This is Part 1 about Pinduoduo and the idea of interactive / engagement-driven ecommerce. Our guests for this podcast were Matthew Brennan and Elliott Zaagman.

Elliott Zaagman is co-host the China Tech Investor podcast and a research and communications professional focused on China.

Matthew Brennan is Managing Director of the China Channel.

We discuss their whitepaper on Pinduoduo and interactive commerce, which is available at China Channel or can be downloaded directly here (Interactive Ecommerce Whitepaper 2020.08.10.)

You can listen here or at iTunes, Google Podcasts and Himalaya.

The 5 choices for explaining Pinduoduo’s success are:

1. First mover in a huge market. Got the right product at the right time in the right market.
2. Offered low cost (sometimes free) products to a frugal demographic.
3. Interactive / engagement-focused ecommerce.
4. Group buying and virality. The tie with WeChat.
5. Good execution and management.

I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for today, what is the secret of Pinduoduo’s success? And this is actually gonna be a two part class. So there’ll be this podcast and then another one and then quite a lot of writing along the way. And in part one today, I’m gonna do some interviews. We’re gonna have a discussion which is something we haven’t done before. So that will be with Matthew Brennan and Elliot Zagman. who are sort of old China hands, all of us who have been stomping around for a decade plus, we all kind of know who each other are. And they wrote and released a paper recently called Interactive E-commerce, which I’m gonna put the link in the show notes. It’s definitely worth your reading, and we’ll talk about that, about Pinduoduo and how they’ve sort of built their strategy. So this is overwhelmingly a strategy document. And I think they coordinated with Pinduoduo on that to some extent. So there’s a lot of inside sort of understanding. No inside information, of course, but understanding. And then next week’s podcast will be more about pin duo duo, me just sort of going through some of the strategy, the background, the history. A lot of you are familiar with this company, many of you probably are not. That’s okay, don’t worry about it. This is one of our core companies we cover, along with Alibaba, Tencent, and all that. So we’re gonna keep coming back to this company over and over, so you can kinda consider this your intro to PintoDuo if you’re not familiar with them. And later this week, for those of you who are members, I’ll be sending out some slides, some texts, some articles, really taking this apart in more depth. There are a lot of important… e-commerce questions that I think Pinduoduo has raised that are going to go far beyond China. And you could argue the recent announcement of Walmart jumping into the bidding for TikTok is really closer to a Pinduoduo strategy than anything else. So anyways, I sent you an email about that yesterday, those of you who are subscribers. And for those of you who aren’t subscribers, you can do that over at jefftausen.com. There’s a 30 day free trial, so try it out, see how you think, see what you think. And join the group, join the community. Okay, let me get a little bit into just a couple points here and then we’re gonna go over to the interview. It’s a little bit of a complicated company and I think interactive or engagement driven e-commerce is an important way to think about this. where you approach e-commerce not as, hey, here’s going to Walmart, shop through the aisles, buy what you need, but more you come at it from an engagement perspective, an entertainment perspective, where look, come and have fun, enjoy yourself, and then along the way, buy some stuff. And you can kind of lead with one or two of those, and they really are a more extreme example of that second approach. And they… They did a lot of stuff which we talked about like group buying, virality, they focused on lower tier Chinese consumers. There’s a lot going on with this company. But I think that’s kind of the most interesting idea. And the three concepts I want you to sort of think about for this class are the first one is just value for money. That a lot of what I would argue Pinduoduo did. is it found a way to buy stuff online very cheap. And that’s a big lever. Like don’t let anyone tell you being cheap or free is even better, is not a very powerful lever in business. They came in at very low price points. And I think that’s a big fact. And they were designed to be that way. Their strategy, their business model, you know, we’re gonna be very, very cheap and inexpensive place to buy stuff. That is a major lever in what their business model. achieves. So that’s kind of one concept for today and this is going to be one of your learning goals. Well, one of the main concepts I want you to think about is value for money. You could call that a digital superpower. Like I’ve called this in the past, digital superpower number one, which is transforming or dramatically improving the user experience, which I’ve mentioned many times in companies like Mobike, you know, making something much is a dramatic improvement in the user experience and digital does tend to be good at that, especially if it’s free. So that would be kind of one concept for today is value for money as a type of dramatic improvement to the user experience, which was superpower number one, digital superpower number one. The second idea, and these are all gonna be in the show notes, is this idea of interactive or engagement driven e-commerce. as opposed to more, you know, let’s say sales-driven e-commerce where the goal of your store is to sell stuff, number one, as opposed to the goal of your store, number one, is actually to drive engagement and participation. And then along the way, people also buy stuff. So that’s the second idea for today. And then the third idea for today is virality and word of mouth, which is something we’ve talked about. That’s one of the concepts. I’m gonna put all these in the show notes. These go under learning goal number 31, which is basically an intro to PinDuoDuo. Now one last comment and then we’ll switch over. I’ve been doing surveys of subscribers, those who listen and those who are subscribed. And I think one of the biggest things, and I’m gonna do a lot more of that in the next week, and one of the biggest sort of points of feedback is, look, there’s a lot of concepts, there’s a lot of ideas, there’s a lot of frameworks. It gets confusing. Okay, totally, you know, that’s something we’re gonna work on. So these ideas that I’ve just sort of laid out, Learning Goal 31, and then these three concepts that go under that, that will be in the framework. This is all gonna get a lot more clear of how all of this fits together as one sort of complete curricula, curriculum for you in this class. But anyways, I’m aware of that feedback. I’m totally on that one, okay. Okay, with that. Let’s jump into the interview and switch over now. Okay, we are here in downtown Bangkok with Elliot Matthew and we’re gonna talk about the paper which I’ve just sort of teed up and which you