Industry News

E-commerce lessons from China: How group buying pays off

Pinduoduo’s three-year rise to become the number three e-commerce platform in China has stunned industry insiders and forced incumbents Alibaba and JD.com to go on the defensive.

In 2018, Pinduoduo recorded US$68.6 billion in transactions on its platform in 2018, and the number of active buyers reached a whopping 418.5 million Chinese customers.

We examine Pinduoduo’s approach to social commerce and extract lessons that U.S. retailers can apply to their own businesses.

Social commerce entertains, educates customers

Social e-commerce is e-commerce driven by social interactions among friends and family. It may include sharing discounts, games and other content to enhance the shopping experience.

These features serve to entertain or educate the customer, increasing engagement and lifting average conversion rates.

Also, when friends and family share social commerce stores or products, customers are more inclined to trust their recommendations and make a purchase, shortening the customer journey.

Social commerce in China is the new craze because customer acquisition costs have increased significantly on traditional platforms such as Alibaba and JD.com, where there are many sellers bidding up ad costs. Both brands and platforms are looking for new ways to engage customers.

And yet Pinduoduo’s social commerce tactics enabled it to lower customer acquisition costs to a fraction of those for traditional e-commerce platforms.

In 2017, Pinduoduo’s average customer acquisition costs were just $1.64 (11 RMB), compared to $46 (310 RMB) for Alibaba’s Taobao and Tmall platforms, and $35 (225 RMB) for JD.com.

Pinduoduo used group-buying promotions to incentivize customers looking for good deals. Customers who pulled in friends and family to purchase a product would receive a steep discount as a reward. The new customer would also receive a discount as well.

While these discounts may seem steep to some, they are much lower than what it would take a merchant to acquire new customers through platform ads on Tmall or JD.com.

They also appealed to Pinduoduo’s customers in lower-tier Chinese cities, whose lower incomes make them much more price-sensitive than residents of Shanghai or Beijing. These customers were reportedly underserved by the likes of Alibaba and JD.com.

WeChat played key role in Pinduoduo’s social commerce strategy

Group-buying has been around since the early days of Groupon, but Pinduoduo’s model was different in that it leveraged pervasive social media platform WeChat and its WeChat mini-program to market its group-buying promotions.

WeChat, as China’s most commonly used messaging app with over a billion users, is a prime platform for social commerce and was instrumental in helping Pinduoduo's awareness.

The development of WeChat mini-programs is one reason. Mini-programs are mini-apps built within WeChat’s ecosystem. These mini-programs can be e-commerce stores, games or even productivity tools.

For Pinduoduo, 65% of its transactions came from its WeChat mini-program, where users can order items and complete a transaction by paying with WeChat Pay.

WeChat mini-programs are effective vehicles for social commerce for two main reasons:

  1. They can be easily shared: Users tap their fingers twice to share with their friends. The mini-program shows up as a large visual picture of the product with a small headline link at the top. A report from ALDZS, a data provider, shows 34% of users access e-commerce mini-programs because they’re shared by friends.
  2. They are easily accessible. Users do not have to download a separate app and they can access them within WeChat through over 60 different ways. They are also light and load quickly, because each page is limited to two megabytes.

These factors were important because Pinduoduo was targeting internet users in lower-tier Chinese cities, who have lower consumption power and smartphones with less memory.

These users weren’t likely to download a new app for shopping but were open to purchasing through Pinduoduo’s convenient mini-program store, especially if the products were recommended by friends and discounted.

These factors helped Pinduoduo grow to over 400 million active buyers within just three years.

Key Takeaways

  1. Social commerce is when e-commerce transactions are driven by social interactions with friends and family. Adding features such as group-buying promotions, content and even games can help customers share e-commerce products with each other. Social commerce is important in China because customer acquisition costs are so high now.
  2. WeChat’s social-sharing features and mini-programs make it a great vehicle for social commerce. Pinduoduo’s group-buying promotions on its mini-program helped it lower customer acquisition costs and go viral among more than 300 million users, despite being a much smaller player.
  3. US retailers and brands should consider incorporating social commerce elements into their marketing strategies. It provides an alternative way to acquire customers and reduces reliance on paid advertising.

Franklin Chu, managing director of Azoya USA, is an expert and speaker on China cross-border e-commerce. Franklin also serves as President of Sage Capital Group Inc. a private equity and investment management firm and is a graduate of Yale University and Harvard Business School.