Pinduoduo's Subsidy Strategy
Users who experienced the intense competition in the e-commerce industry ten years ago have likely compared prices across multiple platforms. In order to seize the development dividends of the industry, industry players engaged in price wars, making it a habit for many people to compare prices before shopping. This phenomenon even gave rise to a batch of price comparison websites. However, as the competition stabilized and platforms entered their respective comfort zones, the intense price wars gradually disappeared, and the shopping habit of comparing prices before placing an order was also diluted.
This situation changed this year. On March 6, JD.com’s billion-yuan subsidy was launched ahead of schedule, and price competitiveness was established as one of Taobao’s five strategies for 2023. Once again, price has become the focus of the e-commerce industry. And undoubtedly, Pinduoduo, which launched its billion-yuan subsidy in June 2019, is leading the new trend of subsidies.
On March 20, Pinduoduo Group released its Q4 and full-year financial report for 2022, which not only disclosed Pinduoduo’s performance over the past year - Pinduoduo’s revenue for the full year of 2022 was CNY 130.6 billion, a year-on-year increase of 39%, and net profit attributable to ordinary shareholders was CNY 31.538 billion (approximately USD 4.573 billion), an increase of 306% from the net profit of CNY 7.7687 billion in 2021. More importantly, it also revealed the answer to decoding the industry’s competitive trend.
While the industry as a whole is experiencing growth bottlenecks, Pinduoduo has achieved the feat of synchronous revenue and net profit growth. Behind this achievement, Pinduoduo’s billion-yuan subsidy, which has become a benchmark in the industry and led a new trend, is re-anchoring the industry’s competitive coordinates.
Subsidies ≠ Burning Cash
This year’s e-commerce industry has become particularly lively due to a pre-promoted subsidy war. On the evening of March 6, after multiple rounds of preheating, JD.com’s billion-yuan subsidy channel was upgraded and launched. The sub-channel that only appeared during major promotions was upgraded to a regular channel and a prominent entrance was opened on the app’s homepage. On the same day, Suning.com also launched its billion-yuan subsidy channel. The words “billion-yuan subsidy” quietly appeared in some grocery shopping apps as well. Earlier, Taobao established price competitiveness as one of its five strategies for 2023, aiming to improve the price-performance ratio of its products.
For ordinary users, this is just a reprint of the subsidy war that was once popular on the Internet a few years ago. However, this round of e-commerce subsidy war has its particularity. Regardless of the total retail sales of social consumer goods, the penetration rate of e-commerce, consumer habits, the scale of netizens, and other dimensions, the e-commerce industry has already been in a completely different development context. In this brand new industry context, the core of the subsidy war has also changed.
The billion-yuan subsidy is not just about spending CNY 100 billion to subsidize consumers.
How to understand subsidies? In fact, e-commerce subsidies can be divided into two types: one is burning money-style subsidies, which are not sustainable; the second is subsidies that demand space from the industry chain.
Everyone is familiar with burning money-style subsidies. At the beginning of the mobile Internet era, industries such as ride-hailing, food delivery, and tourism all launched similar wars. The characteristic of burning money-style subsidies is to simply reduce the price of products or services through subsidies and try to attract more users with low prices. However, this approach is difficult to sustain because pure subsidies only give users a short-term feeling of excitement and do not create more value for users and the industry. Ignoring the commercial essence of burning money is doomed to be unsustainable. Once the capital injection is lost, subsidies become difficult to sustain. With the end of subsidies and the restoration of normal prices, users quickly leave, and the money previously spent is truly just “burned” away, leaving no more traces except for the momentary noise and excitement.
Different from burning money-style subsidies, subsidies that demand space from the industry chain are a completely different approach and idea.
The essence of this subsidy method is to lower production and operating costs by improving the efficiency of the industry chain, reduce prices, and ultimately provide lower-priced products or services to consumers. Although the result presented to consumers is the same - providing lower-priced products or services - the resources required and the impact produced behind the scenes are not comparable to burning money-style subsidies. For e-commerce platforms, subsidies that demand price space from the industry chain are essentially a transformation that uses Internet technology and products to promote the upgrading of the industry chain.
In the early stage of the development when the traffic dividend of the industry still exists, burning money-style subsidies may still be able to accelerate the expansion of user scale and the increase of market share. However, after entering the deep-water period, users’ usage habits have been formed. Although temporary low prices may promote one-time conversion, it is difficult to achieve long-term retention and repurchase. The input-output ratio of burning money-style subsidies will sharply decline.
Therefore, for today’s e-commerce industry, subsidies may seem to be just a variant of the price war, but their connotations have undergone profound changes. Only learning surface-level subsidy tricks can easily lead oneself into a pit.
The reason why Pinduoduo, which first launched the banner of a hundred billion subsidies, can lead the industry direction is that it places the shell of a hundred billion subsidies on the inside of promoting the upgrading of the industry chain.
Improving Efficiency and Lowering Prices Simultaneously
Billion-yuan subsidies and agricultural products are the two prominent features of Pinduoduo. The meticulous cultivation around the agricultural industry chain and the resulting leap in user-side agricultural product prices and quality are a typical case of understanding the core of Pinduoduo’s billion-yuan subsidy strategy.