have the link to in the show notes. So I guess first let me do a quick introduction which will hopefully won’t be too bad. I’m here with Elliot Zagman who is co-host of China Tech Investor podcast and he’s a research and communications professional focused on China. and also Matthew Brennan, managing director of the China Channel, who is based in Chengdu normally, but not this year. We are all of us, for different reasons, trapped in Bangkok for the last several months. So that’s worked out quite well for us. And I think we can, anything, first of all, anything you want to, anything I got wrong on the intro that you’d like to say. No, thanks for having us. Yeah, it did work out well for this podcast being trapped here, definitely. Okay, great. And I think that the first thing maybe just to start with is I’ve given my basic, it’s a very simplistic summary of their report and their thinking, and this is really a thought piece as much as anything else. This is a strategy piece. On a very important topic, this is an interesting phenomenon in the world. the very rapid rise of Pinduoduo is unlike anything we’ve ever seen. We’ve seen other e-commerce companies rise never this fast before. So that’s kind of an important strategy question. But I think maybe the first thing we just handed off to Elliot and Matthew, you know, What really, what was your main goal with this paper? How would you sort of give your summary? What matters here most? You used the phrase interactive e-commerce. So how would you explain that? Yeah, sure. So the piece is termed defining interactive e-commerce and that’s the goal here. Because this term was, it’s not a PR term, it’s not something that was created. to put a spin on something like some other terms that people are probably more familiar with, like personally I think new retailers, a bit like that. This term is something that industry practitioners on the front line at Pinduldo were using. And just through being at the company last year and having one interview with a senior executive, we sort of uncovered this fact that this is how they term themselves, this is how they describe what they’re doing is interactive e-commerce, this is the terminology they prefer. And it immediately piqued my interest, I was like, I’ve never heard that phrase before, I don’t know what it means actually, but it’s clearly something that’s quite important. So that was the starting point for the paper, it’s like obviously there’s something, must be something interesting here, and we work with the company to sort of build this piece and define what is this term that they feel is accurately describing what they’re doing, whereas other people are using terms like social e-commerce, conversational e-commerce is another term that’s bandied around, there’s a lot of sort of overlapping terms in this phrase and hopefully this one, I think with the piece we’ve accurately described and picked out of drivers of their business, which can be termed interactive. Yeah, they’re they’re often called a social e-commerce company because I think that the method that they used to grow was the most, at least the most popular one, the most often cited one, was a social method. But it’s only kind of one component of a larger piece and a larger landscape that is actually kind of defining not just commerce, gaming, entertainment, and social media are all kind of moving at this point where the borders and the boundaries and the categories that sort of distinguish these different sectors of the digital economy are all kind of blurring at this point. Yeah, I mean, out of the US, we hear this idea of, you know, social commerce, right? Facebook, Mark Zuckerberg wants to be an e-commerce. I think that’s missing it. I think, I think you’re, you’re, cause then it’s like commerce, uh, plus content, plus social media. I think that’s not quite it. I think it’s what you’re saying. It’s like, what, like what metric are we measuring to know if our consumers. are enjoying and using this. Are we measuring sales? Are we measuring GMV? And that’s what Amazon measures. Or are we measuring how frequently you come on this app every day to interact? And how much you’re interacting? Are you clicking? And then that’s our primary mechanism. And then out of that, sales will come. Sure. But that’s kind of how I think, like, what are you measuring metric wise that you’re number one? And I think that’s where interactive is a very different metric than, hey, we’re trying to sell you stuff like, no one likes to go hang out at Walmart. Right. That’s not why you go to Walmart. You know, but that’s why you go to the amusement park. That’s why you go to the shopping malls in many ways, especially in Thailand. Right. It’s for a lot of reasons. And then along the way, we buy stuff. Yeah, it’s the night market, really. I think that’s where I think it’s most appropriate. Right. I used the analogy of the night market. Yeah, it’s fun. It’s a community event, essentially. Okay. It’s building that daily habit. So the Pinduoduo team have a background in gaming, the gaming industry, and in gaming, daily active user is a really important metric. So, and building that habit, there’s many, many tricks they use in the gaming industry to get you opening their app again and again and again. Right. That I thought- And incentivizing, and so they took some of that knowledge and industry practice over into e-commerce, which is a very different mindset from where incumbents like Amazon, like Alibaba are coming from a very different place. Right. I think you had a great chart in there where you showed how people spend their day on a regular e-commerce site. They may go to e-commerce at night and spend a half hour there shopping, but then it’s like pin do do do. It’s all day long they’re opening this thing. A couple minutes here, a couple minutes there, and the frequency is dramatically more. Yeah. I mean the company itself consistently compared what they do to what they term was the term they kept using again and again. We are mobile first e-commerce and that’s recommendation driven, it’s social and it has other elements that we’re gonna get into later on but the sort of the way in their minds a very clear comparison it was desktop PC era search driven e-commerce and then they just referred to like the way just that how you use those two devices is so different in terms of the time. Mobile is very fragmented if you actually like every day. Most people are surprised about how many times they actually open it every day. It’s a shocking number actually for most people. And most of those sessions are tiny. They can be very, very short. So how do you make e-commerce work in that environment is completely different to a laptop. Growing up, I don’t know, Jeff, you’re American. I don’t know if you remember the show Home Improvement with Tim Allen, right? So the whole kind of idea behind Tim Allen’s comedy like, you know, Tim is this kind of, you know, stereotypical, you know, man who loves tools and who thinks like a stereotypical man and his wife Jill is kind of much more of kind of the stereotypical woman, right? And