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Why only the right to build, execute and scale is not enough?

Pinduoduo started pitching to investors as a Costco + Disney aI have been reading founders, investors, and ecosystem stakeholders' making references to Pinduoduo for a while. And most of the time it was way south from the real Pinduoduo. I made a fundamental mistake - thinking of Pinduoduo as a feature - to admiring the whole evolution journey - converting right to build and scale to right to win. It is not possible to write everything about Pinduoduo in 2500 words - but I have tried my best to give you a real picture of Pinduoduo’s true evolution.

t the start of its journey. I was so naive that I never tried to dig deep/understand why they were pitching Pinduoduo = Costco + Disney. Now, I know the reasons: a. I had no idea what Costco was, and b. I was at the first stage of the knowledge and confidence curve - you know little, but you think you know a lot. I am not very proud of being in that stage of my life, and I never want to be in that stage ever. But I think if we consistently keep working with honesty - things do turn around. And today, I feel I am the stupidest person on this earth and always live in a fear of being absolute. Therefore I expose myself to non-manipulative information - Books (A book can't hold my attention if I can validate authors' sources), Podcasts, Poetry etc. I have been training my mind to process a large sum of complex information and simplify that into actionable pointers. I would be needing this skill because I have crazy aspirations. Whenever I tell my aspirations, people think I am crazy, and they laugh - that is okay :)

The sudden rise of Pinduoduo had generated tons of curiosity - across individual markets. I was also one of them - but I was thinking of Pinduoduo as a feature rather than an innovative business model - I have burnt my fingers. Whether I read it or not, I have a tendency to signup for newsletters - Pinduoduo, High tech China, Technode Chain, and Evolving for the next billion are newsletters that I follow to keep myself updated with the China tech ecosystem. I do this because progress is not inevitable, but it usually follows from high to low. Just 5 of 6 months back, I had zero interest in Progress as a subject - but today “Progress” is one of my favourite subjects. I have written an internal essay: “Why Bihars' Progress is not inevitable” - I have not published it yet. It was interesting to write because the thought process was if I have been provided with an opportunity to take a company from $90 billion (Bihar’s GSDP) to a $500 billion-dollar in 10 years - what would be my thought process. It was a good exercise considering the fact that Bihar is such a unique place supported by all the variables - unique geography, surplus waterfall, high-yielding lands, vicinity of two of the largest rivers etc. I will make this public someday - not now. I need to think deeper.

But let me give you one example. The flood problem in Bihar - is every year's story. In the past 30 years, in June, July, Aug, Sep - there has been an average of ~700 mm rainfall. And not having proper storage or irrigation method leads to thousands of deaths, economic losses, and significant population migration from the river's vicinity to safer locations. The state has been observing this for the past 30 years. And today also the story is the same.

The proper water storage and irrigation with little investment - The state can convert high rainfall into an advantage.

  • India consumes 10.6 billion litres of diesel each year for agriculture - mostly goes for watering.

  • Bihar contributes close to 10% to India's agriculture

  • This means Bihar utilizes 1.06 billion litres of diesel each year for agriculture.

  • Considering the cost per litre of Diesel = INR 90

  • Bihar spends 9000 Cr on Diesel each year.

  • Bihar's average rainfall in June, July, Aug, Sep = ~700 mm

  • This is equivalent to 65*10^3 Billion litres (700*94163000000)

  • India's withdrawel of Water for argiculture per year = 688 * 10^9 m^3

  • Bihar's consumption = 10% = 68.8*10^9 m^3

  • 1 m^3 = 1000 Liters

  • Necessary water for agriculture in Bihar = 1,00,00,00,000 * 68.8 = 68.8 * 10^3 billion Liters

The necessary water for agriculture in Bihar is equivalent to the 4 months of rainfall.

In the best-case scenario, Bihar can save 9000 Cr and solve a 50-year-old problem from the root.

It took a few hours for me to solve this problem, the title was - Bihar's Flood Problem.

Sorry, that was long, let's come back.

In short - progress is not inevitable. On this topic some other day. If you are interested to know more about progress as a subject- here is one essay by brilliant Patrick & Tyler founders of stripe and root of progress foundation website.

Let’s come back to the Pinduoduo that started their pitch as Costco + Disney. This was new to the ecosystem because companies used to pitch: Uber of X and Google of Y. The founder's choice of words Costco + Disney was a well-articulated representation of the vision that the founder wanted to create through Pinduoduo. The new leadership team's realisation of the negative contribution margin from its initial SKUs forced Pinduoduo to change the course of its business entirely. I have talked about this in the 2nd part of the essay.

Before we go further, we should understand the History of Pinduoduo, and why I have massive respect for its evolution.

a. Building a unique business model.

b. Blitzscalling the model to achieve critical mass.

c. building the knowledge base.

d. Applying Data Science to build the best recommendation engine.

e. The first principle approach even after being a massive company.

f. Building Right to Win Capabilities

Pinduoduo was founded by Colin Huang - in 2015. Colin was a Computer Science Graduate - he was instrumental in launching Google China. Computer Science majored with experience in running a Data Science team in Google US headquarter, and launching Google China was not enough. Before building Pinduoduo, Colin started a Gaming and eCommerce startup in 2007 but couldn’t find much success. But he observed a unique customer behaviour - users' motivation to share games link among their network to earn extra gaming points and play together.

Around 2015, there was a duopoly in China's eCommerce market between - Alibaba and JD. Alibaba has a strong foothold on the overall market. And JD found its Right to Win in the premium category. The fact is - Industry pundits were sure that China's eCommerce market would be the same. But the rule of Three has yet to come into action.