Before Pinduoduo, no e-commerce platform had ever attached such importance to agriculture. Therefore, while the digitization and e-commerce penetration rates of categories such as 3C electronics, clothing, furniture and home furnishings gradually increased, the evolution of the agricultural industry chain was extraordinarily slow. Due to the lack of smooth sales channels, high-quality upstream agricultural products often end up with high prices after passing through multiple levels of sales networks to reach consumers.
Pinduoduo’s way of lowering agricultural product prices is not to simply provide subsidies to consumers or to squeeze the profit margins of upstream suppliers, but to work hard on the less advanced links of the industry chain.
Nongdiyunpin (Agricultural Land Cloud Connection) is an important way for Pinduoduo to unblock the upward channel of agricultural products. Through group purchases and direct delivery from the origin, many agricultural products can go straight from the field to the consumer’s kitchen table, upgrading from “production-sales docking” to “production-consumption docking.” Direct contact between farmers and consumers allows for large-scale capital expenditures such as cold chain logistics and warehousing, which were once redundant under the sales chain, to be saved, sales costs to be greatly reduced, and the prices paid by consumers to be naturally lowered.
Nongdiyunpin has leveraged the upgrade and improvement of the agricultural industry chain, and in the process of platform-driven industrial upgrading, billion-yuan subsidies have played an important role as a tool. Whether it is the Agricultural Products Festival, the New Year Festival, the Anniversary Celebration, or the Double Eleven Promotion, agricultural products have always been the key objects of Pinduoduo’s subsidies. Through subsidies, Pinduoduo guides users to try and accept new agricultural products produced under the new industry chain. The formation of user consumption habits provides more stable guarantees for upstream farmers, allowing them to focus more on the cultivation and cultivation of agricultural products and promote agricultural industrialization and scale, feeding back more high-quality products and services to the market.
In terms of agricultural products, Pinduoduo vividly demonstrates what it means to demand space from the industry chain. Nowadays, based on the policy of zero commission for agricultural products, the model of Nongdiyunpin, and the strategy of continuous investment in agriculture, Pinduoduo, which started with agricultural products, has established a strong quality and price barrier. This price barrier is achieved by improving the efficiency and upgrading of the industry chain.
In the process of implementation, billion-yuan subsidies have become a signpost for Pinduoduo to promote traffic and industry integration, promoting a virtuous cycle of market demand feedback to upstream production, and ultimately reflected in high-quality and low-price performance at the end, consolidating the credibility and brand influence of Pinduoduo’s billion-yuan subsidies.
Compared with other categories, the industrial chain of agricultural products is more dispersed, the standardization difficulty is higher, and there are more uncertain factors. Pinduoduo has put in efforts to tackle the tough bone of agricultural products, and the experience and capabilities accumulated from this can be more easily applied to other categories.
Starting from Demand
The deep understanding of the industry chain is the confidence that Pinduoduo has been the first to launch a billion-yuan subsidy and has continued to this day, and the data is sufficient to prove Pinduoduo’s vision and wisdom: from 2019 to 2022, Pinduoduo’s revenue has increased from RMB 30.14 billion to RMB 1305.576 billion, and the number of active buyers per year has exceeded 868.7 million. The reason why Pinduoduo has emerged as a new force in the highly competitive e-commerce industry is inseparable from its attention to and understanding of user demands. In the development process of Pinduoduo, it has always adhered to the principle of keeping an eye on users and being able to delve deep. Innovations in user experience, such as group purchasing and zero-cost ordering, have lowered the threshold for e-commerce to the lowest level, enabling more people to enjoy the convenience of online shopping in the simplest way. Pinduoduo has entrusted the power of defining the product experience to its users, rather than making users passively learn and adapt to platform rules. By treating users equally, Pinduoduo has naturally attracted users who were once overlooked by mainstream e-commerce platforms. According to data from the China E-commerce Research Center, when Pinduoduo appeared in 2015, China’s online shopping user base was 460 million people, while the number of active smartphones connected to the Internet in China at the same time reached 1.13 billion, which means that there were still hundreds of millions of netizens who had not become new e-commerce users. After lowering the threshold, Pinduoduo reached and activated these silent hundreds of millions of netizens, achieving new growth in the e-commerce industry and making Pinduoduo’s number of active buyers the highest in the industry. The huge user base, which covers the vast majority of netizens, also enables Pinduoduo to keenly discern consumer demands and, guided by demand, go deep into the industry chain through hard work.
Pinduoduo’s success in agricultural products is a typical representative of its ability to delve deep. For Pinduoduo, whose size is growing larger and larger, the strategy of delving deep into heavy industries has never wavered. 2022 is the second year of Pinduoduo’s strategic transformation from “heavy marketing” to “heavy R&D”. According to its financial report, under the US Generally Accepted Accounting Principles, Pinduoduo’s R&D expenses for the whole year of last year increased by 15% year-on-year, exceeding RMB 10 billion, a historical high. Among them, R&D expenses in the fourth quarter increased by 19% year-on-year, reaching RMB 2.4 billion. R&D investment helps Pinduoduo have greater capabilities to improve the industry chain, and the ability accumulated on the industry chain has become the core competitiveness of Pinduoduo’s billion-yuan subsidy, which is difficult to surpass once established. The essence of commercial competition is the competition of organization and strategy. Starting from the interests of consumers, allocating resources, and setting goals and plans have always been Pinduoduo’s way of doing things. After becoming a leading player in the industry, this valuable characteristic has been maintained. Consistent investment in agriculture is a concentrated expression of Pinduoduo’s strategic will.