obviously it’s very reductive, but one of the kind of jokes that would kind of come up again in the show is that, you know, Tim or this kind of stereotypical man would, when he shops, he knows what he’s looking for, right? He buys it and he leaves. more stereotypical female way to shop is to browse, right? To do it as an experience. Now obviously, it doesn’t quite fall down those lines, so black and white, but I do think that there’s a component there, that pin dodoa and the kind of interactive e-commerce model is one that is a lot more of the social experience, it’s the browsing experience, it’s you do it for leisure and for fun, whereas the Amazon approach, the Costco approach, the Walmart approach, is you go there, you know what you want, you take it and you leave because you don’t wanna hang out there. Right. I thought a really, I liked your sushi. Sushi tray? Sushi… Sushi train. That’s what they call it in Australia. Sushi train. This idea of that’s a very different way to shop. And you know, as opposed to, hey, I’m going to Walmart but hunting for stuff or I’m looking through a big menu and I’m searching, search function. Versus I just sit there and the food comes by and I just take whatever I get interested in. And it’s, to some degree, more passive. It’s more impulse driven. It’s more about, hey, it’s fun. What the heck, we’ll do this. I immediately thought of TikTok. Like that’s exactly what TikTok is doing. It’s like you don’t go search for what you want to read. You don’t search for the video. You just like turn that thing on and turn your brain off and you just they just scroll you one after the next and the algorithm just decides what you’re gonna see. Doesn’t need your social network. Doesn’t need any search although you can a little bit. I mean that struck me as like a very similar dynamic of how you tee up what people would buy. There’s TikTok and Pindledore are both mobile first. And a mobile recommendation is by far the most effective way to surface content to the user. Whereas on desktop search plays that role. And so search and recommendation can be viewed as diametrically, you know, there’s strong similarities but essentially what both technologies are doing is surfacing content and matching content with users. But it’s just doing it in very different ways. I think that that is a theme that is throughout so much of the mobile first digital economy, is take away the friction. So even it’s the difference between YouTube, which is not mobile first, and TikTok. And I love YouTube, and YouTube has a good recommendation feature, but I have to click to open. Whereas TikTok is you open it and it just feeds you. So they say, barrier of the click. And it’s the same thing with with with Pinduoduo here as well. It’s like you open the app and it is there right away. And throughout the whole story of their growth, I think, and the story of some of these other mobile first companies that are growing is a story of getting rid of the friction, whether it be finding ways to get people who aren’t online to become online, right, finding ways to allow them to feel comfortable shopping and to feel like they can trust the platform, even if they’re not very used to. to e-commerce, but that is the consistent theme across the board. I thought the implications of that were really surprising. The idea that you behave differently under that sort of user interface than you do. You do it for fun, it’s emotional, it’s impulse driven. I don’t need to see 250,000 SKUs under that environment. But if I go to Walmart or I go to Amazon, I would expect everything to be there. are all about we’re gonna offer you absolutely everything you need in life yeah it’s here the everything store it’s all gonna be cheap and we’re all gonna deliver it super fast that’s their pitch and the big boys are better at that than the smaller companies that’s our advantage this was super interesting actually that the idea of the the gazillion SK use and the long tail because that’s what Netflix is essentially like Netflix is is the difference between Netflix and blockbusters Netflix can deliver the long tail where you know you’ll have a small amount of people that want to but they really, really love that content. And that’s what, when we originally started thinking like, oh, well, that’s what recommendation does here. But when we talked with the Pinduoduo folks, they were like, no, no, no, no, no. We’re actually the, not the long tail, we’re in that big chunk at the beginning because of, you know, it’s, we can identify the everyday products that are the most popular and find ways to essentially, you know, deliver them at scale in a way that can provide savings. Right, so on TikTok, recommendation works to match long tail content to users. That’s why there’s such a big difference between TikTok and Musicly. Musicly was never able to do that. The technology wasn’t good enough to allow that long tail content to flourish, whereas ByteDance had that team to make that happen. So it is possible for Pinduoduo theoretically to also match it very accurately based on the tagging for individual users and their interest graph. However, given their model is based around value, it actually makes sense for them to centralize traffic rather than decentralize. So they’ll centralize the traffic around strong hero products like exceptional value SKUs that are amazing price points. And that matches perfectly with the C to M model where you can actually work with the manufacturer. these two, the compliments of these two things, that they control the traffic and can drive huge amounts of attention to individual items if they wish to do so because it’s all algorithmically driven. And then you can actually on the supply side work with the merchants then to ensure that they produce a huge amount of that SKU. price you wouldn’t usually be able to do but then they can guarantee conversion to that particular SKU because they control all the traffic. They can just make sure that X number of people definitely got to see that. What I like about this story is like the best strategies it’s always they’re doing two or three things that somehow magically link together and all sort of it all clicks together beautifully like so you have this user interface this I was saying like engagement focused e-commerce that gets you a little bit different consumer behavior and then that starts to play out where suddenly you’re not carrying the long tail inventory. So your inventory costs are actually much lower. You don’t need millions of warehouses like JD. I mean, you need a lot, but you’re not carrying all the SKUs. That makes you cheaper. You start doing C to M directly because you’re buying a certain number of things in bulk. That makes you cheaper. And then apparently I’ve heard, but I don’t know if it’s true, is this idea that like when people buy on impulse, they don’t necessarily expect it within 12 hours like we do for other things, that you can actually ship it to them slower and they will accept that. I don’t know if that’s true. I’ve been told that. I think it’s more about the price point, right? When