The e-commerce space is dominated by established technology companies like Amazon, which has become a household name in North America, South America, and Europe, and has expanded eastward, and the Alibaba Group, which has a strong presence in Asia and the Pacific and owns other subsidiaries and platforms or brands like AliExpress, Lazada, and Taobao. However, starting in 2022, Temu has demonstrated how it can challenge dominant industry incumbents head-on similar to how Shein has challenged fast-fashion retailers like Zara and H&M.
Key Elements in the Business Strategy of Temu: Lessons for New Entrants
Temu is a cross-border online marketplace launched in July 2022. It is owned and operated by the Chinese multinational company PDD Holdings. Note that this company also owns the online retail platform Pinduoduo. However, while Pinduoduo has succeeded in China, depending solely on the domestic market has limitations.
PDD Holdings recognized these limitations and launched Temu to expand and diversify its revenue streams further, leverage existing resources, and compete with global electronic commerce giants like Amazon and even Shein. This proved to be a good business strategy since the platform experienced explosive growth and sales.
Temu reached USD 20 billion in gross merchandise value or GMV in the first half of 2024. Note that its GMV in the previous year was at USD 18 billion. It also ranked second behind Amazon in global website traffic in 2023 with about 467 million independent customer visits. The platform is now available in 80 countries.
1. Differentiated Model Strategy: Business-to-Consumer Business Model Focusing on Cross-Border E-Commerce and Managed Marketplace
A surface-level look at Temu would suggest that its business model is similar to Amazon or other e-commerce platforms like AliExpress and Shopee. However, upon closer inspection, its model is actually unique because it not only focuses on cross-border e-commerce but also on a managed marketplace where it handles several processes.
Platforms like Amazon and AliExpress specifically let sellers handle most processes like pricing and listings. Amazon also uses either central fulfillment or a seller-fulfilled logistics depending on the situation. Both Alibaba and AliExpress use seller-fulfilled logistics similar to other platforms and marketplaces such as Lazada and Shopee.
Temu has a different approach. Its business-to-consumer model is essentially a factor-to-consumer model because it allows consumers around the world to buy products directly from manufacturers and sellers. What makes this model unique is that the marketplace is managed. This means that it handles pricing, listing, logistics, and customer service.
Nevertheless, with its managed marketplace, the platform curates and manages the supply chain far more than Amazon or AliExpress. It uses artificial intelligence and big data analytics to forecast demand and optimize inventory. This allows Temu to control prices and set them low and provide a more uniform and predictable user experience.
2. Aggressive Promotion Strategy: Loss Leadership, Deep Discounts, Gamified Rewards Program, and Digital and Traditional Marketing
Temu has attracted millions of first-time consumers in Asia and the Pacific and critical markets like North America, the European Union, and the United Kingdom. The platform has also retained a sizeable portion of these first-timers based on how its website and app continue to generate not only new but also return usage and traffic or visits.
A critical aspect of the business strategy of Temu and one of the reasons why it has become one of the most popular e-commerce platforms today is its aggressive promotions. It subsidizes pricing below costs, provides discounted bundles, and offers other discount vouchers. These loss leaders attract first-time users and trigger impulse purchases.
The aforementioned illustrates a general penetration pricing strategy that is also modified to include other pricing strategies like promotional pricing, price bundling, and loss leader pricing. These strategies are often used by retailers to increase short-term sales during slumps, encourage trials or repeat purchases, and clear out excess inventory.
It is also worth mentioning that the aggressive approach to pricing is complemented by equally aggressive digital and traditional marketing efforts. Temu has purchased ad spots in the Super Bowl in 2023 and 2024 and has run consistent digital advertising campaigns using social media, search engines, mobile, and influencer marketing.
Temu has gamified its rewards program. It has turned user acquisition into a social game in which users can invite their friends to get free items or credits and work through a tiered reward system in which their discounts get bigger the more friends they refer. In-platform tactics also reward and encourage repeat visits and product browsing.
