👁‍🗨 🥖 👐🏾 TogetherMoreMore: How Social & Game Mechanics Are Helping to Capture China's E-Commerce Market 💓 🤲🏾 👵🏿

Around the world, as the novel coronavirus moves us from public spaces to the confined spaces of our homes, our social experiences are forced to adapt.

In addition to the social networks that we already know and use, we are trying to find new ways to integrate sociality into our online life.

At Y Combinator, we wonder what this might mean for e-commerce. For several years, we have observed Pinduoduo as an interesting case study. But especially now that China is recovering from the impact of COVID-19, Pinduoduo and their socio-commercial approach to shopping further balances the shift from offline to online shopping. Pinduoduo's success suggests that there is a huge potential for social commerce platforms to emerge in other regions.

Background

When Pinduoduo launched in 2015 in China, the new commercial platform didn't have much room to develop. The two main e-commerce platforms, JD and Taobao / TMall (sub-brands of Alibaba), have dominated e-commerce in China as Amazon dominates the United States. In the same year, JD and Taobao combined to produce $ 433 billion in gross commodity value. And yet, five years later, Pinduoduo defies expectations by rapidly evolving from a startup to a $ 572 billion company with an active purchasing base of 585 million that has generated more than $ 144 billion in gross product value in the past twelve months. In 2020, it is China's second largest e-commerce platform in terms of active users, second only to Alibaba.

Pinduoduo has found a place in e-commerce, not as a competitor to search websites like JD, but as a new e-commerce platform focused on interactive and social online shopping. Social shopping may seem like a new concept, but the reality is that in the physical world, shopping is meant to be “interactive and fun,” with friends and family reporting purchases regularly.

Consider how difficult it is to acquire a new piece of clothing without immediate feedback from your friends. E-commerce platforms like JD, Alibaba, and Amazon don't account for this. Instead, they optimize efficiency, funnel conversions, and number of purchases. Pinduoduo, on the other hand, tried to mimic the offline online shopping experience by building a community through its group shopping model, encouraging participation through fun and interactive games and rewards, and offering personalized experiences and value through recommendations.

Consumers' desire for social interaction during shopping is confirmed by sales within categories. In 2020, in the US, only 29% of apparel, 11% of health and personal care products, and 3% of food and beverage purchases are expected to be online (compared to 55% and 43% of book / music and computer / electronics purchases). , respectively). These numbers show the missing piece in e-commerce. Shopping on social media is especially important for the categories in which consumers seek reviews or recommendations from friends. Pinduoduo is one of the first companies to successfully create the online social shopping environment and accelerate the transition from offline to online commerce in China.

In our view, Pinduoduo's rapid success in social commerce will be replicated by other companies around the world, further driving online commerce in social categories. So, understanding the success of Pinduoduo means understanding the future of global e-commerce.

Build communities through group purchases

The core of the Pinduoduo experience is group buying, where buyers come together in a group to receive discounts from suppliers. The user experience, as shown in the figure below, looks like this: (1) For each item, sellers set two prices - one for an individual purchase and one for a group purchase. If a user chooses a team purchase, they can either (2.1) initiate a team purchase or (2.2) join an existing team purchase. If a user initiated a team purchase, he or she can use social platforms such as WeChat to actively encourage friends to join their team (3.1) or, more passively, wait for other shoppers to join a purchase on the Pinduoduo platform (Pinduoduo) (3.2 ).To confirm the order, you must form a team within 24 hours. Once the team is formed, the purchase is confirmed and the item is dispatched within 48 hours.

Almost all Pinduoduo transactions are done using a group purchase. In the beginning, many groups were large (eg 10+), but as Pinduoduo scaled up, the group size requirements decreased. Team buying is beneficial for both buyers and manufacturers; buyers benefit from higher prices for the goods they need, and sellers benefit from increased demand and greater visibility of future demand. In addition to lowering prices, team buying is helping to address the “trust deficit” of retailers in emerging cities in China, where more than 80% of retail is unorganized and consumers rely heavily on social guidance when making deals.