you’re getting at that low price and some of the prices are unbelievably low on that platform. I’ve used Pinduodol for about three years now. I buy them regularly on there. I buy a lot of stuff for my daughter, toys and things. And the prices are just unbelievable sometimes. It’s something about this interactive focused e-commerce combined with how they’ve set up their e-commerce gets them this other big huge lever which is like, look, everything here is really cheap. Like ridiculously cheap sometimes. which is like, you know. Business 101, if you can do something cheaper, that’s usually the best thing you can do. Like, people really are cheap. We really are cheap creatures. Price is always the best factor of competition, always. Especially when it comes to, now, there was just a recent story in the news about how Pinduoduo had a little bit of a conflict with Tesla because they were trying to do group, the team purchase with Teslas, right? So, but they’ve been moving kind of higher end. I would consider to be the bread and butter is bread and butter. You know, it’s these staples that that everyone’s going to buy anyway. So if you’re already going to buy certain cooking ingredients or toilet paper or whatnot, then and you say, OK, well, I can save 25% on this. Right. There’s really not much reason not to. And also it is something that you’re buying consistently. And that’s where it gets to that point of if it’s right. If it’s a staple, if you’re going to, you know, I mean, hopefully. you’re not going out and buying toilet paper in an emergency that you need on that day, right? That’s usually not how it works. Right. High frequency items, vegetables, staples, you know, ignore the long tail. It all kind of fits together nicely. And that gets you the idea. Look, Pinduodua is just really, really cheap. And that turns out to be, one, it’s good in general, but with the demographic they were going after, you know, fourth and fifth tier cities who don’t have PCs, who but they’re mostly just using WeChat anyways, and they care a lot about price. That was a really great linking of all this together. So those are kind of the two points I’d listed out. And then there’s this third idea of, which is what I think most people pointed to, was this partnership or association with WeChat where suddenly you’re doing group buying. which I didn’t think WeChat allowed that. You’re the WeChat expert, but I always thought you couldn’t give incentives for people to share your stuff on WeChat. They really didn’t like that. But I don’t know the exact rules. Nowadays, yeah, it’s difficult to do. The rules have tightened up, but… certainly during the hyper growth period of Pinduodal, which was during 2017, roughly, which was the early days of mini programs, you could do this. Right, and the way I’ve always been sort of talking about this with the class is it’s about turning your customers into sales agents or turning your customers into marketing agents. So if I’m writing something and you know… as part of a customer relationship, that person has to share it with somebody. By sharing their content naturally, it basically turns all the users into marketing agents for a company, which is very, very useful. It’s not as useful as when you can turn your customers into your sales agents, where suddenly every single person who’s a customer, a lot of them are out there actively trying to sell for you, which is really what group buying is. I mean, it’s, you know, I’m going to, I want this price. I want the better price. I’m going to go five, five, you know, find five friends and we’re going to buy together. I’m effectively a sales agent for this company. And they’ve got millions and millions of users all doing this. And it’s a hugely powerful mechanism. Very few companies get it. Payment companies get it. Communications companies get it. Zoom got it. And group buying got it in the US with Groupon, but it was very, it didn’t really work like this. It wasn’t essential. It didn’t, it didn’t, they weren’t able to create the same kind of, you know, economies of scale around it. Right. I mean, every time I, I don’t know, I’d buy something on Groupon and then find that the coupon isn’t usable because the restaurant closed down, you know, that kind of thing. That by using those staples that, you know, everyone is going to get anyway by utilizing the economies of scale. Often it’s because these manufacturers are already in China in the first place. That also helps as well. And that’s where a lot of that growth was able to happen. But I think one thing that’s really key here, we have a part in the paper section about where we look at how they overcome some of these barriers to e-commerce that e-commerce companies have traditionally had. And if we look at, for example, in South Asia, Southeast Asia here, right, that a lot of e-commerce and also, you know, economic development specialists in the government want people to adopt as well. That trust element is a big one that a lot of folks, especially if they don’t have a lot of money already, they’re not gonna take a risk to buy something that might never come. But when you have, when your friend or a family member is saying, here, let’s, we can all get oranges for cheaper, if we all do this together, then that’s a way to get a… them on board. And that’s what I think is part of the real genius of that. The funny thing is the sharing aspect, the group aspect, it feeds the interactivity. If your goal is, look, we don’t just want people to buy every moment they’re on, we just want them here doing stuff. It’s another level of activity engagement. And I thought you brought this up well in your document of just talking about, it’s like, would you say girls shopping trip? Where it’s a social way to shop. So it’s a level of activity and maybe they buy stuff and maybe they don’t. So it all kind of links together. But. Then you step back, when I step back and look at this, what jumps out at me is this is really a unique moment within China where the stars had aligned. on the back of 20, oh at this point, 15 years of development where all the pieces were suddenly in place to do this move. And they just shot right through that really elegantly by just doing the one missing piece that locked into all these consumers that were already there, they were already on their mobile phones, they already had payment systems in place on mobile payment. The logistics network was there and accessible. It turns out Chinese consumers, there’s a lot of them. Their wealth is growing. active on their phones anyways, which like that’s part of this. Like they just use their phones all the time, especially like word of mouth and sharing stuff. It’s very common culturally. Like all of those pieces had to be put in place over 15 years for then this company to just, you know, launch on the back. I’m not sure you can do that in other countries. Like, yeah, I mean, if you look here, we’re in Thailand today, right? So every adult in Thailand basically has a phone now. They are all very active, as you just mentioned, they’re using TikTok for example, right, for content, but