the very beginning.

In the long run, what will greet Pinduoduo?

People living within the Fifth Ring Road have already embraced Pinduoduo. There are many items with unit prices of hundreds or thousands of yuan that have been subsidized by hundreds of billions of yuan, not to mention an Apple mobile phone that costs several thousand or nearly ten thousand yuan. However, there has not been much breakthrough in the annual consumption expenditure level of users. If the 10 billion yuan subsidy is stopped one day, will users within the Fifth Ring Road still think Pinduoduo is attractive?

To put it another way, they are more attracted by the brand. If there are no brand merchants with higher unit prices, Pinduoduo will always be filled with absolutely low-priced goods. The increase in GMV volume also relies more on relatively low-priced but absolutely high-priced goods. It is obvious that the two-choice strategy that Alibaba once used against JD.com is now being used more against Pinduoduo.

I wonder what answer Huang Zheng will give to Liu Qiangdong’s unsolvable question.

Author: Xinmang

Source: Xinmang daybreak