Colin’s connection with investors, impressive career profile, and unique insights from his previous startups leads the stone of social commerce. The impressive part was not that Colin’s invented a new type of online commerce. But the approach and low bandwidth wedge shocked everyone.

In simple words, Pinduoduo means Value for money and Entertainment combined, and therefore Costco + Disney. In terms of direct comparison, it was a contrary representation of Costco - membership-based and an asset-heavy model (Owning all of its warehouses). Pinduoduo was a marketplace model - an asset-light business. But at its core, Pinduoduo wanted to provide limited SKUs at the lowest cost to its consumers. Here is one key aspect of the business. Unlike the high purchasing power of the USA consumers, Pinduoduo was targeting consumers from tier-2 and below-tier cities. The consumer base had low purchasing power compared to China’s tier-1 consumers or USA consumers.

They solved this problem through product innovation - Group shopping. The concept-wise, Group shopping was not new. It is an internet version of an offline technique to generate more sales, of low-value products, used by FMCG companies for decades

The group (Team of Two) purchase price is 26.8 and the normal price is 39.9 in Chines representation of money.

The concept-wise not new, but the internet allowed the distribution of benefits among individual users.

We will understand this through an example:

Here if we are buying two items of the above product - we are getting one free. Let’s say, the price of one pcs is INR 200. On the purchase of two quantities - spending INR 400 - you are getting value worth INR 200, free. Great!

But this will not work among the low purchasing power consumers. They have limited money in their pocket and hence can’t spend an extra INR 200 to get the benefits of INR 200. They would like to use this INR 200 for other necessary products. I remember my dad used to break Dettol shop packs of 4 into single pcs and sell to customers. In fact, he used to make higher-margin after breaking that into individual pcs.

Let’s consider the scenario. Two consumers decided to purchase the pack of two by contributing INR 200 each and agreed to share the benefit equally. Here without any investment both the families save INR 100, pretty cool! :) But in the offline world coming to this conclusion by a group of consumers never took off. It can also be a problem of status.

But thanks to the internet, it was possible to replicate the same concept effectively. Instead of two customers coming physically to a conclusion to avail of the benefits - Pinduoduo invented Group purchase. In Pinduoduo’s group shopping, I don’t have to go and find other customers and talk to them. I had two options

  1. Either I can join an existing active group of the same product

  2. Or purchase by creating a group and inviting that group link among my network.

My order would only get confirmed once someone from my group or on the app a new user joined my created group. Cool no? The price of the same SKUs on PinDuoduo and other platforms was significantly lower. Let me share an example.

For an INR 400 product, the difference was INR 120 to 150 (Significant No?)

At the start of the journey, PDD was a marketplace. And it was a zero commission for Merchant - except 0.5% (That was used to cover the payment processing cost). We can understand the first principle approach.

For the initial a few years, Pinduoduo focused on bringing more users, creating more purchase groups, onboarding more merchants, creating strong AI engines, - Personalization and Recommendation - and scaling fast.

Group team purchase was truly instrumental in building strong AI engines. I can’t go into detail on the engine side - but this slide can help you understand more. The bottom line is that it was working.

Pinduoduo went public in 2018 and public investors rewarded high growth and a unique business model. And business kept its high growth for 6 quarters. But public market started questioning related to Path to profitability.

Pinduoduo tried the path to profitability through existing SKUs - it was sort of not possible with the existing SKUs (Why?). The SKUs that Pinduoduo was dealing with were a negative contribution margin category. And Cart feature was not possible with the group shopping. At this point, the team has a strong AI engine of 850 million Chinese - they had no interest in competing with Alibaba and JD. And they were honest with themself. Here let me add this: the PInduoduo team could have brought cognitive dissonance and argued - profit will come at scale. But instead, the team accepted the reality. Started leveraging its knowledge base, massive customer database, Personalization and Recommendation engine - and identified a category that could bring the path to profitability.

Also, India’s 94% traditional online retail is a negative contribution margin business if there is no added delivery cost.

The actual story of India’s Online commerce

Pinduoduo has been thoughtful with its every individual strategy. Let me give you one more example. During 2020, the peak of the Community Commerce in China - everyone was entering the bandwagon to grab the pie of the market. Companies were investing billions of dollars, price dumping, super high CPs incentives etc. In all these deep market fights where everyone thought - it is all about growth at all costs to capture the market. Pinduoduo was unmoved. They applied a completely different approach.

The Pinduoduo team was thoughtful and serious about Right to Win. And today, after 2 and half years. Most of the Community Commerce Startups are already shut down or acquired - Pinduoduo is enjoying all the benefits of being thoughtful.

If we look at the current setup, Pinduoduo makes peace with and planned the next 10 years removing cognitive dissonance and confronting the brutal truth (Sign of a Good to Great companies) - they were in a category whose contribution margin was negative. And the limitation of not having a Cart feature on the app forced them to look for a category and make investments in a category that can a. Have Positive Contribution Margin, and b. Bring profitability in the middle and long term. And therefore the company identified an industry that was overlooked for a long time. They used the Cashflow and a large sum of capital to invest in the industry - that can give them the right to win. But this might not be possible if Pinduoduo was simply delusional and ignored the fundamental reality of operating in a negative contribution margin category. The ability to confront brutal reality and desire for both And/Or - is a sign of Great company.

Today Pinduoduo is in a different league - they are not competing with Alibaba and JD. They have made smart investments in Logistics, Supply Chain, Cold storage, AI, Smart Farming etc. There is a lot that we can learn the ability to shift from Right to Build to Right to Scale to Right to Compete, and Right to Win.

Final Version completion: 19-06-2022 at 20:15 PM

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