there’s no equivalent of Pinduoduo in this market right now because the payment infrastructure is not there, right. We don’t have the same ubiquity in terms of a platform such as WeChat Pay, which was really the driver here. Alipay has done a huge amount to push forward things in China, but when you talk about the history of Pinduoduo and the stars aligning, it’s really all about WeChat Pay, which started Buy well first for lucky money as a peer-to-peer game essentially But then later with sort of low very low price items and very cheap things which again fed into And then the logistic infrastructure is not here right we can’t get the super cheap distribution That you can get in China the manufacturers are here. You can’t do C to M Manufacturers here, but not to the same extent nothing like China So you’re missing these parts of a puzzle everywhere, wherever else you go, there’s going to be one missing component. So in India, they have a very ubiquitous digital payment system, but the infrastructure and the logistics isn’t there as much. In Bangladesh, they have a government program called A2I or EK Shop, where they essentially have had to bootstrap this on a government level because it’s tricky to get the investment to come in there. you know, government offices that are orchestrating logistics or, you know, or that are incentivizing people to get online and things like that. It is a, it’s quite a, it’s quite a tricky thing and I think a lot of credit should go to, you know, that with a lot of these Chinese stories, right, this sort of virtuous cycle that create, that is created between kind of state investment in the right places and then also encouragement of entrepreneurship that See you later. Bye. causes things to move in this direction. Yeah, I mean, it’s like TikTok is a much easier play. What do you need? You just need smartphones and data plans. You don’t need payment. You don’t need logistics. You don’t need, you know, that one was easier. From a user experience, right? The monetization comes from adverts, whereas here with e-commerce, there’s some pretty high barriers, typically. One of them is getting to download an app, and even bigger one is getting to input their address. That is a huge one, right? WeChat, they were able to leverage a lot of that data through a partnership with JD for many programs where it was one tap to add your phone number. So WeChat has this data on you, right? They’ve got your phone number for sure, you have to use it, and you can’t register in China without that now. And they have a lot of people’s addresses. So they’re able to drastically lower that barrier. And then the social element, for those people who hadn’t even done that, because your group buying, it’s an extra element that helps get over that, that if you’re really having trouble with that, the people who are buying the actual good together with you can talk you through that process in a sort of way that’s very relevant to that user, which would, for many of these users, would be physically getting their phone and doing it for them, perhaps. Or through voice messages in the WeChat group, things like that. which these are actually very big barriers. This is why no one thought this market was addressable before, right? Like something like inputting your address was just too much for these people. Yeah, I think that brings us to sort of the last factor I sort of teed up, which is, you know, is this about management and execution? I mean, this was a very… clever strategy, very well executed, wasn’t easy. This was not a simple move like, oh, I don’t mean to back on Facebook, but I mean, they were very effective for a certain period of time at the right moment. But it wasn’t like they failed 50 times. I mean, this company struggled, and this is serial entrepreneurs here with a long history of starting multiple companies. I mean, this looks to me like the A-Team of, well, maybe not the senior Jack Ma level, but this is top tier China digital entrepreneurship, right? Seasoned executives, very good venture capitalists behind them, and this is some impressive management. How much of the story was this? I mean, could anyone have done that? Was this? you know, oh, it was the opportunity. Someone was gonna do it. Or was, look, it was mostly these people figured it out and pulled off. You know, it’s like Elon Musk. He just seems to do the stuff others can’t do. Yeah, I think a key here, I mean, I can’t say, you know, I can’t say, okay, it was 95% management. But I think a key component was the cross-disciplinary nature of the founding team and what they had worked on in the past. So their founder, Colin Huang, in gaming and he understood sort of the the attraction and retention that is involved in the gaming industry and he applied a lot of that to e-commerce and that’s one one reason why I think it turned out looking kind of like this. I think that’s a big component. Back in 2017, it was clear Tencent was going all-in on many programs, all-in, and the goal of that is to hyperdrive usage of So they want to boost that heavily, payments, and they want to get e-commerce working on WeChat in a way that it was kind of there already with official accounts for several years actually. The e-commerce since around was possible on WeChat since 2013. But in terms of overall e-commerce pie for China, it was very small slice. And they really wanted to like jump that up considerably. To attack Alibaba at the very heart of their empire. e-commerce. So it’s a big strategic initiative from Tencent which opened up much of the opportunity here and the competitive dynamics between these two giants led to that. This is why we don’t see this same dynamic outside China. Facebook hasn’t got the same set of incentives in order to actually make this work. There’s also other elements like Visa and Mastercard etc. like those guys are actively working against this dynamic. We haven’t got this jump in terms of mobile payments. playing field chance to do these kind of things. So without that dynamic between Tencent and Alibaba, would we see Pinduoduo today in its current form? Probably not. So there’s definitely that to consider. Having said that, was it easy to execute on this? Almost certainly not. Yeah, there’s definitely these guys are seasoned entrepreneurs. William Ding was the sort of mentor of Colin Brown. So these guys already had top level mentors coaching them for many years. They were connected. I find it a little bit difficult to believe it was pure luck that these were the guys to jump on that bandwagon of mini programs and e-commerce. There was a helping hand there somewhere along the line, I feel. I’m always curious how much Tencent has been involved in this from early on. If you were doing this sort of, quote, social e-commerce, I call it WeChat e-commerce. I mean, it’s all about WeChat. It would be very easy for them just to shut you down any day. Right? What is this group doing on our platform? Stop this. They clearly didn’t. It was either they were engaged or… There was some sort of like relationship of like Alibaba versus Tencent and then Kindle was