Facebook and Instagram Shops are here, finally. Plus an interview with Chinese social commerce giant Pinduoduo

How new models of e-commerce can enable the Passion Economy

Before becoming a VC investor, I worked as a Product Manager at Shopkick, a Greylock- and KPCB-backed shopping app that rewarded users for walking into retail stores. Our product roadmap was oriented around the holy grail of combining content, community, and commerce: enabling people to browse content in the app, share, and shop. Not only do the three factors in tandem create a stickier, more engaging experience that improves with more users, but all three are core to how users naturally shop: 71% of users say they are more likely to purchase based on a social media referral.

In the US, dominant platforms typically have just two out of the three: Amazon is a wealth of commerce and content related to products, Tik Tok has community and content—but it’s rare to successfully integrate all three elements (they require very distinct DNA to do well!). Successful case studies include Glossier and Food52, while new startups like Supergreat for makeup and cosmetics reviews, Popshop for live video shopping, and Jumprope for how-to content are forging new models of social e-commerce.

Coming soon: live shopping features on Instagram and Facebook

A natural opportunity for social platforms that already serve as a hub for content and social connections—and which already spark purchase intent—is to allow users to seamlessly purchase. Facebook recently announced its intention to pursue that opportunity with Facebook Shops and Instagram Shops, which allow businesses to create storefronts that drive product discovery, all in a native shopping experience. In addition, Facebook is rolling out more features for Live Shopping: “Sellers, brands and creators will be able to tag products from their Facebook Shop or catalog before going live and those products will be shown at the bottom of the video so people can easily tap to learn more and purchase.”

Facebook has a long history of attempts to move into payments and commerce, and this latest iteration is happening amid an accelerated transition from offline sales to e-commerce and a softening ad market.

Many smart takes have been written about the announcement from a business strategy perspective, but I find it exciting for a few reasons from a consumer and creator angle:

• These features create new monetization paths for businesses and creators through selling products, providing another way to participate in the Passion Economy. Because brand sponsorships were mainly accessible to creators with large followings, the addition of e-commerce functionality should lower the barrier to earning income from the platform.

• As I’ve previously discussed, the importance of individual brands diminish on aggregator e-commerce platforms. It’s challenging to build a strong brand on Amazon because Amazon itself is the brand that consumers trust, and brands become secondary to signals like reviews and sort order. The antidote for brands is to leverage platforms that allow for accentuation of uniqueness and to build an emotional connection with consumers. For many brands, Facebook and Instagram already represent the discovery/storytelling piece of the e-commerce stack—and can enable brands to maintain more pricing power and resist commoditization.

• Facebook Shops and Instagram Shops represent a model of e-commerce that more closely aligns with consumers' natural shopping behavior, combining serendipitous discovery and social inspiration.

• Commercial activity is already happening on the platform, and these features are a more user-friendly way to support it. Today, the comments under many creators’ posts are peppered with commerce-related questions like, “Where is that dress from?” and users are left with the onus of finding the products elsewhere.

Shops is interesting also from the angle of growing and diversifying Facebook’s revenue sources: the company’s revenue today is dominated by advertising, with just 2% of ARPU coming from non-advertising sources (Q4 ’19 ARPU in US & Canada was $41.41; only $0.92 was from non-ads), and the same holds true across its entire family of apps. In contrast, there’s a ton of revenue to be unlocked through e-commerce: the average Amazon Prime subscriber, for instance, spends about $1,400 per year on the platform. Facebook is well-positioned to be a major e-commerce player given that it has already aggregated demand and supply (2.6B MAUs, 140M small businesses).

Shops represent a natural evolution for Facebook and Instagram, and in many ways, are a step towards catching up to what Chinese counterparts like Xiaohongshu and Taobao Live have been doing for years. One prominent example of a social e-commerce platform in China is Pinduoduo, which was founded in 2015, went public in 2018, and is now worth more than $87B as of June 2020. Pinduoduo’s success has been attributed to its social shopping model in which buyers leverage social platforms and receive discounts for team purchases, as well as its C2M (consumer-to-manufacturer) model in which manufacturers design and produce products based on user data, resulting in a more efficient development process. Pinduoduo is the 2nd largest online marketplace in China by number of users and number of orders, with 482M monthly active users, $145 billion in GMV, and $1.6B revenue in Q4 ’19.