Team buying Pinduoduo is often compared to Groupon in the US because they both allow for group buying. But the models are actually very different. First, Pinduoduo deals are developed by sellers but initiated by consumers (i.e. Users must create or join a specific size group to access the deal), while Groupon deals are developed and managed by sellers. Second, Pinduoduo team purchases are used to purchase everyday items (e.g. fruits / vegetables, clothing) that are of value to consumers versus one-off products / items that have not sold well elsewhere. Third, the products on Pinduoduo are offered by sellers from different regions of China and increasingly from all over the world.This contrast is seen mainly with local sellers who use Groupon to drive customers to their stores / locations. This results in a much stronger supply of customer value as users get discounts on items they might still need, compared to letting sellers dictate discounts by aggregating demand for low-value items or excess inventory.

To maximize this effect, Pinduoduo launched a category of fruits and vegetables. This was strategic for two reasons: 1) incumbents were focused on non-perishable products, so competition was limited; 2) fruits and vegetables have a lower cost and goods are often used, which means that users had a reason to use Pinduoduo regularly. When potential buyers saw a lot of interesting things, they sent them to their neighbors and friends via WeChat to create a team of 10+ buyers who could purchase the product. In turn, the initiator of the group will receive products for free as they helped Pinduoduo attract 10 additional users. Since the group purchase resulted in an organic distribution of the product,Pinduoduo was able to grow its user base very quickly. Just a month after launching its first app in January 2016 (prior to that, transactions took place through WeChat), Pinduoduo already had over 10 million customers. Just four years later, Pinduoduo has grown to 585 million active customers. In comparison, Alibaba crossed the 500 million active customer threshold 14-15 years after launching its consumer marketplace, compared to 4 years for Pinduoduo. The takeaway for startups is that the group shopping model is important because it allows offline commerce behaviors (e.g., sharing products or ideas with friends, browsing the mall with friends) in a networked environment.Team Purchase helped Pinduoduo grow rapidly and create a unique recommendation engine based on social user interactions. While group buying may be unique to China today, we expect social e-commerce to go global. New commercial platforms that can leverage social relationships will accelerate the transition from offline to online, and if you can connect to social relationship groups versus individual relationships, the faster your platforms will scale. PDD has one of the most powerful networking effects in the world (Reed's Law: The value of a grouping network is proportional to the number and the ease with which groups are formed within it. Think of Slack, WhatsApp groups - they all grew exponentially ashow they could connect to social relationship groups).

While team buying has been the main reason for Pinduoduo's rapid growth, an important factor behind Pinduoduo's virality has been the widespread use of WeChat as a platform in China. Tencent (owner of WeChat) is a large investor in Pinduoduo, and as a result was happy to let Pinduoduo grow on top of its ecosystem. We find it highly unlikely that Facebook will allow a social commerce app like Pinduoduo to be built on top of Messenger or Instagram in the US. That being said, messaging in the US is fragmented, so it's not a problem for US social e-commerce companies.

Users visit Pinduoduo without any specific intent, much like visiting a real shopping mall. In a shopping center, the time that a consumer spends in a shopping center directly depends on the amount he buys. As such, Pinduoduo designed the gaming experience to maximize the amount of time the user spends in the app, whether they make a purchase or not. The main features / capabilities that have spurred exchange and use are daily check-ins, price cuts, card programs and mini-games. Social commerce isn't just about connecting user accounts to Facebook. This means investing in creating a physical world on the Internet - in particular, bringing the pleasure of offline shopping to online platforms.Below we take a look at how Pinduoduo implemented this.

Daily check-ins

Daily check-in is a feature featured prominently in the center of the home page. It encourages daily use by rewarding users with variable points every time he or she checks Pinduoduo. The user interface is shown in the image below. First, the user clicks the yellow icon to administer the registration. Every time a user signs up, he is given a small amount of money and / or a loan. These awards accumulate over many months (and many checks). In the example below, the user has accumulated a reward of RMB 26.6. In order to withdraw money in the form of a voucher without minimum costs, the user must reach a certain minimum value (for example, 30 RMB).

