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Pinduoduo Blazes Trail for New Kind of Social Ecommerce in China

The formula is simple: recruit friends, reap rewards

Those with even a passing interest in China's ecommerce sector have likely heard of Alibaba, the country's behemoth in online retailing. We estimate the company will rake in more than $1 trillion in retail ecommerce sales this year, far more than second-place, with a projected $318.31 billion.

The country's third place finisher, Pinduoduo, is far from a household name in the US. But the company has pioneered a business model that has let it capture a projected 7.0% of all retail ecommerce sales in China this year, not a bad showing for a firm that launched in 2015.

Unlike Alibaba, which built its success on the back of consumer-to-consumer marketplace Taobao—or, which largely manages its own inventory and focuses on direct sales—Pinduoduo relies on its users to leverage their social networks to drive conversions. The more friends and family a shopper can get to buy a product offered on Pinduoduo, the lower the price drops for everyone in the group.

Pinduoduo's success has been aided by its presence on WeChat, a near-ubiquitous messaging app that's evolved to offer its users a wide range of functions, including ordering food, hailing cabs, paying bills and even accessing government services.

Pinduoduo users can easily share product listings on WeChat, which itself has more than 1 billion monthly active users. What's more, they can access Pinduoduo within WeChat via a "mini program," an instant app that doesn't require a user to download anything from an app store.

The company has also used a grab bag of gamification techniques, such as flash sales and leaderboards for customers who have gotten the most kickbacks for recruiting friends to make a purchase.

"Pinduoduo has grown through their use of social virality in unlocking deals. Spontaneity adds to the gamified nature of the platform making it not only a useful place to find cheaper goods, but fun, which can attract more buyers," said Monica Peart, senior forecasting director at eMarketer.

That user growth strategy seems to be working. Pinduoduo had 62.6 million daily active mcommerce users in September 2018, behind only Taobao, according to Jiguang (Aurora Mobile).

The company has also managed to parlay its unique approach to generate an estimated $138.47 billion in ecommerce sales this year.

However, the firm has largely focused on offering low margin, inexpensive goods that are popular in smaller Tier 3 and 4 cities and rural areas, where residents tend to have less disposable income than those in larger cities.

In addition, Pinduoduo has been saddled with a reputation for selling counterfeit and low quality goods; that's likely a disincentive to shoppers living in bigger Tier 1 and 2 cities.

The company is trying to get ahead of those concerns. In December, Chinese media reported that Pinduoduo had pledged to more closely monitor vendors selling goods on its platform in the hopes of weeding out those selling fake items.