Chinese startup Pinduoduo made headlines this summer following a successful US debut on the NASDAQ, catapulting its founder Colin Huang to the position of China’s 12th richest person with a newly-minted fortune of US$13.8 billion.
Pinduoduo’s incredible rise
At just three-years old, Pinduoduo has seen explosive growth, quickly becoming the third-largest Chinese e-commerce app (by monthly active users) after Taobao and JD.com. Huang launched the company in 2015 as a social buying platform for fruits, dubbing it Pinhaohuo.
Exhibit 1: Pinduoduo is the third largest e-commerce app in China
Source: Jiguang data (jiguang.cn); WalktheChatAnalysis.
If a user wants to buy some watermelons on offer on the site, she would use WeChat to invite her network of friends to form a shopping team to get a lower price for their purchase. Once the number of purchasers hits a certain figure, the offer is unlocked and the goods are shipped to each buyer at a steep discount. Pinhaohuo’s C2B business model allows goods to be shipped directly from manufacturers to the end consumer. By eliminating layers upon layers of distributors, this lowers the price tag for end users while increasing the profit margins for suppliers – a win, win.
Exhibit 2: Tissue papers on sale
Later that year, Huang launched sister company Pinduoduo which ventured into verticals beyond fresh food. Pinduoduo now sells everything from kids’ toys to household goods. Like Pinhaohuo, the core function of the app is group buying. As shown in Exhibit 2, each product has a full price and a group-buy price. Users can either pick up 8 packs of tissue papers for RMB 16.9 (USD 2.5) or they can canvass enough friends and get the same deal for RMB 9.9 (USD 1.5). The highly addictive and viral nature of this model means companies can expend less on advertising, relying instead on word of mouth to generate sales.
Pinhaohuo and Pinduoduo ultimately merged in 2016 creating a group-buying juggernaut ready to take on China’s largest e-commerce players. In its IPO prospectus, Pinduoduo notes that it is one of the leading Chinese e-commerce players in terms of gross merchandise value (GMV) and number of total orders. Its GMV in 2017 and the twelve-month period ending June 30, 2018 was RMB141.2 billion and RMB262.1 billion (US$41.8 billion), respectively. During that same period, the number of total orders placed on its mobile platform reached 4.3 billion and 7.5 billion, respectively.
Who is the typical Pinduoduo customer?
As China morphs into a high-income society, the greatest growth will not come from its most affluent cities such as Beijing and Shanghai, but rather will be driven from the smaller and faster-growing Tier-3 and Tier-4 cities. This significant but often overlooked market is precisely the target market for Pinduoduo.
As Examples 3 and 4 highlight, 70% of Pinduoduo’s customers are female users with almost 65% of users living in Tier-3 cities or beyond. This is in contrast to JD.com where only 34.3% of its users are female and only half of its clientele reside in Tier-3 cities or beyond. Unsurprisingly, average orders on Pinduoduo are relatively low, as much as 10 times smaller than the average order on JD.com (Exhibit 5). This indicates that Pinduoduo’s customer base is predominantly lower-income females who are price-sensitive shoppers and are attracted to scoring bargain discounts on everyday household items.
Example 3: Female users dominate Pinduoduo’s customer base
Source: QuestMobile, 2018.3; WalktheChat Analysis
Exhibit 4: Distribution of Pinduoduo and JD users in various city tiers
Source: Jiguang data (jiguang.cn); WalktheChat Analysis
Exhibit 5: Average order value on JD.com, Taobao and Pinduoduo
Source: Company filings
Pinduoduo’s IPO and beyond
Pinduoduo successfully went public on the NASDAQ stock exchange on July 26, raising more than US$1.6 billion and putting the market valuation of the company at US$21 billion. This is particularly impressive given its two largest rivals JD.com and Alibaba were both operational for 16 years and 15 years respectively, before they listed on US stock exchanges. Pinduoduo achieved the same feat in three years.
Prior to its IPO, the company received funding from a slew of private equity funds including Gaorong II, Lightspeed II, Advantech I, Gaorong III, IDG China, Sequoia Capital, and Tencent Holdings, amongst others.
Pinduoduo’s rapid growth though, is not without its challenges. The company has come under scrutiny following accusations of counterfeit goods being sold under its platform. One example saw fake Pampers diapers which had packaging that resembled the original in color and branding, only to be sold under the name “Parmebos”.
However, this is an industry-wide problem in China that has plagued not just Pinduoduo but both e-commerce giants Alibaba and JD.com. Pinduoduo has taken steps to address the issue, pledging to enforce better mechanisms to tackle fake goods. The company issued an open letter on August 22nd stating that in the week spanning August 2nd to 9th, it had shut down 1,128 stores, taken down 4.3 million listings, and blocked 450,000 suspected listings from going up on its platform.
Counterfeit products aside, the allure of cheap goods and the high of scoring a good deal will likely continue to be a winning formula for Pinduoduo. Simple migration dynamics illustrate this point. China’s booming large cities are a well-known fact but what perhaps garners less coverage is that there are still 600 million Chinese people who live rurally. As the pace of urbanization continues, and they migrate to cities, the smaller Tier-3 and Tier-4 cities will be the ones that will benefit. This is exactly the type of consumer that Pinduoduo seeks to serve. With Tier-1 and Tier-2 cities becoming saturated (in terms of both people and costs for businesses), innovative and nimble companies that can adapt to serve the needs of numerous, but less high-profile cities, are set to reap the rewards. In this sense, Pinduoduo is already well on its way to grabbing the headlines that bigger rivals JD and Alibaba have been accustomed to.
 “Pinduoduo: A Close Look at the Fastest Growing App in China”, Walk The Chat, June 18, 2018.
 “Pinduoduo removes 4.3 million listings in crackdown on fake goods after stock takes a hammering”, South China Morning Post, August 23, 2018.