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Interview with Ada Yang, International Corporate Affairs, Pinduoduo

I recently sat down with Ada Yang from Pinduoduo’s International Corporate Affairs team to get her perspectives on social e-commerce in the US and China and to delve into how Pinduoduo is an enabler of the Passion Economy. 

Here are some of my top takeaways from the interview:

• The Passion Economy is broader than what one might think, and encompasses all types of work where the worker/service/product isn’t just viewed as interchangeable and commoditized. I was surprised to learn that nearly 15% of Pinduoduo’s GMV comes from agricultural products (which I had never thought of as being part of the Passion Economy!). Farmers on PDD are livestreaming while tending to their crops, building relationships with customers who care about where their food comes from, and earning a living by selling to a broader audience of customers beyond their vicinity.

• By removing intermediaries and cutting out middlemen, creators can benefit from higher earnings and consumers can enjoy lower prices. Ada shares lots of great examples of creators leveraging the platform to build a brand and earn a living through e-commerce.

• While Facebook & IG Shops are long-awaited and much-needed, they only begin to scratch the surface for innovation in e-commerce. As we graduate beyond the intent-driven model of e-commerce—marked by table-like grids of products, filters, and search bars, there are opportunities to create new experiences that promote the sense of serendipity and fun of shopping in the real world. Indeed, as Ada points out below, Pinduoduo considers itself part e-commerce platform, part entertainment app, and part social network, meeting multi-faceted user needs through different features.

How has Pinduoduo been impacted by COVID-19? 

Like most businesses in China, Pinduoduo faced challenges during the peak of the COVID-19 outbreak earlier this year. We stepped up efforts to help the entire ecosystem of users, merchants, and our business partners. For instance, we helped factories that faced a hit to their export businesses to customize their products to sell to Chinese consumers. In February, we launched a “Help the Farmers” section on Pinduoduo to allow consumers to buy fresh produce directly from farmers in poverty-stricken areas.

Since May, we’ve recovered to pre-COVID levels with 65M average daily orders, up from an average of 50M in mid-March.

What are your thoughts on the recent news from Facebook regarding Shops?

Facebook’s latest foray into social e-commerce bears resemblance to what Pinduoduo has been pioneering in China. We are at the beginning of a mega trend in e-commerce where we leave behind the legacy model of “search, pay, and leave” and move toward a more interactive, social recommendations-based model, such as what Pinduoduo has pioneered. At Pinduoduo, we’ve designed the online shopping experience to mimic the offline experience of browsing, getting recommendations and feedback from friends, and interacting with shop staff.

I think with the introduction of Facebook and Instagram Shops, you will see a more direct example of how a recommendation model can be integrated with e-commerce.

How does Pinduoduo relate to the Passion Economy and the idea of monetizing individuality?

We have found that consumers like to know the stories and people behind the product. This appreciation for the work that goes into the making of a product often translates into higher sales. We believe in not just providing a platform for people to make a living, but also help them to build their own brands via connecting them to our 600M+ users.

We’re big on putting creators and makers in front of the camera and connecting them with consumers directly, rather than spotlighting influencers who have little connection to the products they’re hawking.

For example, a university undergraduate whose family has been in the tea business for generations was able to share that knowledge with Pinduoduo’s users through a livestream. He was able to build a following in the app and recently broke 1M RMB ($141K USD) in monthly sales, and in the process helped his family business undergo a digital transformation.

Another merchant, a demobilized soldier, was similarly able to help boost his family’s business through Pinduoduo by connecting with users through a livestream and explaining how to choose high-end jewelry. Artisans in Shandong province show how they go about crafting woks, shaping the kitchenware by hand with a mallet.

We’re continually launching new features to engage merchants and consumers. Duo Duo Live was launched in late 2019 and gives the stage to creators to showcase their work. Any content creator has the chance to broadcast their skills, from agricultural professors delivering online classes, to farmers on the latest growing techniques, to vineyard owners providing online wine appreciation classes.

What are some surprising examples of workers in the Passion Economy who are enabled by Pinduoduo?

Farmers are seldom seen or heard but have found their voice on Pinduoduo, which has become China’s largest agricultural e-commerce platform. Agricultural sales represent nearly 15% of total GMV on the platform.

In mid-April, potato farmers in Shandong province hosted a livestreaming session, welcoming more than 600,000 users to visit their farms, virtually. Users saw in real-time how farmers dug up potatoes and could purchase them through the platform. It’s akin to the direct connection and relationship you might build with producers at a farmers’ market, but because of Pinduoduo’s digital platform, customers can purchase from merchants all over the country and enable them to become much bigger businesses.

