Editor’s note: This was contributed by Sheji Ho, the Group Chief Marketing Officer at aCommerce, an end-to-end e-commerce enabler in Southeast Asia. Currently based in Bangkok but having previously worked in China, Sheji writes about e-commerce, tech, the internet, and how Southeast Asia is the next China.
Pinduoduo, or PDD, is a social commerce app founded by Colin Huang, an ex-Google engineer, in September 2015. Only a couple of years old, PDD has become the fastest growing e-commerce company in China. It raised $100 million in 2017, is backed by China’s Banyan Capital and Tencent, and valued at a whopping $1.5 billion.
As of Feb 21, 2018, PDD ranks #3 overall in the Chinese iTunes app store ranking for free apps, after popular apps like Tik Tok (aka Douyin) and WeChat, and ahead of other shopping apps like Taobao. PDD went from 100 million yuan ($16 million) GMV a month in early 2016 to 4 billion yuan ($630 million) GMV a month by 2017, putting it in fourth place behind Alibaba, JD, and Vipshop.
How does Pinduoduo work?
Users can download the PDD app or access it within WeChat. Like any e-commerce platform, PDD offers products across a wide range of categories from food to fashion. However, unlike Tmall and JD, PDD incentivizes users with discounts to invite friends to buy in groups.
For example, one container of Similac Advance Infant Formula Powder costs RMB 59 if you buy alone but only 35.5 yuan if you can get one other person to buy it too. In the screenshot below, a total of 1,822 pairs have “group-purchased” this item already.
In addition to group discounts, PDD also incentivizes customer acquisition. Getting users to follow the PDD WeChat Official Account, install the app, and sign up via WeChat login will earn them free products.
PDD also offers cash hongbao worth RMB5-20 to users for each friend they get to download the app and register. The entire system is then gamified through a public leaderboard.
Wait, is this new? Didn’t Groupon invent social commerce?
Groupon did arguably pioneer the group buying concept. In its early days, a certain number of users had to sign up for the same deal in order for everyone to receive the voucher. But unlike PDD, there wasn’t a direct incentive; users had to sit back and wait for anonymous users to tip the scale.
This mechanism was quickly abandoned to scale faster with minimum thresholds that acted more like gimmicks.
Groupon was labeled “social commerce” at first but in its later years, lost its social aspect.
Let’s take a step back and look at the definition of social commerce, according to ConversionXl:
“Social commerce is defined as the ability to make a product purchase from a third-party company within the native social media experience.”
Groupon emerged in the pre-mobile age of 2008 when most consumers still transacted via desktop, especially in the company’s US home market. Back then, less than 1% of e-commerce transactions were via mobile acquisition channels.
In addition, the company’s main distribution channel was email newsletters, a slow and high-friction medium and payments weren’t seamless either as users relied on a credit card or PayPal.
Now looking at 2016 in China—PDD’s first full year in operation—WeChat was the country’s dominant “super app” and leading medium to socialize online with 889 million Monthly Active Users (MAUs) by year-end.
71% of e-commerce now takes place on mobile, creating a flattering backdrop for the rapid rise of PDD, which started out as a mini program on WeChat.
Paying for products on PDD is also remarkably easy because the app makes it automatic. After the first payment, users can opt for one-click payment via WeChat Pay that doesn’t require passwords.
Desktop usage, clunky email newsletters, and credit card payments limited Groupon’s true social commerce potential. Where Groupon failed, PDD is succeeding because of an ecosystem of mobile-first users and WeChat’s features that make it a super app.
Will PDD come to Southeast Asia?
Why not? Southeast Asia e-commerce is already being carved up by Alibaba and Tencent. Lazada and Tokopedia, two companies owned and invested in by Alibaba, dominate the B2C and C2C space at one end and Tencent-invested JD, Shopee, and Go-Jek are at the other end.
With Southeast Asia’s horizontal e-commerce market being consolidated into a few properties like Lazada, Tokopedia, JD, and Shopee, there isn’t as much opportunity in the space as before.
New e-commerce players have to focus on dominating a specific, vertical category or provide a competitive advantage through means other than outspending peers in advertising and/or coupon subsidies.
This is where a model like PDD fits snuggly.
It also helps that one of PDD’s biggest investors is Tencent, which already has its eyes set on the rapidly growing Southeast Asian market.
Will the PDD business model work in Southeast Asia?
To determine if the PDD model would work in the region, we need to identify the criteria that were conducive to its success in China:
- Lack of distribution channels / expensive distribution channels
If you strip away all the hype, PDD’s competitive advantage is in its customer acquisition strategy. Instead of relying on expensive channels like display advertising or paid search (e.g. Baidu ads), PDD is paying its users to get more users. For example, CPCs alone on Baidu can range from 5 to 25 yuan. Note these are clicks, not even users acquired.
Southeast Asia (excluding Singapore and Malaysia) is very similar to China in terms of lack of channels, due to a similar “no-tail” ecosystem. Whereas entrepreneurs in China had to pick their poison between Baidu, Sina and Sohu back in the day, startups in emerging Southeast Asia are limited to Facebook Ads, Google Search, and portals like Detik in Indonesia and Sanook in Thailand.
Early entrants like Lazada took advantage of low cost-per-clicks (CPCs) back in 2013 but given the raging e-commerce “bloodbath”, online ad CPCs have gone through the roof.
Having saturated online channels, Lazada started exploring offline advertising channels like TV and out-of-home media.
