<Editor's Pick>Can Pinduoduo's marketing-for-growth strategy continue to work out with its depth development ?

作 者  /  步摇

编 辑  /  tuya

出 品  /  财经涂鸦(ID:caijingtuya)
 
According to Forbes real-time data, Pinduoduo CEO Huang Zheng's net worth soared. At the end of April, his personal net worth was as high as $ 25.7 billion (equivalent to 182 billion yuan), making him the third richest person in mainland China.

Benefiting from the cooperation with Gome, since April, Pinduoduo's shares have continued to reach a new high. As of April 25, the US stocks closed, and Pinduoduo quoted at $ 49.57, a year-to-date increase of 31.07%. The market value is $ 58.5 billion.
 
On April 25, Pinduoduo also released its 2019 annual report. The annual report data shows that in 2019, Pinduoduo realized a turnover of 1006.6 billion yuan and an annual revenue of 30.14 billion yuan. The gross profit increased from 10.217147 billion yuan in 2018 to 23.803 billion yuan in 2019. The net loss attributable to ordinary shareholders was 6.968 billion yuan, narrowed 10.298 billion yuan compared with the net loss of 2018.
 
In 2019, Pinduoduo's marketing expenses reached 27.174 billion yuan, and in 2018 it was 13.442 billion yuan, a year-on-year increase of double.

In terms of users, the number of annual active buyers of Pinduoduo platform reached 585.2 million in 2019. If counted by the number of users, Pinduoduo has become China's second largest e-commerce platform.
 
As of the end of 2019, the annual number of active merchants on Pinduoduo platform exceeded 5.1 million, an increase of 41.7% from the 3.6 million in the same period last year. In terms of cash reserves, Pinduoduo holds cash, cash equivalents and short-term investments totaling 41 billion yuan.
 
Pinduoduo stand out in terms of user volume, user activity and GMV and other e-commerce core data due to the continuous growth of marketing. According to the research report of Agricultural Bank of China, the online market share of Pinduoduo is estimated to be about 9% in 2019 , while Alibaba is 63% and JD.com is 20%.
 
As a rising star in the e-commerce field, Pinduoduo has investment every year to acquire customer. Lack of ecological coordination like Alibaba and supply chain advantages like JD.com, can Pinduoduo save enough competitive capital for yourself by burning cash? 

Pinduoduo spend 27.2 billion yuan in marketing 
 
The financial report shows that the sales and marketing expenses of Pinduoduo were 27.174 billion yuan, an increase of 102% from 13.434 billion yuan in 2018. The company said the increase was due to investment in building greater user awareness and engagement through online and offline advertising and promotions.
 
In 2019, Pinduoduo's annual revenue was 30.1 billion yuan, and the ratio of market sales and marketing expenses to total revenue was at a very high level of 90.2%. In comparison, Alibaba is about 10% and JD.com is 3.7%. In addition, its sales and marketing expenditure / total sales ratio is 2.7%, while Alibaba is 0.7% and JD.com is 1.0%.
 
The marketing expense ratio of Pinduoduo has always been high. Pinduoduo is taking the road of promoting GMV through marketing, increasing the purchase frequency and unit price of purchasers through marketing investment, which ultimately promotes the continuous growth of the platform GMV and drives the company's commission income to climb. The marketing expense ratio of Pinduoduo once exceeded 100%. The company's Q4 expenses in 2018 totaled 6.871 billion yuan, of which the marketing expenses were 6.024 billion yuan, an increase of 699% year-on-year. The marketing expenses were also mainly invested in online and offline advertising, promotion and brand activities. 
 
However, compared with Alibaba and JD.com, the large investment of marketing is relatively low in the cost of customer acquisition. Pinduoduo started from the social teaming mode and enjoyed the dividends of early social customer acquisition. Calculating customer acquisition costs based on new active buyers and marketing expenses invested, customer acquisition costs increased to 182.55 yuan in the fourth quarter of 2018, a year-on-year increase of 2008%, and an increase of 105.47 yuan from the third quarter of 2018.
 
According to the data of the second quarter of 2019, as of 2019Q2, the cost of acquiring customers for Pinduoduo is between 100 and 150 yuan, and the cost of acquisition for JD.com is around 300 yuan. And the cost of acquisition for Alibaba is 535 yuan, while Pinduoduo accounted for around 29% of it.
 
Benefiting from the increasing retention rate and new mini-games, the cost of acquiring new users has dropped from 197 yuan in the first quarter to 130 yuan in the third quarter. Pinduoduo added about 53 million new users in the third quarter, with 536 million annual active users, and completed its annual target of 500 million users in advance.
 
Prior to 10 billion subsidy plan in June 2019, the growth rate of Pinduoduo's active users was declining, and it fell to 6% at the end of March. After the introduction of 10 billion subsidy plan, its growth rate increased to 9%, and continued to rise to 11% in the third quarter. 

In the first three quarters of 2019, Pinduoduo's marketing expenses accounted for 96%, 107%, and 108% of revenue, respectively. All the first two quarters of revenue were used to pay market expenses. In the third quarter after 10 billion subsidy, the proportion of marketing to revenue dropped below 90%.
 
The company said that in addition to online user acquisition, sales and marketing expenses, more importantly, promotional activities and coupons come from offline advertising. In the external doubts about the growth of marketing expenses, the company emphasized its user growth strategy this year and next year, it seems that the short-term strategy will focus on traffic rather than transactions.
 
At the same time, the company will also observe the time spent by users, whether they can bring new users and AOVs, order frequency and product categories purchased. If the company observes that certain users only buy when they have coupons and do nothing else, then these users will be low-value users who do not meet the company's ROI threshold.
 
