Cross-Border Update: Pinduoduo’s Temu (part 2)

In the summer of 2022, I wrote extensively about cross-border e-commerce from China. Since there have been many developments in this area, I am publishing another series of articles on the initiatives of relevant companies. In the previous articles we looked at the overseas activities of Alibaba, Bytedance/TikTok  and JD/Ochama, Shein and Pinduoduo’s Temu. With Temu being a new market player, having only been launched in the US in September, it deserves some extra attention. In the previous article we looked at its business model, merchant cooperation and marketing channels. In this second part we look at the front end of website and app and how Temu is already changing into a western version of Pinduoduo.

At the end of November, it became clear that Temu is pretty important to Pinduoduo (PDD). LatePost (link in Chinese) reported that the cross-border website currently has higher priority than PDD’s domestic platform. Pinduoduo even upgraded its corporate identity to ‘Pinduoduo Holdings; ‘a multinational commerce group that owns and operates a portfolio of businesses, including Temu, an e-commerce marketplace for North American consumers, and Pinduoduo, a leading social commerce platform.’

The mention of ‘North American’ corresponds with LatePost’s November article reporting that Temu was considering expanding to Canada. It was also said to have plans for a launch in Spain, also a preferred destination for Alibaba and Bytedance, as we’ve seen in previous articles in this series. At the end of October Linkshop (link in Chinese) reported that Temu had launched its app in Africa, although it is not yet operational there and is only available for download.

According to Sensor Tower data, Temu had been downloaded more than 10 million times in the US by the end of December, 4 months since its launch. At the time of writing the app remains the most downloaded free app in the country in both the Apple and Google app stores.

Building on the strength of Pinduoduo

It is important to remember that Temu is a website by China’s third biggest ecommerce company, Pinduoduo. PDD has an enormous number of Chinese factories and merchants (11 millions according to its own information) selling through its main Pinduoduo domestic app. On YouTube Temu even presented itself to followers of Chinese content as ‘Pinduoduo has come to America!’ With little effort, these merchants can also start selling on Temu, especially when they are already doing a large volume on PDD, and they pass the quality control test.

Theoretically Temu is supposed to be able to provide better quality goods than platforms like Shopee and Wish (or Bytedance’s failed initiatives), since its operational model can guarantee a certain level of quality control that those other platforms cannot. After a merchant submits products requested by Temu/PDD, they need to send samples to PDD’s Guangdong warehouse for quality control. When products are accepted, they can be put on Temu for sale. Thus, Temu decides which products to put on the website, determines the price and takes care of logistics (from its own warehouses onward) and promotion. This model is closer to the way Shein controls the supply chain (actually deciding on designs and procuring them for their own brands) than that of some less fortunate Chinese webshops that have let merchant list on their websites and ship items to consumers directly.

According to Connie Chen of Andreessen Horowitz, one reason why Temu is investing heavily in vast acquisition of a large volume of users, through advertising and large discounts on the first 3 orders, is to be found in its AI-driven content. Only when there are enough users generating content can the app’s recommendation engine work optimally and present the best selection of items to individual users. TikTok basically did the same thing after its launch and it’s an approach that Pinduoduo has also successfully used in China.

What’s the deal with those super low prices?

The pricing on Temu might seem unrealistically low, but some products often come from the same factory that produces big brand products. In China, the factory-to-consumer model (also referred to as C2M, consumer-to-factory) that was launched by Pinduoduo and others have enabled these factories to sell directly to consumers, cutting out many logistical movements and resellers in wholesale and retail. Thereby these factories are now selling comparable products under private labels, or no branding at all. Often, the manufacturing costs are the same as for the goods they produced for big international or domestic brands. But now, these brands and multiple resellers that all added their own margins are taken out of the picture.