Daily check-in is a simple yet great feature that encourages users to interact with Pinduoduo on a daily basis. While every registration does not generate Pinduoduo revenue, the product experience is ultimately commercially driven if / when users redeem their vouchers. In theory, this should provide higher customer value for Pinduoduo.

Price Chop

Price Chop is a feature that allows users to get products for free by sharing a custom link with their friends. This feature is detailed below. Once in the Price Chop section of Pinduoduo, the user chooses the products he needs for free. Once selected, a 24-hour timer starts. To get the product for free, the user must share his link with as many friends as possible. Every friend who clicks on the link and interacts with Pinduoduo (no purchase required) gets an additional discount for the initiator. If you don't drop the price to 0 within 24 hours, you won't get the item for free and you'll have to start over!

The product simulates the "leveling" experience of a large-scale online multiplayer game such as World of Warcraft, where it becomes more difficult to level up as you level up. In the case of Pinduoduo, difficulty is configurable depending on the user (i.e. easier for low-engagement users) and subject (i.e., expensive items are more difficult to slice). In addition, as with leveling up, as you get closer to 0 (i.e., a higher level), each additional friend who interacts with your link grants smaller and smaller discounts.

Similar to the Daily Check-In, Price Chop encourages users to interact with Pinduoduo and ultimately links the interaction to an order on the trading platform. But unlike the Daily Check-In, Price Chop encourages users to share Pinduoduo on their social network. So, in addition to increasing customer value, Price Chop also helps Pinduoduo effectively attract customers by sharing product from user to user.

Card program

The Pinduoduo card program is designed to encourage users to share the product with friends and save money with coupons / special discounts. The Pinduoduo company has created several different cards that either (1) encourage certain user behavior or (2) provide usefulness to the Pinduoduo user. The three most popular cards are Free Pass Card, Black Brand Card, and Brand Card.

The Free Pass is similar to a loyalty program where users can enjoy a "team purchase discount" without joining a team. Users usually receive one Free Pass Card after making two purchases on Pinduoduo.

The Brand Black Card encourages users to leave reviews on the platform by offering them a discount on branded products in return. Pinduoduo issues a brand Black Card to users after they post 2-4 reviews on the site. This is important because consumers rely on reviews and recommendations from previous buyers when making a purchase decision. Brand Black Card encourages good user behavior, which makes the platform better for the entire user base.

The brand map aims to promote Pinduoduo branded products. Consumers receive a brand card after making a purchase on Pinduoduo. They can share their brand cards with friends through WeChat to get friends to view and purchase Pinduoduo branded products. This is an effective way to encourage users to buy branded products that they usually don't buy because the recommendation / card was sent to them from a trusted friend.

This is also important because Pinduoduo has historically been used primarily to buy non-branded goods. The brand card is an effective incentive mechanism to increase the market share of Pinduoduo branded products in China.

Mini games

Pinduoduo wants users to interact with the platform as often as possible, and they want the experience to mimic actual purchases. As such, they want users to interact with the app to have fun, even if it doesn't immediately lead to a purchase. Pinduoduo now hosts games in apps that help increase the daily time spent on the platform. The first popular game on Pinduoduo was Duo Duo Orchard. Think of Farmville, except that the rewards are now real physical goods. The game is simple - the user creates and grows a virtual fruit tree to end up receiving a real box of fruit sent to his or her address. It already has over 11 million DAUs (daily users)!

While not a multiplayer mode, Orchard has aspects of social collaboration that also facilitate networking. After users select a tree to create (e.g. mango, lemon, macadamia), they need to grow the tree with water and fertilizer. The more you shop on Pinduoduo, the more drops of water you get to grow your tree. To encourage more communication with your friends, you can also share water drops. Team buying and product link exchanges allow users to get special tools like a water canister, decorations for your garden, or bags of fertilizer that will speed up your tree's growth. Pinduoduo expands the selection of games in apps. He recently launched DD Bank, a piggy bank game in which users accumulate exchange coins over time.