Others like Pomelo Fashion tapped into physical stores as a more cost-efficient way to acquire users and simplify last-mile logistics.
PDD social and viral customer acquisition strategies could work quite well.
- High mobile commerce penetration
The majority of e-commerce transactions in China now take place on mobile. In 2016, 71% of e-commerce GMV was on mobile. In the US, this number was only 20% in 2016.
In Southeast Asia, companies like Lazada and Shopee today see over 65% of their orders coming from mobile (with 21.6% using both mobile and desktop to shop), according to a recent survey by ecommerceIQ.
Needless to say, high mobile penetration in Southeast Asia along with high mobile e-commerce usage will provide a fertile ground for a business model like PDD to gain traction here.
- Frictionless mobile payments
One of the drivers of PDD’s success is its seamless payments through WeChat Pay.
This will be a challenge for PDD in Southeast Asia as only Singapore and Malaysia are credit card dominated whereas the rest of the region is mainly a cash-on-delivery market.
Despite efforts to come up with a universal mobile payment standard, no one has succeeded as of today. Efforts like Sea’s AirPay, Ascend’s True Pay, and LINE Pay have hit a wall due to lack of distribution, lack of use case, and a plethora of other issues.
Right now, most eyes are on Go-Jek’s Go-Pay, which has a massive distribution channel by leveraging Go-Jek’s 40 million install base and 10 million Weekly Active Users (WAUs). In addition, and more importantly, Go-Jek addresses emerging Southeast Asia’s unique lack of both credit card and bank account penetration — users are able to top up their Go-Pay accounts by handing cash to Go-Jek drivers that essentially act like mobile ATM deposit machines.
While still a poor man’s WeChat Pay, Go-Pay offers hope for business models like that of PDD to thrive in Southeast Asia.
- Attachment to popular social platform
Without the WeChat ecosystem, PDD wouldn’t have been the company it is today. Being embedded in WeChat, PDD was able to quickly get massive distribution by tapping into the potential 889 million MAUs of WeChat.
In Southeast Asia, Facebook, Instagram, WhatsApp, and LINE are highly popular, however, none are considered super apps that offer seamless integration.
The closest to WeChat in Southeast Asia would probably be Indonesia’s Go-Jek.
While Go-Jek hasn’t entered e-commerce yet (it’s positioned only as a services marketplace and offers delivery for partners through its GO-MART product), it wouldn’t be surprising if PDD decided to leverage the Go-Jek platform, given the similarities to WeChat in China. Like PDD, Go-Jek also counts Tencent as an investor.
With an estimated third of e-commerce in markets like Thailand happening on Facebook, Instagram and LINE, the user behavior of buying through social channels already exists.
- Access to cheap product sourcing
If you browse through PDD, you’ll notice that most of the products sold bear similarities to many of those sold on Taobao. In other words, a lot of “mass” and non-branded products. PDD thrives in China because of easy access to a supply of these products manufactured locally.
However, in Southeast Asia, these kind of products (typically sold on social media and C2C platforms) are imported from China, which leaves less margin for PDD to play with in terms of discounts and customer acquisition.
To sum up, emerging Southeast Asia meets several of the criteria behind PDD’s success in China but poses some unique challenges:
PDD success drivers: China vs. Emerging Southeast Asia
What will happen next?
In the analysis, we’ve identified some of the drivers of PDD’s rapid rise in China and also their presence in emerging Southeast Asian markets at an earlier stage.
Given this opportunity, we can expect the following scenarios to play out over the next few months and years:
Local and Chinese entrepreneurs will launch PDD clones across the region
Ever since opening up to the world in the 80s, we can describe China having gone through the following three stages, with the third one still progressing as we speak:
- Made-in-China (1980-2000)
China perceived as manufacturing base for (often cheap, low-quality) export products
- Copy-to-China (2000-2015) Chinese entrepreneurs, some foreign educated, bring back models that worked in the US, e.g. Search (Google -> Baidu), Portals (Yahoo -> Sina, Sohu)
- Copy-from-China (2015-2030) Birth of unique Chinese Internet business models (e.g. dockless hire bikes, payments, live streaming, social commerce, O2O). Increasing media focus on Chinese tech innovation and locals outside of China looking for Chinese models to copy
We are witnessing stage 3 happening right here in Southeast Asia. Below is a Thai post on Facebook looking to recruit staff to work on what looks like a PDD clone:
It doesn’t have to be local talent copying PDD from China to Southeast Asia. With the influx of Alibaba, Tencent and JD into the region, there are plenty of Chinese employees who’ll be noticing the similarities between Southeast Asia today and China, and jump on new opportunities.
PDD will enter Indonesia through Go-Jek (helped by common investor Tencent)
If PDD were to follow Alibaba and Tencent’s steps and enter Southeast Asia, we expect them to join forces with Go-Jek. By embedding itself inside Go-Jek, PDD is executing the same game plan that led to its rapid initial growth within the WeChat ecosystem. Fostered by a shared investor–Tencent–Go-Jek would be the perfect launch partner for PDD in Southeast Asia.
Existing players will adopt the PDD business model to compete against horizontal e-commerce plays
Local e-commerce players like MatahariMall, Konvy, and Orami could pre-empt PDD by adopting its customer acquisition strategies to compete with regional giants like Lazada and Shopee.
For Konvy and Orami, two female-focused e-commerce platforms, this move could make a lot of sense since the majority of PDD’s users in China are female, over 40 years old, and living in smaller cities.
Play on players.