part of that equation. You have to get to a scale where Tencent cares about you. Certainly that zero to one part where they… Tencent’s not going to invest in you day one. You have to prove yourself and get to a certain scale before they’re even considering putting money into you. And they certainly achieve that mostly by themselves. But then once it’s clear that you’re leading the pack and you’re doing something that Tencent really wants to happen, then of course, yeah, it’s going to be some aid there, let’s say. But as we alluded to, like today, this sort of group buying dynamic, because when you open, from WeChat’s perspective, when you open this kind of activity on your platform, there’s good actors, there’s people leveraging it in crypto, but there’s also bad actors. There’s a lot of marketers and people doing the fairest things. All kinds of activity happening on a platform like WeChat. Literally one third of all internet traffic in China is WeChat traffic. So imagine what that encompasses. So for them, they really need to ensure that things don’t get out of hand, that this platform is well managed, it’s an ecosystem. So today it’s not possible to do what you could do in 2017. And the reason for that is mostly that sort of management and ensuring that bad actors don’t take advantage. OK, so why don’t we do the first question here for the… You know those listening. So the question for today, and we’ll do two rounds of this question for today is What are the biggest, let’s say one to two factors that account for The early success of pin duo duo this this sort of remarkable breaking into a sector everybody thought was dominated by giants and unpenetrable impenetrable and then not only breaking into this business of e commerce very late. in the e-commerce game, but then also having this rocket ship-like growth that’s really stunning in just the scale and speed. What are the two biggest factors you think accounted for that? You have to do a lot of things right, but what were the number one and number two on that list? I’ve given you five options in the show notes there. I’ll read them to you now and then we’ll ask our guests their call. Number one, they were first mover. in a very large market with the right, you know, they cracked the equation of how to capture this very big sort of lower tier market and they got their first. Number two, they came up with a e-commerce product that allowed them to sort of go after a very, with a very low price point. You know, they were a cheap option for a demographic that is sort of historically very frugal. And they got there by various mechanisms, which we’ve sort of talked about, like CTM and group buying. Number three, they were interactive commerce, engagement focused commerce, this idea that they are closer to a gaming site, closer to TikTok, than a closer to a sushi train, than this traditional hunt through the menu for what you need. Number four, it was about virality, that early growth mechanism. by virtue of group buying, that’s just a very powerful way to grow at a certain stage of a company’s life. That was the big factor. And number five, management. Very good execution and a fairly complicated scenario, just good management. So of those five, pick your top two and press pause. It’s better if you write it down or leave your notes and then come on back. Okay, and we’re back. So we will turn to our really our first two guests on this podcast ever. So we’ll turn to our esteemed guest and allow me to think a little bit more while they talk. So, Elliot. So of these of these five, right, I think the first one would have to be the fact that not that they were the first mover because Alibaba has been trying to crack that that growth in that space for a while. But the fact that they were able to do it the most effectively through that sort of social mechanism, that more interactive mechanism, which has allowed them to gather more insights on their users, be able to do recommendation based on a social graph that most e-commerce firms aren’t able to do. And that has opened the door for what we see now as this interactive e-commerce, and for them to be able to hit these economies and also to continue to raise funding and continue to expand. Okay. I would term it as timing, right, being number one, being in the right place with the solution. infrastructure in place to actually make this form of e-commerce happen, possible to be even be possible to do and being at the right place in terms of many programs opening up on WeChat a little bit later on with the hypergrowth stage. So that timing is clearly probably in my mind the largest factor. Couple that with the actual team itself. the experience they had in gaming, the mindset they had with doing all of their starts, I think it was three or four starts before, I think it was number four if I remember correctly. So an experienced team with good connections and a mindset that was not from traditional e-commerce, so coming from the gaming industry and applying first principles again to attack this problem from a mobile mindset. Okay, my take would be, you know, they hacked into a massive market, right? They’re very clever, they’re very good strategy, but they also picked like the biggest single target I could think of, right? It’s the market that there’s hundreds of millions of Chinese consumers that were ready to be gone after. So it’s kind of for me, it’s like right market with the right product at the right moment when it suddenly became possible. Otherwise you don’t get anything like a story like this if they had cracked a smaller business. So that was number one for me and then number the second one for me would be the viral growth mechanism group buying which it’s not going to help you all the time but in that first phase of growth it really had power for them in the first two years. It’s not doing as much for them anymore. Those two together I think broke them into a market. that was supposed to be not breakable and do, it’s not a word, and then moved very, very quickly before the majors could respond. But I’d probably put those two. Yes. B speed is something we haven’t talked about, but yeah, the execution comes down to the management as well. I mean, their first growth in the first two years when they really went, you know, pinned to it was unbelievable. I mean, it was just crazy. All right. So that’s kind of the take from our side. Let’s, let’s shift the question to. Alright, that’s phase one. Now it’s five years later. Colin is kind of doing some management, shifting around at least legally, if not in practice. That early easy growth is probably over. They’re not getting the same viral effect. Customer acquisition costs are going up. Taobao of course is coming after them, as are all the other players. They’re trying to move upstream. go from cheaper napkins and basic goods to more complex. They’re trying to sell Teslas, which is, that’s just good fun, I think. And okay, so I mean, looking at this company, going forward, I think the first question is like, looking forward, what do you think the next three to four years to them is gonna