To The Moon

Thanks to @TigerTradingNotes for the invitation to explore Pinduoduo’s unique business strategies and market developments.

Pinduoduo has emerged as a major player in the Chinese e-commerce industry in recent years due to its unique business model and rapid growth. However, the recent protest by hundreds of merchants from Temu, Pinduoduo's cross-border e-commerce platform, at its Guangzhou headquarters has revealed numerous conflicts between the platform and its merchants. Through this incident, we can explore how Pinduoduo has distinguished itself in the e-commerce market and built its product ecosystem.

The Birth of Pinduoduo

Reflecting on Pinduoduo's rise, many may recall the "bargain for a cut" campaigns that once flooded WeChat. Users could obtain substantial discounts, ranging from 100 to 200 yuan, by inviting 20 to 30 friends—or even more—to help them "cut" the price. This model was particularly attractive to low-income groups.

From the beginning, Pinduoduo attracted users from third- and fourth-tier cities and rural areas with low-cost products and viral marketing strategies, especially those who used WeChat but had not yet adopted shopping platforms like Taobao or JD.com.

Source of Low-Cost Products

Pinduoduo achieved notable success in user acquisition, app UI design, and marketing strategies, but these are tactical elements. The core question lies in the source of low-cost products, which is a strategic issue. Pinduoduo initially focused on selling fruits and agricultural products.

What is the biggest difference between an apple and an Apple iPhone? The level of product standardization. Fruits are non-standardized products that inevitably result in substandard fruit (including first-grade and second-grade) during production.

In the past, premium fruit was usually sold in high-end supermarkets and specialty stores, first-grade fruit was sold in large supermarkets and e-commerce platforms, and second-grade fruit was sold to processing plants, convenience stores, and school cafeterias.

The price of second-grade fruit is often much lower than that of premium and first-grade fruit. Pinduoduo worked directly with agricultural suppliers to procure second-grade or surplus fruit at low prices, selling them in large quantities through group buying. This strategy helped Pinduoduo quickly build its user base, increase brand awareness, and capture market share.

Favoring Consumers in After-Sales Policies

Pinduoduo’s after-sales policies, especially its "refund only" service, have frustrated many merchants.

Let’s analyze why Pinduoduo adopts and supports the "refund only" policy. Due to the higher probability of quality issues with substandard fruits during transportation, consumers might request refunds for damaged goods. Merchants usually do not request returns, as the damaged goods have no resale value. Refunds are processed in two ways: partial refunds (proportional to damaged goods) and full refunds.

Pinduoduo initially supported both methods, but full refunds gradually became mainstream. By algorithmically controlling the proportion of full refund orders, the platform ensures merchant profitability, reduces the need for manual customer service intervention, and enhances customer satisfaction, achieving a win-win situation. Through systematic after-sales rules, the platform partially transfers merchant profits to consumers, maximizing overall benefits.

Escalating Conflicts Between the Platform and Merchants

As Pinduoduo expanded, early after-sales rules faced new challenges. Some "coupon scalpers" exploited platform rule loopholes to conduct "refund only" operations, even offering "30% off order placement" services. Consumers paid only 70% of the order amount, and scalpers placed the order and applied for a full refund after receipt.

Therefore, the protest by hundreds of Temu merchants can be seen as an inevitable challenge in Pinduoduo’s development.

I speculate that Temu merchants encountered higher "refund only" rates in overseas markets compared to domestic ones. The unexpectedly high refund rate at current prices could lead to increasing losses with every sale, potentially causing the incident to erupt.

Change and Consistency

What might be the outcome of this concentrated protest?

Core Principles

Pinduoduo may adjust platform rules to appease merchants by setting stricter "refund only" standards, but its consumer-favoring after-sales strategy is unlikely to change.

Entering the Mid- to High-End Market?

Despite the higher profit margins of mid-to-high-end products, Pinduoduo is unlikely to immediately enter this market. The global economy is in a tightening cycle, reducing consumer demand for high-priced goods in favor of affordable and practical products. Pinduoduo needs to consolidate its market share, defending against Taobao (Taobao Special Edition) and JD.com (Jingxi) as well as the influence of platforms like Douyin (TikTok) on consumer habits.

Market Outlook

Although Pinduoduo's human efficiency (efficiency per employee = total output/number of employees) is significantly higher than that of Taobao and JD.com, this is not strongly correlated with its market valuation. Pinduoduo's share of the domestic low-end market faces challenges from traditional e-commerce and live-streaming platforms, but its foundation remains stable.

In terms of expanding overseas, if Pinduoduo can further increase its market share in the U.S., Europe, and Southeast Asia, its stock price potential will be significantly enhanced. We hope to see more domestic companies succeed internationally. However, based on current public information, I have not seen significant breakthroughs in Pinduoduo's overseas markets, so I will not consider buying Pinduoduo stock currently.