Ex-Googler Colin Huang Zheng founded Pinduoduo in 2015 and currently acts as its CEO. While the Chinese market was dominated by the Alibaba ecosystem, Huang figured out that there was still a massive low-income suburban and rural consumer base that was looking for cheaper alternatives to Taobao.The Shanghai-based startup has become one of China’s largest e-commerce sites in just two years. And this meteoric rise has Alibaba concerned; as it is finally starting to pay more attention to China’s towns and villages, aware of the potential this massive new market offers.

Pinduoduo works on the concept of social buying or group buying, i.e. buying commodities as a group allows the users to enjoy better discounts than they would as an individual. The concept is quite similar to that of Groupon, but Pinduoduo takes social shopping further. The company lets the users share and invite their friends to buy a particular product via WeChat, and the price of the commodity gets lower in proportion to the size of the group buying it.

Products bought in groups can have discounts as high as 90%, with users buying mobile phones for $89 and a few packs of toilet paper for a single dollar. To encourage social media sharing, Pinduoduo even offers cash back incentives and free products.

Smaller merchants and manufacturers are also migrating to Pinduoduo for more exposure. They have been searching for alternative platforms, as Alibaba focuses on enticing wealthy shoppers by bringing big-name brands such to its TMall site. As an example, Pinduoduo partners with Chinese bathroom tissue maker Zhihu (also known as Botare). The company receives bulk orders from the site before shipping products directly from factories in Jiangsu province to Pinduoduo customers.

“The Pinduoduo model is based on social media and has a wider reach into a lot of new Internet citizens, Alibaba is trying to serve more high-end customers, but there are people who don’t want to pay for premium, but value.”
– Jason Ding, Partner at consultancy Brain and Co

Analysts say Pinduoduo is likely to sustain its growth as e-commerce continues to reach remoter areas by virtue of improving internet access. According to the China Internet Network Information Center, the country is home to 772 million online users as of 2017, suggesting an Internet penetration rate of 56% — far less than the 85% reported in the United States. Meanwhile, online commerce is expected to account for 25% of the country’s total retail sales by 2020, up from 17% in 2017, according to a PricewaterhouseCoopers report citing Goldman Sachs statistics.