Combined with a platform like PDD that aggregated large volumes of demand, prices could be kept extremely low, even compared to those on Alibaba’s Taobao. This same model is being rolled out abroad and the manufacturers can now reach the western consumers and sell comparable products for a fraction of the price they normally paid. Without a doubt, there is a lot of low-quality junk being sold on Temu. But customers have also been surprised about how remarkably high the value-for-money of some products is.

Still, Temu has kept the prices extremely low by only allowing tiny margins for the merchants, and it has already been increasing many of its prices, now that it has made its initial splash in customer acquisition. A vlogger, James White, compared the prices of 10 items he had previously bought and noticed substantial price increases on some of them. Do watch his video for interesting reviews on the product quality.

Despite these price increases a lot of Temu items remain very inexpensive compared to other outlets. Comparing the prices on different webshops gives you an idea of how low the actual production costs are and how much margin different resellers add to the cost.

Take for instance these two random items I selected, an air compressor and a jacket.

This is what they cost on Walmart:

 On Temu:

And in China on Pinduoduo:

38 RMB = $5.60 and 56 RMB = $8.26.

In other words, the same air compressor is sold for 3,5 times the ‘domestic PDD price’ on Temu and 7 times that price on Walmart. The jacket is sold for almost 3 times the PDD price on Temu and almost 7 times the price on Walmart. In all cases its Chinese merchants/manufacturers selling to western consumers and even with the PDD price they are still making a bit of margin. Let that sink in for a while.

According to 36Kr (link in Chinese), during Black Friday 2022 Temu temporality lowered its prices to only 10%-20% of Amazon’s, and even only 30%-60% of those of Chinese competitor Shein’s.

Now Temu turns into Pinduoduo: Gamification

The low prices and wide range of product categories aren’t the only way that Temu looks a lot like its Chinese older brother Pinduoduo. Temu has also started to implement various forms of gamification and user acquisition tactics that we know from PDD. While its website looks pretty standard, its only when opening the app that similarities with PDD become apparent.

The Temu app uses the same e-commerce template as most Chinese e-commerce apps. In the product search screen, the categories use up the left side of the screen, while products are shown on the right side. This is something that works well in the Chinese language (where product categories only take up a few characters) but might offer a very unfamiliar user experience in western languages.

More important however are the various games the app offers. Here’s a few examples of gamification that can be found in the Temu app.

Daily gift box: every day this will hold a gift, e.g., $5 off on orders above $29, that is only available for a limited amount of time (or so it seems). Not only will this incentivize you for making larger orders, but it will also keep you opening the app every day to check your gift. In other words, a tactic to enhance conversion and retention.

Earn credits: when making purchases you can earn credits for future orders. This loyalty scheme was also tried by JD’s Ochama in The Netherlands, before being abandoned after half a year.

Free gift: This game is comparable to Pinduoduo’s ‘price cut’ feature. You pick a gift and enter your shipping address if you haven’t done so before. Temu now has your address even though you have not bought anything yet. You will first get to flip a card that gives you a substantial discount on the chosen item. After getting a few discounts like this and getting closer to a 100% discount, you can only cut the price further by inviting friends to download the app through a unique link. You have 24 hours to convince enough friends. This way Temu has you doing their user acquisition at a cost price that is far below the shown price of your chosen gift. It’s a customer acquisition strategy that PDD has successfully applied in China before: back in 2018 WalktheChat reported on how it received free products after convincing friends to install the app.

Cash rewards: Opening this game showed that it is ‘currently not available in my region’, but I think it will be comparable to Pinduoduo’s Shake Money game that I described in this article.

Redeem Cash: A game that is a lot like the Beans and Earn a Fortune games in Pinduoduo which I described in this article. You are promised a certain amount of money, for instance $1 to $4, to be paid to your Paypal account (in China this is done to WeChat Pay). To reach the pay-out amount you need to collect a certain number of ‘Star Coins’. As in all games, you get part of the necessary number of coins for free but to reach even the lowest goal of $1, you will need to invite new users to the app. I guess you are starting to get the idea by now.

