Blog #2 Rising from the Low-end Market

In the year of 2018 in China, it seems true for everyone that the e-commerce market is almost saturated with heavy-weight contenders like Alibaba, JD, and many other retail giants transitioned from offline to online. Who would have thought: out of nowhere, a newcomer founded in 2015 became the next unicorn in e-commerce and went public with its name as Pingduoduo (NASDAQ: PDD). Within a short span of three years, PDD earned a user base of size over a hundred million with annual revenue over a billion dollars. PDD’s success seems miraculous, but it is actually the result of well-positioned marketing strategies. Seemingly, the e-commerce market is occupied by big names like Alibaba and JD, leaving no space for another business to grow. However, with careful analysis, there’s a huge gap in between:

When Alibaba made its name and expand rapidly, there were about 40 million internet users in China with the dominant way of internet access through computers. However, by 2015, when PDD comes into play, that number nearly doubles. Additional to rapidly growing internet users base, the dominant way of accessing the internet also shift toward mobile devices, mainly smartphones. Beneath the surface of this enormous expansion of internet availability, there was a huge change in internet demographics. Quick profiling of these new internet users tells a lot about this shift: reside in non-major cities or countryside, span a much lower income range and have lower education background. As a result, when it comes to purchases, these users are more sensitive to price over brands, and they do not fully understand the concept of customer service and product warranty. Meanwhile, there are a lot of small manufactures in China crafting products at a lower cost but with lesser quality and they do not have the capability to provide warranty or customer service. Therefore, there is a big gap to be filled: selling extremely low-priced products at the compromise of all other factors. PDD aims for this market as the starting point and quickly wins over a huge number of users over a short period of time.

The unique aspect of this market position is that the giant was very unlikely to compete. Lowering the price as at cost can lead to all kinds of compromises such as poor product quality and bogus/copycat products. Aiming as such market risk the potential of hurting brand image, so e-commerce giant like Alibaba and JD won’t take this risk entering this market, leaving opportunities for PDD.

The strategy of PDD inspired a bunch of other startups following the same idea aiming for the lower-end market, such as Tik-Tok and Toutiao (a subsidiary of ByteDance). However, as the growth trajectory of all of these companies shows, the lower-end market has a very limited capacity. Once the companies reach the market capacity, they have to find another way out-migrating to higher-tier markets: PDD now compete directly against Alibaba and JD, offering similar products and services in e-commerce; Tik-Tok enters the international market and compete against similar rivals such as Instagram; Toutiao upgrades itself and competes against other mainstream social media platforms such as WeChat. The vacancies in the lower-end market offer great opportunities for other companies to quickly gain volume and capital, but it can also becomes a trap limiting the growth of startups if they fail to migrate to greater markets.