China’s social ecommerce platforms remain largely unknown outside of the country, but the models have had a big impact on China’s ecommerce sector — lowering the acquisition cost for tech companies and bringing affordable goods to Chinese consumers — especially in lower-tier cities.
Pinduoduo is the third-largest ecommerce player in China behind Alibaba and JD.com, and is growing faster than its major rivals. Average monthly active users rose to 643 million in 2020, according to Bloomberg.
Nearly all of Pinduoduo’s sales are group buys — created by sellers but initiated by consumers — who create or join a group of at least two people to access a deal. Chinese consumers use the platform for mostly everyday products such as fruits, vegetables, and consumer goods, but also apparel.
Pinduoduo is popular with women who make up 70% of the user base. These women control the family purse strings, are price-sensitive, and always on the lookout for deals. Where JD.com and Alibaba dominate China’s tier 1 cities such as Beijing and Shanghai, a large percentage of Pinduoduo’s user base is from smaller cities. In lower-tier cities, prices are often higher, because of distances and logistics inefficiencies, and customers are price conscious and more in contact with lower quality products.
Social media and user engagement
The more participants, the lower the prices, and buyers are eager to share product links and QR codes with friends and family on social media platforms such as WeChat and microblogging site Weibo. The platform has also introduced a price reduction or Price Chop feature — allowing users to get products for free by sharing a custom link with their friends. To receive the item for free, the user must share their link with as many friends as possible, which drives down the price and can reduce the price to zero within a 24-hour period.
The platform also incentivises daily check-ins and rewards users with redeemable points. Each time a user checks in, they receive a small reward such as credit, and these rewards accumulate over time. Pinduoduo also launched in-app games to help drive traffic and time spent on the platform. Pinduoduo wants users to engage and have fun on the site, even if it doesn’t translate into an immediate sale.
Shihuituan’s community leader model
Shihuituan is another Chinese company that is tapping into the success of social ecommerce or group buying. Like Pinduoduo, Shihuituan sells consumer goods such as fresh fruits, vegetables, and packaged goods — targeting lower-tier Chinese cities with less competition.
The community leader is central to the success of the model, and responsible for placing the order, receiving the goods, and last-mile delivery. Community leaders are often stay-at-home moms or local neighbourhood stores, who act as influencers and community marketers and earn a commission of 10 per cent on average.
Each community leader handles its own small network of around a 100 customers, and uses social media apps such as WeChat to share deals and the latest product information. Shihuituan has successfully built a network of 80,000 community leaders — serving 20 million households in 60 cities in China.
Shihuituan reduces the need for a full cold chain logistic model, by moving goods efficiently from warehouse to customer. The company employs a 12-hour delivery schedule for fresh produce across China, with goods in transit for 5-7 hours in cold and iceboxes. Community leaders also use their own fridges and freezers to store goods before collection or for last-mile delivery later in the day.
Shihuituan doesn’t own any fixed assets and outsources delivery trucks. They store limited inventory and encourage suppliers to distribute products as and when orders are received. The platforms operational speed and logistics efficiencies — lower the cost of infrastructure and cold storage — helping to keep logistics costs to less than 10 per cent.
Cost savings and value proposition
Pinduoduo and Shihuituan’s group buying models create bulk orders and reduced prices for shoppers — leading to economies of scale and increased profits for manufacturers. For Shihuituan, community leaders also bring significant cost savings for last-mile delivery, and reduced prices for customers living in lower-tier cities.
Close social relationships and trust within the community are particularly important for categories where consumers don’t know the product source, and seek feedback or recommendations from friends and family.
The platforms have a strong consumer value proposition, as users receive a discount on everyday consumer goods and fresh produce items. Unlike a Groupon type of model, observers often compare them with.
Most ecommerce businesses need to invest approximately $10-20 or more to gain a customer, but with these models, the acquisition cost is close to zero. Users become unofficial recruiters for the platform — lowering acquisition cost and attracting more customers to the platforms.