3. Localized Expansion Strategy: Internationalization For Global Expansion with Localized Tactics and Key Centralized Integration
PDD Holding is a Chinese company but it is registered in the Cayman Islands and has a principal office addressed in Dublin. Some large Chinese tech companies register in the Cayman Islands to attract international investors and reduce their tax liabilities. Some also register in a European city for market compliance and operation optimization.
Nevertheless, in the overall global and default market, PDD Holdings oversees Temu. However, in the United States market, it is owned and operated by Whaleco, a subsidiary of PDD Holdings registered in Delaware. This helps in navigating through the American regulatory environment and optimizing dedicated operations in the American market.
The aforementioned represents the general global expansion strategy of Temu. However, when it comes to specific operational considerations, it approaches internationalization through some local adaptations. These include translating content and using local currency, using a specific payment method, and following local consumer trends.
Remember that its logistics is still centralized despite its widespread global operations. It keeps an integrated supply chain through direct linkage with manufacturers while handling logistics in its various fulfillment centers around the world. This enables global scaling while maintaining control over pricing and other aspects of promotions.
4. Maximized Technology Strategy: Leveraging Data Analytics and Artificial Intelligence and Exploiting the Potentials of Mobile Application
Temu is technology-driven. This is the default for all e-commerce platforms. Moreover, to compete against e-commerce behemoths like Amazon and Alibaba, it has maximized various technologies to create a technology stack that will help it build and maintain a competitive advantage. Tech is a critical element of the business strategy of Temu.
It has inherited the technological approaches of PDD Holdings. These include leveraging big data analytics and artificial intelligence to predict which products will sell based on user behavior and global trends, make real-time price adjustments to stay competitive, and track the performance of factories and fulfillment to reduce delays.
One of the purposes of the aforesaid artificial intelligence strategy of Temu is to implement lean inventory management and minimize the risk in overproduction or underselling. Another is to enable personalized product recommendations by tracking user behavior and implement target digital ad campaigns through automated split or bucket testing.
The platform also has a mobile-first platform design. This means that the online storefront was designed and is maintained not as a website but as a mobile application. It is optimized for mobile shopping experience and is designed to appeal to mobile-native consumers. The user interface also has a product discovery design similar to TikTok.
Another interesting aspect of its mobile-first design is that the user interface and user experience are designed to drive impulse. The platform focuses on low-ticker or inexpensive items that are fun to purchase. These include products under USD 20.00 that feel like bargains, pet items, fashion accessories, and bundled and discounted products.
Takeaways from the Business Strategy of Temu
Temu entered the global e-commerce market in 2022 and has quickly challenged dominant players like Amazon and AliExpress. It has followed a playbook similar to Shein in disrupting established industries by undercutting prices and optimizing operations. Nevertheless, unlike Amazon or most e-commerce platforms, it operates a managed marketplace on top of its factory-to-consumer model in which it handles pricing, listings, logistics, and after-sales. This approach allows tighter control over pricing and the entire value chain.
Moreover, to attract first-time consumers, it uses an aggressive marketing strategy that includes a penetration pricing strategy, aggressive multi-channel advertising, gamified and rewarded user referral programs, and other complementary sales promotion strategies. This aggressiveness is the reason why it has managed to become one of the top-visited websites and mobile apps in 2023 and how it has succeeded in competing against industry incumbents like Amazon and Alibaba despite being a new player in a competitive market.
The global expansion or internationalization is handled with localization in mind. This is another important aspect of the overall business strategy of Temu. It localizes content for each market. The business structure also factors in possible legal or regulatory concerns and operational or process efficiencies. This represents a hybrid model of central control and local adaptation that sets it apart from its more established competitors. The platform is a marketplace that connects consumers with sellers but it regulates this connection.
Another reason behind its success is its technology strategy. It is a tech-based platform that uses the most recent and relevant technology stack available. These include big data analytics, artificial intelligence, and mobile-centered design or mobile-optimized user interface and user experience. The entire technology stack helps in managing a lean inventory, automating control over pricing and product listings, running and testing marketing campaigns, and enriching further the digital shopping experience of users.