Is the marketing-for-growth strategy sustainable?
 
Pinduoduo was launched in September 2015, and it has risen rapidly in social traffic. In November 2016, its daily transaction traffic exceeded 200 million. In June 2018, its users exceeded 300 million.
 
Pinduoduo continuously launches marketing campaigns for acquisition. On November 11, 2019, it sold 400,000 iPhones, and 80% of the buyers were post-80s and post-90s. At the end of February 2020, a shopping festival on the theme of "people's rework" was launched, with a subsidy of 10 billion yuan. More than 50,000 iphones and 20,000 MAC lipsticks were sold a few hours before the event.
 
In the large-scale marketing investment, the gap between the number of users is narrowing. The gap between Pinduoduo and Alibaba dropped from 386 million in the first quarter of 2017 to 126 million at the end of 2019. As early as the second quarter of 2018, Pinduoduo has surpassed JD.com in terms of user numbers. In 2019, its users is 18% less than that of Alibaba, which narrowed 85% difference from the first quarter of 2017. Although the growth rate of Alibaba is low on the basis of users, but its plate is large, the number is not small. In 2017, Alibaba already has 450 million users, and by 2019, Alibaba will maintain at least more than 20 million new users each quarter. 
 
In terms of user activity, in the fourth quarter of 2019, Pinduoduo's active users reached 585 million, a year-on-year increase of 39.67%. Alibaba's active users reached 716 million, a year-on-year increase of 11.2%, and JD.com's active users reached 362 million, a year-on-year increase of 18.6%. At present, Pinduoduo's active users have surpassed JD.com and is moving closer to Alibaba.
 
In 2019, Pinduoduo's MAU reached 481.5 million, with a compound growth rate of 84.8% in the past three years. And it accounted for 82.3% of the annual active buyers, an increase of 24.68 percentage points from 2017. Meanwhile, its user stickiness is increasing, with a compound annual growth rate of 72.7%.
 
In terms of GMV, speed is the key for Pinduoduo's success, but there is still a lot of room for its volume. In 2019 fiscal year, the revenue of Alibaba reached 5,772.7 billion yuan, up 18.82% year-on-year, and Pinduoduo reached more than 106.6 billion yuan, up 113% year-on-year. Pinduoduo's GMV rose from 141.2 billion yuan in 2017 to 1006.6 billion yuan in 2019, which took Alibaba and JD.com 9 years and 15 years to achieve this goal respectively, while Pinduoduo only took 4 years. In terms of total amount, Pinduoduo is still in place Taobao's 2011 level, in 2019 JD.com's GMV just reached 2 trillion, while Alibaba is nearly twice the sum of JD.com and Pinduoduo.
 
From 2017 to 2019, the compound growth rate of Pinduoduo's GMV was 167%, revenue compound growth rate was 315%. And its monetization rate was 2.99% in 2019, and its monetization reached 3% in the third quarter and fourth quarter of 2019.
 
In terms of customer unit price indicators, compared to Alibaba, Pinduoduo is still hovering at a relatively low customer unit price. In 2019, the average customer price of Alibaba was 9,200 yuan, JD.com was 5,800 yuan, and Pinduoduo was 1,700 yuan, which still exist many gaps. From the perspective of unit price, Pinduoduo is also growing, the user unit price was 600 yuan in 2017, 1100 yuan in 2018, and 1700 yuan in 2019.
 
From an investment perspective, almost 100% of the revenue is invested in user acquisition every year. There is still a large gap between the absolute amount of users, user activity and GMV from Alibaba, but its growth rate is rapid. If Pinduoduo keep this growth rate, in a few years, it will be enough to reshape the new pattern of e-commerce competition.
 
Compared with Alibaba, Pinduoduo still has many limitations. The most obvious difference in the unit price of passengers is that the current average unit price of Pinduoduo is only 18% of Alibaba. In terms of order volume, the number of orders per active user per capita in 2018 is 27, Alibaba is 90, only 1/3 of it, the price per customer is 42 yuan, and Alibaba is 97 yuan.
 
In terms of logistics, supply chain construction and system coordination, Alibaba is still a strong rival. Of course, from the perspective of its investment, the growth brought by the large investment in marketing and sales has been quite convincing to the market and investors.
 
In terms of the achievements, Pinduoduo's investment in marketing is undoubtedly successful, which is difficult to shake Alibaba's position. However, its growth rate is far higher than that of Alibaba and JD.com. It surpasses JD.com in terms of user volume and other indicators, and is approaching the second largest in terms of trading volume. At the same time, in terms of trillion trading volume, the completion speed of Pinduoduo is half of Alibaba's and about a quarter of JD.com's. From the data, Alibaba should regard Pinduoduo as its biggest competitor.
 
At the end of 2019, the cash and cash equivalents in Pinduoduo's account amounted to 33.3 billion yuan. In other words, Pinduoduo still has funds to make another 10 billion subsidy plan in 2020. The company predicts that the non-GAAP sales and marketing expense / income ratio will be reduced to 68.0% by 2021, and the compound annual growth rate of total sales value (GMV) for 2019-2021E is expected to reach 46%, reaching 2.2 trillion yuan in 2021.
 
However, the company's sales and marketing expenses will be reduced in 2020. What Pinduoduo should ponder is whether the marketing-for-growth strategy can work out?

This is an article from WeChat official accounts Caijingtuya(ID: caijingtuya), written by Bu Yao, translated by Chris Yuan.