Produced by | Yiguan Finance

Author | Gui Shen Qian Gui

Before the results announcement, Pinduoduo's low-price strategy was criticized by Zhong Shanshan, the founder of Nongfu Spring.

On the evening of November 21, Beijing time, Pinduoduo released its third-quarter 2024 earnings report before the US market opened. The data showed that for the third quarter of 2024, Pinduoduo's revenue was 99.35 billion yuan, far below market expectations of 102.83 billion yuan. Revenue grew by 44% year-on-year, a near-halving compared to the 86% year-on-year growth rate in the previous quarter.

With revenue falling short of market expectations, coupled with Zhong Shanshan's criticism of Pinduoduo's low-price strategy, Pinduoduo's stock price plummeted before the market opened, and the "ghost story" after the Q2 earnings release was repeated. Nowadays, Pinduoduo's revenue growth has slowed for two consecutive quarters, and the myth of high growth is no more. Will Pinduoduo collapse?

Since its inception in 2015, Pinduoduo has quickly stood out in the e-commerce landscape with its extreme low-price strategy and "viral" marketing. By precisely targeting the market and adopting a low-price strategy, it quickly accumulated a large number of users in the lower-tier markets, leading to significant growth in the company's revenue and profit. Its cross-border e-commerce platform, Temu, has replicated its domestic development path overseas, capturing market share with its ultra-low prices. Its robust performance both domestically and internationally has driven up its share price, and at one point, Pinduoduo's market capitalization surpassed that of Alibaba, earning it the title of "the light of Chinese concept stocks." The company's actual controller, Huang Zheng, saw his wealth soar, and he briefly topped the list of China's richest people.

However, recently, Zhong Shanshan, the founder of Nongfu Spring, criticized Pinduoduo's low-price strategy, sparking widespread public concern. Zhong stated, "A pricing system like Pinduoduo's is a huge detriment to Chinese brands and industries." Pinduoduo drives down the entire pricing system, leading to bad money driving out good, whereas Nongfu Spring has been propping up the pricing system all these years.

Regarding Zhong Shanshan's criticism of Pinduoduo's low-price strategy, the following perspectives are worth considering:

1. How should we view Pinduoduo's low-price strategy?

Pinduoduo's ultra-low pricing strategy has enabled its rapid growth and expansion, with its market capitalization once surpassing that of Alibaba, and its actual controller, Huang Zheng, briefly becoming China's richest person. Outsiders were amazed that a company selling low-priced goods could make its founder the richest person in China.

How does Pinduoduo make money?

Pinduoduo's revenue mainly comes from online marketing services and transaction services. Data shows that in the third quarter, Pinduoduo's online marketing service revenue was 49.351 billion yuan, a year-on-year increase of 24%. Most of the advertising revenue on Pinduoduo comes from platform merchants.

In the third quarter, Pinduoduo's transaction service revenue was 50.03 billion yuan, a year-on-year increase of 72%. A significant portion of transaction service revenue comes from commission income. When merchants sell products on the platform, the platform charges a certain percentage of the sale price as a commission. The increase in the number of active merchants and transaction volume on the platform has also driven an increase in transaction service revenue.

It is important to note that Pinduoduo's platform is dominated by small and medium-sized enterprises. Whether it is domestic e-commerce business or overseas cross-border business, Pinduoduo's transaction service revenue comes from domestic small and medium-sized enterprises. These enterprises are the cornerstone of Pinduoduo's revenue and profit sources.

An objective fact is that in its early days, Pinduoduo focused mainly on agricultural products and white-label factory goods. It sold these "low-priced" white-label goods to a massive user base on its platform and launched the "10 Billion Subsidy" program, further consolidating its advantage in "price-to-quality ratio" and attracting more consumers, thereby expanding its market share. "Low price" has become the "moat" for Pinduoduo's development.

Price competition has once been the most common competitive means among major e-commerce platforms. However, in the era of stock competition, the domestic e-commerce market is highly competitive. A simple price advantage is no longer sufficient to support long-term development. Consumers' pursuit of quality life has never changed. Therefore, for enterprises to get rid of the traditional Chinese brand image of "low price and low quality," they must transform towards branding. To remain invincible, enterprises must focus on product quality and service levels, enhancing brand image and value. Only in this way can they stand out in the fierce market competition and achieve sustainable development.

Pinduoduo is also aware of this and is beginning to transform towards branding. On the one hand, it supports factories in the industry to achieve branding and improve product quality. On the other hand, through collaborations with high-end brands such as Huawei and Sam's Club, it is attempting to reverse its ingrained image of low quality and low price among consumers. However, judging from Zhong Shanshan's criticism of Pinduoduo, the public's perception of Pinduoduo as a "low-quality and low-price" brand has not yet improved.

2. Does Pinduoduo's low-price strategy cause significant harm to Chinese brands and industries?

Behind Zhong Shanshan's criticism of Pinduoduo lies a deeper issue: the impact of e-commerce on China's physical enterprises. As the founder of Nongfu Spring, Zhong Shanshan's criticism of Pinduoduo's low-price strategy reflects his concerns about the healthy development of Chinese brands and industries. He believes that Pinduoduo's low-price strategy is a huge detriment to Chinese brands and industries, potentially leading to bad money driving out good and suppressing the motivation for corporate innovation.

This viewpoint is somewhat reasonable because a low-price strategy can indeed have certain negative effects. The rapid development of e-commerce platforms has changed consumer shopping habits, leading to a decrease in foot traffic and sales at physical stores, with some facing operational difficulties or even closure.

On the one hand, to cater to low-price demands, some merchants reduce product quality and production process standards, resulting in issues such as uneven product quality and an influx of counterfeit and shoddy products, harming consumers' legitimate rights and interests. Additionally, the excessive pursuit of low prices plunges enterprises into vicious competition, compressing profit margins and making it difficult to invest in research and development and innovation, leading to insufficient momentum for long-term industrial development.

However, the development of e-commerce also brings certain positive effects to the development of physical enterprises.

Simply put, e-commerce platforms provide new sales channels and market opportunities for physical enterprises, promoting the transformation and upgrading of the real economy. In cases of overcapacity, e-commerce platforms provide online sales channels for some small and medium-sized manufacturing enterprises, helping them digest inventory and alleviating production pressure to a certain extent. At the same time, e-commerce platforms also drive the development of related industries such as logistics and packaging, creating a large number of job opportunities. Moreover, cross-border e-commerce breaks through geographical restrictions, enabling small and medium-sized enterprises to promote their products and services to the global market, providing more business growth points for these enterprises.

To a certain extent, a low-price strategy can force some enterprises to optimize their cost control and supply chain management, indirectly promoting industrial efficiency. It reduces the operating costs of physical enterprises, improves operational efficiency, and helps them share the dividends of digitization.

A low-price strategy is a means of competition among e-commerce platforms, and there is no inherent right or wrong. The key lies in balancing the relationship between price, quality, and innovation. Secondly, e-commerce platforms and physical enterprises are not mutually exclusive; they can promote and develop together in a coordinated manner.

Currently, China's economy is the world's second-largest economic entity. In addressing the challenges of economic structural transformation, enterprises need to not only grow larger but also become stronger and better, gaining more bargaining power in the global market. This is both a tremendous opportunity and a significant challenge.