The Secret Behind Temu’s Rock-bottom Prices – The Diplomat

In just two years, the Chinese e-commerce platform Temu has emerged as a key contender in the global marketplace. In France, it ranked as the fifth most-visited online commerce platform in October 2024. In the United States, it is number three; globally it’s ranked second. At the heart of this remarkable achievement are its ultra-low prices, which many observers argue are made possible only through questionable practices, such as poor product quality, dumping, aggressive marketing, and deceptive trade tactics. 

Despite widespread skepticism over its long-term viability, Temu continues to invest heavily in advertising and market penetration, challenging an e-commerce sector where no new player has made a significant breakthrough in the past decade. While other online retailers, like AliExpress and the fashion giant Shein, have disrupted Western markets with similar cutthroat pricing strategies, only Temu has done what few believed possible: outperforming Amazon, the long-standing gold standard for competitive pricing.

From Factory to Global Store

Temu’s pricing policies are not revolutionary in China. The platform closely follows the business model of its parent company, Pinduoduo (or PDD Holdings). As Pinduoduo’s international arm, Temu represents China’s ambition to transition from being the world’s factory to becoming the world’s store. Its low prices are not a temporary launch tactic but a fundamental pillar of its long-term strategy.

Established in Boston in September 2022, Temu is an offshoot of the Chinese e-commerce giant Pinduoduo, founded in 2015 following the success of Pinhaohuo. Introduced by Colin Huang in April that year, Pinhaohuo used WeChat’s group-buying model to sell bulk orders of fresh fruit. Its rapid growth led to the creation of Pinduoduo, which disrupted China’s e-commerce market – long dominated by JD.com and Alibaba – before expanding globally through Temu. Today, Temu operates in 79 countries.

Reverse Auctions and Consigned Inventory: Driving Down Prices

At the heart of Temu’s pricing strategy is the Consumer-To-Manufacturer (C2M) model, introduced by Pinduoduo in March 2023. This approach utilizes reverse auctions, where Temu solicits bids from manufacturers, forcing suppliers to compete by offering the lowest possible prices. PDD Holdings sets final product prices and profit margins, and manufacturers deliver products directly to Pinduoduo’s warehouses in China, eliminating the need for Temu to purchase or hold stock. Instead, manufacturers bear storage costs and must take back any unsold items. Payments are typically made quarterly, further easing Temu’s financial burden. In essence, Pinduoduo operates a consigned inventory model.

Reverse auctions enable Temu to secure the lowest possible prices from the outset, with Pinduoduo’s logistics expertise allowing for rapid order consolidation, creating economies of scale that particularly benefit smaller manufacturers who, without Pinduoduo, would struggle to achieve such demand levels. Additionally, by pooling shipping logistics, Pinduoduo further reduces total product costs compared to direct manufacturer sales.

Creating a Buzz on Social Media

On the consumer side, Pinduoduo deploys its group-buying model to drive sales through social media trends. The name Pinduoduo roughly translates as “together, more and more.” This reflects its core strategy: the more buyers in a group purchase, the lower the price. This tactic has propelled Pinduoduo to become the world’s leading social commerce platform by user numbers, with 694 million users in China alone as of June 2024, according to XQuestMobile China.

Beyond group purchasing, Pinduoduo has leveraged gamified shopping features – widespread in Chinese business culture – to encourage impulse buying, a challenge for most online retailers.

The company entered the market by strategically targeting overlooked consumer segments, focusing on lower-income shoppers in smaller cities and rural areas, rather than competing for wealthier urban customers dominated by JD.com and Alibaba. This approach led to rapid growth and profitability by 2021. By 2023, Pinduoduo, including Temu, reported $34.879 billion in revenue and a net income of $8.267 billion.

A Commission-free Revenue Model

How does Pinduoduo generate revenue? By charging manufacturers for end-customer shipping logistics and marketing services such as product promotion, visibility, and platform placement. Logistics revenue accounts for 38 percent of the platform’s total earnings, while marketing services contribute 62 percent.

Unlike Amazon and other online marketplaces, Pinduoduo does not take commissions on sales. Instead, it operates as a logistics and marketing service provider, facilitating distribution for manufacturers and managing logistics flows.

This proven revenue framework is key to Pinduoduo’s highly competitive prices. Additionally, the company benefits from a favorable corporate tax rate in China – 15 percent compared to the standard 25 percent for traditional businesses. By leveraging bulk purchasing, optimized marketing and logistics, and a commission-free structure, Pinduoduo can sustain its low-cost pricing strategy – much like its Chinese e-commerce rival, Shein.

Favorable Customs Regulations

Temu is duplicating the Pinduoduo model abroad. Within this framework, Temu benefits from the U.S. customs tariffs (Section 321 of the Smoot-Hawley Tariff Act of 1930) that exempts goods valued under $800 from customs duties. The EU provides a similar exemption for items under 150 euros (Article 23 of Regulation 1186/2009). Most of Temu’s products fall below these thresholds, allowing them to be shipped duty-free.

In the United States, President Donald Trump ordered an end to the tariff exemption for low-value goods, but was forced to delay implementation of the change until “adequate systems are in place to fully and expediently process and collect tariff revenue.”

Within two years, Temu has onboarded over 200,000 retailers, shipped 4 million packages daily from 60 warehouses in China and attracted 467 million users worldwide by offering products 40 percent to 60 percent cheaper than Amazon. To rapidly grow its customer base and achieve self-sustaining critical mass in Europe and the United States, Temu is investing heavily in product subsidies.

Its online advertising strategy is equally aggressive, with substantial investments in social media ads on platforms like TikTok, Instagram, and Snapchat, as well as search engine ranking. While exact figures for these campaigns remain undisclosed, annual reports from PDD Holdings, show its marketing spending – including Temu’s – increased by 34 percent to approximately $11 billion in 2023, with an estimated $4 to 5 billion allocated to Temu alone.

Temu’s marketing strategy and its slogan, “Shop like a billionaire,” follow the playbook of major digital platforms, where sustained subsidies drive demand and fuel viral engagement. In such models, economies of scale are directly tied to consumer demand – a concept known as the demand-side economy of scope.

High Logistics Costs

Expanding the Pinduoduo model internationally comes with logistical challenges, particularly due to the higher shipping costs of air freight delivery from China, making the current international model vulnerable to potential losses.

To address this, Temu began transitioning to a new operating model in March 2024, gradually shifting from its initial fully managed approach to a semi-managed one. Under this model, Temu-represented merchants ship products via ocean freight to U.S. warehouses for local distribution.

Additionally, Temu has engaged the Chinese diaspora in the United States to operate “family warehouses” from their homes, including apartments and garages, providing storage, labeling, and shipping services at competitive rates. This strategy attracts smaller merchants who cannot afford large warehouse facilities. It also demonstrates how retailers are adapting to Temu’s evolving logistics model, with the platform primarily managing purchasing and pricing.

However, Temu has introduced a traditional model, where sellers set their own prices much like eBay, AliExpress, and Amazon. Already rolled out across several European countries, including the United Kingdom, Germany, Spain, and France, the model could challenge Temu’s ability to sustain its ultra-low prices.

If Temu transitions into a more conventional marketplace, how will its low-cost offerings stack up against Amazon? Temu has disrupted the online retail landscape, but can its aggressive pricing strategy stand the test of time?

This article was originally published on The Conversation. Read the original article.