The Pinduoduo Business Model In A Nutshell

Pinduoduo is a Chinese agriculture-centric platform founded by Colin Huang and Chen Lei in 2015. The platform connected farmers and distributors with consumers through an interactive shopping experience. Today, it offers a much more diverse range of products to ordinary consumers.
Pinduoduo has a typical revenue generation strategy for an eCommerce giant under the marketplace business model.
Pinduoduo also offers advertising to merchants in a system not dissimilar to Google’s PPC advertising model.

Pinduoduo Origin Story

Pinduoduo is a Chinese agriculture-centric platform founded by Colin Huang and Chen Lei in 2015. The platform originally connected farmers and distributors with consumers through an interactive shopping experience.

Pinduoduo is the fourth start-up for ex-Google employee Colin Huang, who had prior experience in developing eCommerce algorithms and chat-based gaming systems. Huang had the vision to combine the best elements of Chinese giants Alibaba and Tencent since the two companies did not understand how the other made money. Indeed, Alibaba struggled to create an online community despite achieving great success selling online goods. Tencent, on the other hand, was a social media conglomerate that had failed to leverage its massive user base in eCommerce.

Central to the future success of Pinduoduo was Huang’s belief that shopping was like a game. To that end, users on the platform could enjoy large discounts if they were able to convince family and friends to purchase in bulk. Translating this idea into a working platform required more work and an initial $8 million round of funding. Pinduoduo then went on an aggressive recruitment drive, seeking out new graduates hungry for success and single individuals unburdened by family commitments in particular.

Pinduoduo started by selling fruits and vegetables with more attractive fees than competitors such as Alibaba and JD.com. This attracted millions of working-class, price-conscious Chinese citizens who pushed monthly revenue to $152 million by 2016. Many of these citizens lived in remote or rural areas where it had been previously uneconomical to ship products.

To profit from the more affluent end of the market, Pinduoduo began onboarding international brands such as Nike and Apple. No longer confined to agricultural products, the platform now sells a range of items including liquor, cosmetics, clothing, electronics, and baby supplies.

In April 2021, Pinduoduo surpassed Alibaba to become China’s largest eCommerce site in terms of annual active users. Four months later, the company posted its first quarterly profit of $372 million.

Pinduoduo revenue generation

Pinduoduo has a typical revenue generation strategy for an eCommerce giant under the marketplace business model. The company makes money through transaction services, merchandise sales, and online marketing services.

Transaction services

The company charges merchants fees for transaction-related services provided, and it also rewards merchants who sell high-quality products
and provide superb services with preferential fee rates.

In this case, the company, as it highlights in the financials, “charges fees for transaction services to merchants for sales transactions completed on the Group’s platform, where the Group does not take control of the products provided by the merchants at any point in the time during the
transactions and does not have latitude over pricing of the merchandise.”

The fees are determined as a percentage of the purchase price of the merchandise sold by merchants.

Transaction services revenues represented about 10% of the company’s revenues in 2020, per its financials.

Merchandise sales

Merchandise sales are generated as a small portion of revenues from online direct sales, where the company acquires products from suppliers and sells them directly to users.

How does the merchandise sales model work?

As the company shows in its financials, in certain cases it acquires merchandise from suppliers and sells directly to consumers. Thus acting as a principal for and taking control of the merchandise.

Merchandise sales revenues represented about 10% of the company’s revenues in 2020, per its financials.

Online marketing services

As reported in its financials, Pinduoduo provides online marketing services primarily to “allow merchants to bid for keywords that match product listings appearing in search results on its platform and advertising placements such as banners, links and logos. The placement and the price for such placement are determined through an online bidding system.”

In a similar vein to Google’s PPC advertising, Pinduoduo merchants can also bid for keywords to have their product listings show in search results.

The online bidding system determines the price paid by each merchant and where the ad will be placed on the platform, which uses recommendation algorithms to show highly targeted ads based on a user’s browsing behavior.

The advertising platform also covers video ads, through browsing rather than searching.

As the company highlights display marketing services are provided allowing merchants to place advertisements on the platform primarily at
fixed prices. As highlighted merchants will “prepay for display marketing which is accounted for as customer advances and deferred revenues and revenues are primarily recognized over the period during which the advertising services are provided.”

Over 80% of the company’s revenues came from online marketing services in 2020.