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Since its launch in September 2022 by China’s PDD Holdings, Temu has rapidly disrupted the e-commerce market, challenging incumbents such as Amazon, Shein, and Etsy. With a strategy centered on offering a vast array of low-priced products, Temu has positioned itself as the destination for budget-conscious shoppers, generating an estimated $9 billion in U.S. gross merchandise value last year and attracting over 100 million users. Temu’s meteoric rise is rooted in its highly effective marketing strategies, commitment to rock-bottom prices, and focus on tailoring user experiences

Massive Ad Spend and Social Shopping

At the core of Temu’s rapid expansion is its blitz marketing strategy. In 2023, PDD Holdings allocated nearly $2 billion to advertising on platforms like Meta and Google, propelling Temu to the top ranks of global advertisers and driving up ad costs for the industry. The company also maximized awareness by buying airtime during the Super Bowl, whose 30-second ads cost $7 million, and giving over $15 million in giveaways and coupons during the event.

Goldman Sachs reports that Temu’s marketing has undermined its unit economics, costing the company approximately $5 to acquire every $39 order in the U.S. during 2023. This spend marks a slight improvement from the staggering $16 spent to attract each $29 order in 2022. Despite this reduction, the company still suffers from a notable loss—averaging around $6 per order in the U.S. and even higher, at $18, for orders in other markets.

This seemingly reckless spending is fueled by a strategy that hinges on data collection. Temu needs vast amounts of data to analyze user spending habits so it can refine its algorithms, identify optimal pricing, and forecast inventory needs.

More importantly, enticing users to the platform initiates a snowball effect; repeat visits or app referrals can trigger discounts and coupons that encourage further purchases. This gamification of marketing campaigns not only increases user engagement but also provides Temu with valuable psychographic and demographic data to further tailor offerings and drive lifetime value (LTV).

Temu’s app interface is also designed to fuel demand and optimize engagement. Prominent promotions, short videos, and product layouts keep users scrolling to uncover new merchandizes and find the best deals. Product reviews are also organized like comments on social media sites, giving it a feeling of having friends review the products.

Temu’s User Interface

High Efficiency and Hard Bargains for Ultra-Low Prices

Temu distinguishes itself by offering a selection of merchandise comparable to Amazon’s but at prices 60% to 70% lower. These large discounts stem from aggressive supplier negotiations and a highly efficient logistics system.

The platform adopts a direct-to-consumer approach, carving out new channels for Chinese manufacturers to reach North American buyers directly. This eliminates numerous intermediary stages and associated markups in the traditional supply chain. To compensate for the lower price points, manufacturers benefit from higher sales volumes.

Moreover, Temu diverges from the conventional e-commerce model of sourcing from a limited pool of suppliers. Instead, it consolidates consumer demand and distributes production across a multitude of smaller vendors, who are expected to fulfill orders quickly. Any surplus inventory is returned to the suppliers at their own cost, thus minimizing Temu’s inventory risk and enhancing its agility to meet fluctuating demand.

Temu’s profit strategy also deviates slightly from that of standard e-commerce or marketplace entities. The company doesn’t rely on sales commissions but instead realizes profits through the revaluation of goods during currency conversion from the Chinese yuan to the U.S. dollar.

Source: eMarketer

Sustainability of Temu’s Growth Model

Despite Temu’s impressive market penetration and growth, questions arise about the long-term sustainability of its business model. The aggressive pricing strategy, while effective in capturing market share, has raised concerns about the potential for diminishing returns and unit economics. The reliance on substantial advertising spend to drive traffic and conversions may not be sustainable without equally strong gains in customer retention and lifetime value.

Logistics also pose a challenge for Temu. With most products shipped from China and taking over 10 days to reach U.S. consumers, Temu’s delivery times are considerably longer compared to Amazon’s two-day delivery promise. Reducing this gap is crucial as as fast shipping has become the norm.

Another critical area for Temu is building consumer trust. Reports of low and inconsistent product quality have surfaced among users, particularly given the platform’s focus on low-cost items. While this may be less of a concern for inexpensive products, it could deter consumers from purchasing higher-priced items in the future, potentially limiting Temu’s market scope and growth trajectory.

It is still uncertain if Temu can develop a lasting business model, but its audacious debut in the U.S. market has clearly demonstrated to existing retailers the new potentials in commerce. Temu’s strong push into the market, smart use of data, and efficient handling of its worldwide network to keep prices low offer fresh insights into the future of retail and how the industry might evolve in the years to come.