be about? Like, Doing more of the same going up market going after branded goods flash sales. I don’t know What do you think to me? I? Don’t know if it’ll say this maybe they might say agree with part of it, but to me It’s all about agriculture. I see that as really a, you know, they’re, to use the term again, they’re bread and butter going forward. And for a number of reasons. I think the biggest one is that, especially in China, but this is the case anywhere, that you have to shift into institutionalizing yourself if you’re a major company like this, right? So you go from being this growth story to something that is an indispensable part of the economy and society, right? so that the authorities need you and that you have your corner in that market. And I think that when we look at the areas where they can expand, they could go more global, but we’re seeing that those options are really starting to get shut off for a lot of Chinese companies. But the other side of that is that China is very much, or China’s leaders are very much focused right now on ensuring their food security and stability. And if you’ve ever been to the Chinese countryside, you see that there are a lot of missed efficiencies that are there. It’s not very digitized. A lot of these agricultural plots, they’re just a few acres and they’re… Highly inefficient. Exactly. Highly inefficient. And China is pushing very hard to scale that up and to digitize it and to make it more efficient. And I think Pinduoduo could be the indispensable factor in that. And that’s where I think if we’re talking 10 years from now of Pinduoduo still being this giant, I think it will depend on how well they succeed in their agricultural innovations. Yeah, just to lead on from that, sort of all ties together, sort of just the general vibe of companies, whether they’re in America or China, having to think about the social implications of what they’re doing now, that technology has clearly become such an important thing. When I say technology, I’m really just thinking about mobile internet there, really though it’s become tech for good, has become a sort of theme across all large mobile internet companies these days. That lines up with that. Moving forward, yeah, apart from that, I do agree with what you said. I think agriculture is important. The other big thing is moving up markets, which they’ve been doing for quite some time now, right? So they’ve got this, they’re user-based in the lower tier cities at the same time, which we haven’t talked about yet, but it’s quite well known that they have a very bad reputation with sophisticated internet users, with people with high income, in places like Beijing and Shanghai, a place they would never shop. The reputation there being based around I think goods, merchants providing things which would be very poor quality. This is a problem that actually Alibaba suffered from for many, many years during the early, during Taobao in the PC era. So it’s gone for a similar, I think, in terms of perception of the brand, a similar journey to what Taobao did. Now with Alibaba, they opened up T-Mall and took things in that direction. It seems that Pinduoduo is not taking that strategy. I don’t see, so far there’s no indications that they would do something like T-Mall. But what they are clearly doing is opening, subsidy program by Eudelte in the last year which has been quite popular and what that is is basically offering items like iPhones and high expensive laptops or electrical equipment or just very prestigious sort of brands in there and offering those at a price below the other major marketplaces in order to attract those consumers, in order to change that reputation around things. Because if that mindset around the brand doesn’t change, there’s no hope of reaching those consumers, of becoming a more mainstream platform, similar to Townbowl essentially. So I see the future of Pinduoduo as being an alternative to Townbowl. One of their problems is the brand problem. perception and build that trust with those users and that it’s safe to shop on Pinduoduo and that the goods are the same as they have that sort of safety feeling when they shop on Taobao. What jumps out at me on this is I love the interactive thing because I find it so interesting and it’s such an interesting business model to get engagement and then to do sales. I’m also afraid of that business model generally because Alibaba doesn’t want your time. Alibaba wants a percentage of your wallet. That every year, every month of your life with your household you have to buy certain goods, you have to buy your kitchen, maybe you buy a sofa every year. There’s a certain amount of money you spend. They want to own a share of your wallet. That’s their game. And that number keeps going up because consumers get wealthier. They have more disposable income. Pinduodua wants a percentage of your time. They want your engagement. Well that number doesn’t go up. That’s a zero sum game. And every year there’s more things that people come out and say, hey pay attention to me, look, you like short videos, now watch live streaming. Holding people’s attention is a harder game, I think, overall. Now both companies do this to some extent. I mean it’s a spectrum. But I’m generally more afraid of… doing something that’s popular now as my primary sort of thrust and having to keep attention. You know, TikTok is very popular right now. It might not be popular in two years. People might discover they like something different. And you’re competing with TikTok, Netflix, old- not Netflix and chat about gaming, people’s jobs, right? You’re competing with everything. Right, so I wouldn’t, I mean, but this is what gaming companies do, is they try and keep your attention by entertaining you and doing all this. I’d be trying to shift that model as much as I can to sort of a percentage of wallet that is locked in. where with this demographic, we got there early, we know this demographic, we know them well, there’s a lot of them, we are gonna lock in a certain percentage of their consumer spend every month for households, and we’re gonna own that share of wallet. And then if attention goes up or down, maybe we have a cool new thing, maybe we don’t, we’ll do our best. But at least we got that foundation. Because if they start losing attention, what happens? the whole thing go. I mean, I don’t like being dependent on, hey, please pay attention to me. Yeah. Because that’s a very hard game. Like I said, becoming indispensable is the next key. The number one thing I like about e-commerce generally is you don’t have to keep people’s attention. You just have to keep a share of their percentage of their spending. And generally in China, that number goes up every year. The wallet gets bigger. I like that. But that’s what makes me nervous. Even though I think it’s the exact same reason it’s cool, it also makes me nervous. I have to look at like most of the techniques that we’ve carved in the paper have actually been adopted across the industry already quite some time ago. So I have to go to Taobao actually uses many of these techniques