Games like Duo Duo Orchard and DD Bank are brilliant because progress, or "leveling," is about behaviors that drive a company's financial goals. By encouraging users to play games on Pinduoduo, they can create a win-win situation for merchants, consumers, and themselves. Specifically, sellers see more sales, consumers have fun and get unique discounts, and Pinduoduo gets revenue.

Create value by offering personalized recommendations

Finally, unlike search platforms, Pinduoduo is highly personalized and recommendation based. This means that users are visiting Pinduoduo without any specific intent, much like visiting a shopping mall in the physical world. Based on information such as the user's friends, their favorite categories and the friends they trust, Pinduoduo can make individual recommendations for each user. Pinduoduo is uniquely positioned to do this by sharing the product between the user and the user through a group purchase. The data aggregated by the platform allows the company to optimize what elements the user encounters in the application, highlighting (1) products that trusted friends have already bought or recommended, and (2) products in categories,selected by users. For new customers, it is standard practice to show new users different categories (based on what they know about that user and their friends) and observe how they interact with those categories. This is then used to create your shopping image and help inform future product recommendations.

Pinduoduo not only offers personalized product recommendations, but also views value for money as a personalized concept. Based on the user's purchase / visit history, Pinduoduo determines whether the user appreciates expensive branded clothing or inexpensive non-branded clothing. Depending on the user's shopping image, Pinduoduo will only show you clothes that match your willingness to pay.

The future of global e-commerce

There is a tremendous opportunity for companies to embed social media into their commerce platforms to gain a share of transactional platforms and increase their overall e-commerce spend. The success of group buying may be specific to China's commercial landscape, but Pinduoduo's ideas of social integration in commerce are likely completely universal. Further, when creating their products, founders should take into account the understanding that shopping is a social activity. Web 1.0 platforms, including Amazon, are optimized for efficiency and don't serve trust-based categories very well. We strongly believe that creating products to share use cases and engaging experiences that simulate the pleasure of real-world shopping will accelerate the transition from offline to online shopping.

There are great indications that there is already a strong demand for more sophisticated social commerce in the US market. A prime example of this is Instagram, which has over a billion users and is now arguably one of the world's largest social shopping platforms. As with Pinduoduo, Instagram has encouraged friends and influencers to view information that might interest consumers, often accompanied by purchase links. The growth of the social media influencer economy alone shows that US consumers are willing to fully participate in online social shopping.

In fact, we've already seen several companies go through Y Combinator trying to fill that void. Snackpass, the campus powerhouse app, has built a social experience into its product. Students can send gifts to each other or breed virtual pets together by ordering food through the app. This interactive experience promotes wider use of the company's product. Meesho, a marketplace for resellers in India, allows its customers to create microbusiness by selling products / merchandise to their friends and family through Whatsapp and other messaging channels.

Companies like Amazon will continue to grow market share to meet specific shopping needs. But it is inevitable that something will rise to fill the void of e-commerce and social media browsing in the US market. And the half-hearted attempts by some retail platforms to fill that gap have yet to close it. Social commerce doesn't just mean connecting user accounts to Facebook, it means creating new shopping experiences for online buyers and sellers.

Meanwhile, Pinduoduo's social commerce is only gaining sophistication and market power. Pinduoduo has already collected enough consumer information to partner with and influence manufacturers in China to meet the needs of its users. If there is a gap in the US e-commerce market, this is not just an opportunity for domestic online commerce to grow. As the pandemic pushes social life to the Internet, there is an undeniable opportunity for companies to embed social media into their commercial platforms to accelerate the global transition from offline to online.

Translation: Elena Kim

If you want to help with translations of useful materials from the YC library - write in a personal, @jethacker cart or mail alexey.stacenko@gmail.com

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TogetherMoreMore: How Social & Game Mechanics Are Helping to Capture China's E-Commerce Market