To date, Pinduoduo has held more than 100 livestreaming sessions in conjunction with more than 20 provinces in China to help local regions showcase their farm produce. The webcasts, many of which are helmed by farmers, have helped sell more than 350,000 metric tons of produce directly to consumers, By reducing the layers of intermediaries and their associated costs, Pinduoduo has helped raise farmers’ incomes while allowing users to enjoy lower prices and fresher produce. 

The cost of an onion in the supermarket (left) vs. Pinduoduo (right) are 5.9 RMB/500 grams and 8.6 RMB/2.5kg, respectively. Savings are achieved via bypassing intermediaries and selling direct-to-consumer, a journey that is chronicled in this YouTube video.

How does Pinduoduo differ from e-commerce platforms we’re familiar with in the US? 

Pinduoduo’s interactive e-commerce / social commerce model is designed to more closely mimic how people interact, exchange feedback, and share recommendations when they shop in real life.

Much of legacy e-commerce is based on the conventional search-based, transactional model. But this is increasingly not how most people prefer to shop, either online or offline. Aside from certain shopping use cases that are truly intent-based (e.g. you are out of toilet paper or pasta and need to replenish) much of shopping in the physical world is actually quite serendipitous. Imagine spotting a nice dress while passing by a shop window or telling a friend about a bargain. Pinduoduo integrates the social aspects of shopping, the interactivity of the process between friends and between shopper and sales assistant, into the user experience.

We have features like Duo Duo Orchard which inject fun into the shopping experience. It’s a game within the app where users can tend to virtual fruit trees and be rewarded with a free box of fruit from Pinduoduo once their virtual tree is fully grown. As of March 2020, 60M daily active users logged on to play the game.

Is Pinduoduo first and foremost an e-commerce platform, social network, or an entertainment app?

Pinduoduo is a co-mingled space between the virtual world and the physical world, where users can find the best value-for-money goods. Given that we have more than 600M users and 5M merchants interacting in this space, it’s less useful to put a label on it and say that we are one or the other.

Perhaps the best way to understand it is that we are here today precisely because we have created a space that meets the different and evolving needs of our community, whether that’s social interaction, commerce, or entertainment.

Why do you think US platforms lag behind in combining commerce, content, and community? 

There are several aspects to the development and innovation of China’s e-commerce industry that differ from other regions of the world:

1. Many of China’s internet users skipped the desktop internet era and went straight to mobile. With close to 900M people having access to the internet via mobile devices, this has created an important base condition for the proliferation of mobile e-commerce.

2. Mobile payments: China never really had a credit card culture and for most mobile users, cashless transactions took place via smartphone. WeChat Pay and AliPay, the two leading payment apps, together account for 93.3% market share for mobile payments.

3. The logistics industry is well-established, having developed alongside the e-commerce industry. Thanks to the e-commerce boom in China, particularly in the past decade, the logistics and express delivery market is speedy, reliable, and cost-efficient.

4. As the global manufacturing base for much of the world, China has earned the nickname as the “factory to the world.” This manufacturing capacity has provided the e-commerce industry with a wide selection of cost-efficient products that draw in consumers.

In my blog post, I wrote that Passion Economy platforms go beyond simply facilitating transactions and provide holistic tools to grow and operate a business. In what ways does Pinduoduo support merchants?

We very much believe in the proverb, “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.” 

Pinduoduo has launched various initiatives to empower our merchants and help them not only gain knowledge and skills, but also to leverage technology to improve their business efficiency. We launched Duo Duo University to help merchants, including farmers, learn how to sell directly on Pinduoduo and to train them in the basics of e-commerce, finance, business operations, and online marketing. 

Pinduoduo also provides consumer insights to merchants to help them better develop and price their products, plan their inventory, and schedule deliveries. This results in more sales and better products for users.

Farmers in Yunnan Province learn how to open and operate a store on Pinduoduo at the Duo Duo University.

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The way we shop in the offline world often blurs the distinctions between social hangout, entertainment, and actual commerce: think of weekends spent at stores with friends/family, asking for others’ opinions on items, and buying together. My former partner Connie Chan recently predicted, “The next Amazon competitor is likely going to look like a social or video app, not a shopping app.” I’m excited about a future where digital platforms reflect our offline behavior, empower creators to build a brand and earn a living, and integrate the trifecta of content, community, and commerce.