around entertainment and has even more. Especially around things like live streaming with the old LiDAR chieftain. That is entertainment. I believe that will, you know, it’s risen rapidly and it will probably fall rapidly as well. When you look at these sort of sushi models, sushi train models, Taobao does that as well. They actually have lots of content, not just live stream, but written content, feeds and streams where merchants can, it’s basically, I’m thinking they have a sort of version of They’ve got all different kinds of techniques in there to have content mixed in with e-commerce and entertainment mixed into the experience. We’ve used Pinduoduo as the case study here, but actually some of these themes here are across the industry and I feel that Taobao is just as exposed to Pinduoduo in some respects for some of these trends. It’s a spectrum. It’s a spectrum, yeah. is difficult with content to keep that stable. I mean, I like Walmart for this reason, which is like, we all have to buy certain things in life, and Walmart has everything we possibly need at the lowest price we’re gonna find. That’s their, they get a very predictable revenue stream based on that. Now everything on top of that, great, do entertainment, do content, do whatever, but we know we have this foundation of like. With big dollars, you could say, I mean, ultimately that’s why they always stress value. They’re always going to worry about values so much. because you do know like I know as a user, I’m definitely gonna I don’t even I don’t need to look at other platforms that pin dollar is going to be the cheapest platform. Right, this is this is Walmart’s pitch, which is there’s no reason to go anywhere else. Every we sell everything and you won’t find cheaper prices. So there’s no reason to even look. That’s a really good pitch. Right. And that’s kind of my thing is I would always pin do do I’d be trying to lock down a foundation like that that’s just stable. in these fourth and fifth tier cities, we got that. Now on top of that, let’s try and thrill people and gamify and have some fun and interact and, you know. But that’s what they’re dangling though, is that it’s not just that it’s fun, it’s that they, by being an e-commerce platform, they’re able to incentivize through money essentially, by saying, okay, you’re gonna play this game, you play this game more, you play this game enough, then you get free creative oranges. So that’s where I think things tie into each other very very well but I think you’re right you know if you look at you know Alibaba, Alibaba has an ecosystem that no one can really be with they’re they’re almost a monopoly. JD, I look at JD kind of like I look at Apple in that if you look at an iPhone and iPhone usually doesn’t isn’t the first one the first phone to have a new feature. But what it does do is they often will do it better than the other phone companies so that you know that whatever you have on your iPhone, they’re going to do it better or in a more user-friendly way than Huawei or Xiaomi or Samsung. That’s kind of what JD does, is that they might not be the first company to move into a certain area, but they’ll do it with a higher end brand and more sophistication. So what that means for Pinduoduo here is Pinduoduo has to be what Huawei is, or Xiaomi, or Samsung. So they can innovate and offer new things, or they can offer better value for money. So that’s why they emphasize. Because they can’t they can’t be Apple but they can be Huawei or Xiaomi or Samsung It’s great. Okay. So this is question for the listeners going forward What’s the single most impressive important factor and it’s the same five questions as below. So Well, I guess it doesn’t make sense for the first one except for the first one which is, you know first mover they’re not first mover, but in the next phase of pin duo duo, what’s going to matter most to stay number two was to stay the low cost sort of low cost player for what has been a frugal demographic. to go after interactive commerce, engagement focused e-commerce to double down there, focus on group buying and virality, or it’s just going to be management. It’s going to be agile, clever management that keeps pivoting and pivoting and pivoting in a landscape in China that does change pretty frequently. So what’s the most important of those? So everybody take a minute and pause the recording and make your best call on what do you think of these same really four factors that we just listed which are in the show notes. Which of those is gonna be the most important for Pinduoduo going forward? If any of them, is this still the right focus and which is the, you know, what is the most important thing to do in this phase of the company’s sort of development? And then come back. And that is it for this class. So let me thank Matthew and Elliot for being the first official guest, well, not official, but the first guest on the show after 44 episodes. We finally had a guest, which is great subject. Really fascinating, great report. And the report, the link to the report is in the show notes. It’s also on my webpage where this episode is located. So it’ll be all over there, very easy to find. Definitely take a look at that. It’s great. And… In terms of following up, Elliot, where can they follow you? Well, you can listen to the China Tech Investor podcast. powered by tech notes, interesting facts when it comes to Chinese tech stocks and IPOs. You can subscribe wherever you get your podcasts. Also, you can check with me on LinkedIn or on Twitter. For both of those, my Twitter handle is Elliot Zagman, E-L-L-I-O-T-T-Z-A-A-G-M-A-N, and then you can search that on LinkedIn as well. And Matthew? To find me, yeah, Twitter is good as well, Embrack in China, and in LinkedIn. Okay, and that’s it for us from Bangkok. I’m going to… head out and get some food I think. But thank you so much for stopping by. And that was the end of the interview with Matthew and Elliot. I think that was, I found it really fascinating. A little bit of audio issues there. Sorry, we’ll get that improved. I’m not really set up for interviews yet. It’s usually just me sitting at my desk. But that’s it for today. And in part two, we’ll go into Pinduodua a lot more. We’ll kind of be more expansive on, there’s a lot of factors going on here that are important. And I tried to just sort of boil it down to the top two or three in your own minds, but there’s actually kind of a lot to go through. And just to repeat, for those of you who are in the class, the three concepts, I really want you to take away from this, which is in the show notes, a value for money as potentially a digital superpower by dramatically improving the user experience. Number two, interactive or engagement driven e-commerce, depending what terminology you want to use, and then virality. and word of mouth and that all goes under Learning Goal 31, which is basically intro to Pinduoduo. Okay, and we’ll go more into this this week in the emails and then more next week as well in the podcast. But that’s it, I hope this is helpful, I hope everyone’s doing well and I will talk to you soon.