In simply two years, the Chinese language e-commerce platform Temu has emerged as a key contender within the international market. In France, it ranked because the fifth most-visited on-line commerce platform in October 2024. In america, it’s quantity three; globally it’s ranked second. On the coronary heart of this outstanding achievement are its ultra-low costs, which many observers argue are made doable solely via questionable practices, akin to poor product high quality, dumping, aggressive advertising, and misleading commerce techniques.
Regardless of widespread skepticism over its long-term viability, Temu continues to take a position closely in promoting and market penetration, difficult an e-commerce sector the place no new player has made a significant breakthrough in the past decade. Whereas different on-line retailers, like AliExpress and the style big Shein, have disrupted Western markets with related cutthroat pricing methods, solely Temu has finished what few believed doable: outperforming Amazon, the long-standing gold normal for aggressive pricing.
From Manufacturing facility to International Retailer
Temu’s pricing insurance policies will not be revolutionary in China. The platform carefully follows the enterprise mannequin of its mother or father firm, Pinduoduo (or PDD Holdings). As Pinduoduo’s worldwide arm, Temu represents China’s ambition to transition from being the world’s manufacturing facility to changing into the world’s retailer. Its low costs will not be a brief launch tactic however a elementary pillar of its long-term technique.
Established in Boston in September 2022, Temu is an offshoot of the Chinese language e-commerce big Pinduoduo, based in 2015 following the success of Pinhaohuo. Launched by Colin Huang in April that yr, Pinhaohuo used WeChat’s group-buying mannequin to promote bulk orders of contemporary fruit. Its speedy progress led to the creation of Pinduoduo, which disrupted China’s e-commerce market – lengthy dominated by JD.com and Alibaba – earlier than increasing globally via Temu. Right this moment, Temu operates in 79 nations.
Reverse Auctions and Consigned Stock: Driving Down Costs
On the coronary heart of Temu’s pricing technique is the Shopper-To-Producer (C2M) mannequin, launched by Pinduoduo in March 2023. This strategy makes use of reverse auctions, the place Temu solicits bids from producers, forcing suppliers to compete by providing the bottom doable costs. PDD Holdings units ultimate product costs and revenue margins, and producers ship merchandise on to Pinduoduo’s warehouses in China, eliminating the necessity for Temu to buy or maintain inventory. As a substitute, producers bear storage prices and should take again any unsold objects. Funds are usually made quarterly, additional easing Temu’s monetary burden. In essence, Pinduoduo operates a consigned inventory model.
Reverse auctions allow Temu to safe the bottom doable costs from the outset, with Pinduoduo’s logistics experience permitting for speedy order consolidation, creating economies of scale that significantly profit smaller producers who, with out Pinduoduo, would battle to attain such demand ranges. Moreover, by pooling delivery logistics, Pinduoduo additional reduces complete product prices in comparison with direct producer gross sales.
Making a Buzz on Social Media
On the patron facet, Pinduoduo deploys its group-buying mannequin to drive gross sales via social media tendencies. The title Pinduoduo roughly interprets as “collectively, increasingly more.” This displays its core technique: the extra patrons in a gaggle buy, the decrease the value. This tactic has propelled Pinduoduo to develop into the world’s main social commerce platform by person numbers, with 694 million customers in China alone as of June 2024, in response to XQuestMobile China.
Past group buying, Pinduoduo has leveraged gamified purchasing options – widespread in Chinese language enterprise tradition – to encourage impulse shopping for, a problem for many on-line retailers.
The corporate entered the market by strategically focusing on missed client segments, specializing in lower-income buyers in smaller cities and rural areas, slightly than competing for wealthier city clients dominated by JD.com and Alibaba. This strategy led to speedy progress and profitability by 2021. By 2023, Pinduoduo, together with Temu, reported $34.879 billion in revenue and a net income of $8.267 billion.
A Fee-free Income Mannequin
How does Pinduoduo generate income? By charging producers for end-customer delivery logistics and advertising providers akin to product promotion, visibility, and platform placement. Logistics income accounts for 38 % of the platform’s total earnings, whereas advertising providers contribute 62 %.
In contrast to Amazon and different on-line marketplaces, Pinduoduo doesn’t take commissions on gross sales. As a substitute, it operates as a logistics and advertising service supplier, facilitating distribution for producers and managing logistics flows.
This confirmed income framework is essential to Pinduoduo’s extremely aggressive costs. Moreover, the corporate advantages from a positive company tax fee in China – 15 % in comparison with the usual 25 % for conventional companies. By leveraging bulk buying, optimized advertising and logistics, and a commission-free construction, Pinduoduo can maintain its low-cost pricing technique – very similar to its Chinese language e-commerce rival, Shein.
Favorable Customs Laws
Temu is duplicating the Pinduoduo mannequin overseas. Inside this framework, Temu advantages from the U.S. customs tariffs (Section 321 of the Smoot-Hawley Tariff Act of 1930) that exempts items valued below $800 from customs duties. The EU supplies an identical exemption for objects below 150 euros (Article 23 of Regulation 1186/2009). Most of Temu’s merchandise fall beneath these thresholds, permitting them to be shipped duty-free.
In america, President Donald Trump ordered an finish to the tariff exemption for low-value items, however was compelled to delay implementation of the change till “sufficient programs are in place to totally and expediently course of and gather tariff income.”
Inside two years, Temu has onboarded over 200,000 retailers, shipped 4 million packages every day from 60 warehouses in China and attracted 467 million customers worldwide by providing products 40 percent to 60 percent cheaper than Amazon. To quickly develop its buyer base and obtain self-sustaining crucial mass in Europe and america, Temu is investing closely in product subsidies.
Its internet advertising technique is equally aggressive, with substantial investments in social media adverts on platforms like TikTok, Instagram, and Snapchat, in addition to search engine rating. Whereas precise figures for these campaigns stay undisclosed, annual studies from PDD Holdings, present its advertising spending – together with Temu’s – elevated by 34 % to roughly $11 billion in 2023, with an estimated $4 to five billion allotted to Temu alone.
Temu’s advertising technique and its slogan, “Store like a billionaire,” comply with the playbook of main digital platforms, the place sustained subsidies drive demand and gas viral engagement. In such fashions, economies of scale are straight tied to client demand – an idea referred to as the demand-side economic system of scope.
Excessive Logistics Prices
Increasing the Pinduoduo mannequin internationally comes with logistical challenges, significantly because of the larger delivery prices of air freight supply from China, making the present worldwide mannequin weak to potential losses.
To handle this, Temu started transitioning to a brand new working mannequin in March 2024, step by step shifting from its preliminary totally managed strategy to a semi-managed one. Below this mannequin, Temu-represented retailers ship merchandise by way of ocean freight to U.S. warehouses for native distribution.
Moreover, Temu has engaged the Chinese diaspora in the United States to operate “family warehouses” from their houses, together with residences and garages, offering storage, labeling, and delivery providers at aggressive charges. This technique attracts smaller retailers who can not afford massive warehouse amenities. It additionally demonstrates how retailers are adapting to Temu’s evolving logistics mannequin, with the platform primarily managing buying and pricing.
Nevertheless, Temu has launched a conventional mannequin, the place sellers set their very own costs very similar to eBay, AliExpress, and Amazon. Already rolled out throughout a number of European nations, together with the UK, Germany, Spain, and France, the mannequin might problem Temu’s means to maintain its ultra-low costs.
If Temu transitions right into a extra typical market, how will its low-cost choices stack up in opposition to Amazon? Temu has disrupted the online retail landscape, however can its aggressive pricing technique stand the check of time?
This text was initially printed on The Conversation. Learn the original article.
