Pinduoduo, the Chinese social ecommerce company that went listed in Nasdaq last week, is full of controversies.

Since its listing, a few investor & entrepreneur WeChat groups that Momentum Works moderates are full of chatter about what it really signifies. Have the social elite in tier-1 cities completely missed a shopping & social revolution, or is it just a massive scam?

The wider WeChat content ecosystem, in the meantime, is full of mockery. The main point here, many of the cheap items sold on Pinduoduo are fake.

Regardless, the listed Pinduoduo will have the pressure from the public market to monetise and eventually profit:

Pinduoduo’s public investors already started being demanding

One method the Pinduoduo is experimenting involves a bidding. The user contributes CNY 0.01 (US$0.0015) to bid for items from cherries to BMW cars.

Once the bidding finishes, a random bidder will be selected as the winner to receive the item.

CNY 0.01 for a BMW anyone?

By now you would probably have guessed that this is actually a lottery – a highly regulated activity in China.

In fact, this online lottery model is specifically called “一元夺宝“ – literally means “One Yuan treasure hunt”.

Google Translate has apparently watched too much Harrison Ford

A history of treasure hunt

The model goes like this: say an iPhone X (256GB edition) is selling at CNY 9688. On the 一元夺宝 website, each consumer can contribute CNY 1, until the total contribution hits CNY 9688. The system then draws a random winner to deliver the iPhone to.

So you do not feel the pain of paying CNY 1, especially when WeChat Pay & Alipay allow really smooth mobile payment.

Going back in time

However, this is obviously gambling – which the state has always been trying to curb. The sector, popular until 2016 with many players, was plagued with rampant scam. For example, iPhone X above will be listed at CNY 12688 instead of 9688. Many scams involve fake winners, with the operator pocketing the entire proceeds contributed by the users.

At its peak, there are hundreds of companies operating this model

Most players stopped operations once Alipay & WeChat cut their payment channel, quite possibly under the instruction of the government. The remaining players, such as US-listed Netease, also phased out the product when the government-affiliated media launched a vehement attack on the model.

A few companies we know went overseas, but with very limited success – mainly due to the fact that payment is not as smooth as it is in China.

Pinduoduo’s power

It is actually a surprise that Pinduoduo launched such a service at all – given the government’s obvious dislike of the model. That said, the fact that only CNY 0.01 is contributed from each user probably made people who keep losing (i.e. almost everyone) less likely to complain.

You might wonder, how many CNY0.01 would be needed for a CNY9688 iPhone, let alone a BMW?

Well, Pinduoduo claims to have more than 300 million active users – it only takes fewer than 10 million people to complete the iPhone bidding. That is less than 3.5% of the total user base.

Nobody would bother if they lose CNY0.01, especially the winning ticket is an BMW or an iPhone. That’s how people have been playing lottery anyway.

Cost is low, and I might win, why not?

In fact, nobody would even bother if they lose CNY0.01 100 times.

That’s the power of Pinduduo’s huge user base.

Only risk for the business model here is the government.

Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at hello@mworks.asia.

 

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Jianggan Li is the Founder & CEO of Momentum Works. Prior to founding Momentum Works, he co-founded Easy Taxi in Asia, and served as Managing Director of Foodpanda. The two years running Rocket Internet companies has given him a lifetime experience on supersonic implementation, and good camaraderie with entrepreneurs across the developing world. He holds a MBA from INSEAD (GMAT 770) and a degree in Computer Engineering from Nanyang Technological University. Unfortunately he never wrote a single line of code professionally - but in his first job he was in media, travelling extensively across Asia & Europe, speaking with Ministers & (occasionally) Prime Ministers. Apart from English and his native Mandarin, he is also fluent in French and conversational in Cantonese & Spanish. He tried to learn Latin (for three years) and Sanskrit (for six months) as well. In his (scarce) free time, he reads, travels, hikes and dives. Pyongyang, Tehran & Chisinau are among the interesting cities he has been to.