Lucky Flip: the Redeem Cash game there is another game called Lucky Flip. It’s basically the same game but you get shopping credit instead of cash pay-outs.

Fishland: The Fishland game is basically a copy of Pinduoduo’s Ranch and Orchard games I described two years ago in this article. You pick an item and get it for free by raising a number of fish. You need to earn fish food to feed each fish, which is relatively easy in the beginning but will get progressively more difficult once you get closer to your goal. To earn enough fish food before the deadline of the game arrives you need to do things like scrolling through product feeds, checking in multiple times a day and inviting friends to the game or even the app. Again, Temu has you doing their marketing, disguised in a game.

‘Free shipping’: Not a game, but still worth mentioning, Temu presents as free shipping on a specific day, with a stopwatch counting down, but it actually will be free the next day too.

In some examples of these games, you will receive $20 buying credits when registering five friends. Think about it, Temu has these users working as their sales staff and it only costs them $5 per new user, whereas recruitment through online channels have been reported to cost as much as $75. This is how Pinduoduo has managed to grow extremely fast in China, while also keeping its user retention and percentage of users opening the app every day to play these mind-numbing games incredibly high.

I have made no secret of the fact that I fiercely dislike the gamification in Pinduoduo, describing the aggravation in a series of articles, calling these games Sisyphean tasks. At the time of writing the games are still relatively hidden in the user profile page (at least for me), but if they prove successful I have no doubt that they will get a prominent spot in the app’s homepage, just like on Pinduoduo. Thinking about the time people will be wasting chasing minor rewards while doing Temu’s marketing for them is perhaps the biggest worry I have about Temu becoming a success. I hope users won’t fall for this trick.

The struggle ahead

To succeed and not go the same path as Wish, which failed to retain customers because of long delivery times, shipping costs and complaints about product quality and customer service, Temu will have to do better. According to Time Magazine it is already receiving complaints in these same areas. Still, its rating in the apps stores remains remarkably high compared to other failed Chinese webshops. But maybe, like in China (link in Dutch), we should take these with a grain of salt.

While Temu pays for the shipping costs to the customer, the merchant has to pay for any return costs if the customer isn’t happy and wants to return the goods. As mentioned in the previous article, most of the time the merchant lets the customer keep the item (at a discount) or gives a refund without a return (which would be more costly than the refund).

Since I don’t live in the US, I haven’t been able to do any test orders on Temu myself. I did however download the app and register when it launched. After three weeks of some standard welcome e-mails and reminders about the three 30% off coupons I received, it went quiet. Until the start of this year. Temu has clearly adjusted its strategy and is now trying to activate its inactive non-buyers. Since the 5th of January I have been receiving almost daily e-mails with random selections of products, in the beginning sometimes even twice a day. The tactics that are being used could sometimes be considered questionable, like with this e-mail subject line.

Shein has been fighting the arrival of Temu, especially after Pinduoduo started poaching Shein staff with 2 or 3 times their Shein salaries and suppliers. Temu promised merchants shorter payment cycles and larger orders, but required (link in Chinese) experience in cross-border e-commerce platforms or independent webshops and experience in the North American market.

According to 36Kr Shein has reacted aggressively and has given two suppliers enormous fines for cooperating with Temu. Some factories have registered new companies with indirect shareholding to get around Shein’s restrictions.

It remains to be seen if Temu’s approach is sustainable. It selects a range of suppliers for a specific item in its enormous collection of domestic manufacturers and will give a place in app to the one that can deliver at the lowest price. As such, the current price is very close to the actual manufacturing costs. 36Kr questioned (link in Chinese) how sustainable a model is in which Chinese factories margins are being squeezed while western consumers are being subsidized. But considering how PDD has taken the same approach in China, it might well succeed. And if it does it will be as disruptive to e-tailers and marketplaces as Shein was to the fast-fashion industry.