Everybody wants a good deal. While most retailers can offer discounts and reasonable prices, Temu became a disruptor on the scene because of its ability to offer unbelievable prices continuously.
Bargain hunters can’t get enough of the retail platform. Still, other established online retailers and more quality-conscious customers can’t stop wondering how Temu can offer deals at a fraction of their prices while staying in business.
Do they need to improve quality, or are they just so good at finding the perfect suppliers?
An in-depth study of Temu’s pricing strategy will provide answers and is an advantage for e-commerce retailers. The lessons can help you skyrocket your profit via cost-saving hacks and will help you remain relevant as a competitor.
Join us as we explore the secrets – business model, cost-saving tactics – behind Temu’s bargain prices.
Temu’s Business Model
Temu’s ability to offer such low costs is dependent on a unique business model that differs significantly from that of the major e-commerce giants. Let’s explore these key differences:
1. Direct-to-Consumer (D2C) Model: Cutting Out the Middleman
In a typical e-commerce model, the wholesalers and distributors often act as intermediaries, connecting manufacturers with retailers. That means they add their profit to the manufacturer’s cost.
Before the product gets to the retailer, the original cost of the product has almost doubled in price. Temu eliminates this by adopting a direct-to-consumer model. This means they get their products directly from manufacturers, eliminating the markups and achieving lower costs.
That’s not all, however. They go further than just cutting out intermediaries by choosing only suppliers who can offer quality at the cheapest cost. This means they cut out suppliers who have higher prices in favor of those who have lower prices.
While this could affect the quality the supplier can use, Temu safeguards against this by its policy of charging the supplier five times the cost price if any product is returned due to quality complaints.
2. Focus on Efficiency: Data Drives Decisions
Most of the time, the success of a store is not dependent on how much money they spend but on whether the money is profitable. That’s another thing Temu gets right in its business model.
Temu prioritizes knowing its customers so well that they can predict what sells out and what incentives get the buyer to make purchases. They do this by investing in data-gathering (via ads and other marketing anchors) and analyzing the data to forecast and predict their customer needs accurately.
This data-focused approach helps them focus their marketing, minimizing ad spend and maximizing results.
3. Supplier Pressure and China’s Vast Labour Landscape
Temu does not always present the best option for suppliers looking to make large profits. In fact, because of the high purchase rate on the platform, the primary advantage for a supplier is the turnover instead of the profit margin.
This is because Temu aggressively negotiates with its suppliers to secure the lowest possible prices. We are yet to see if this will be sustainable in the long run.
However, Temu’s policy of a higher cost on the supplier in the event of quality complaints and the considerable fact of lower labor costs in China due to its large population ensures that suppliers can make some form of profit despite the low prices while retaining quality.
4. The Power of Unbranded Products
Temu caters to customers who are looking for a cost-efficient product. That is, these customers do not care what brand it is as long as it serves the purpose they require it for.
For these customers, Temu offers a large selection of unbranded products that are cheaper than their branded counterparts.
Imagine being able to get a product without having to pay for the brand name – although one cannot get the assurance that comes with a recognized brand, young and price-conscious customers are willing to go for it.
5. Bypassing Custom Fees
De minimis is a law that exempts imported items below $800 from taxes and customs duties. Temu reportedly takes advantage of this exception by shipping products to their customers in the U.S. without additional shipping and import costs.
This allows them to continually offer low costs and even free shipping in some cases.
6. Heavy Marketing and Incentives
Temu tells its customers to shop like a billionaire. They never let up on pushing the message that they have provided a way to shop for a vast array of products with less money.
Their heavy investment in social media, influential marketing, and personalized ads has made it commonplace to see a Temu ad pop up after you make a search for a black dress or a replacement for your cooking spoons. And they don’t stop there.
They also make purchases fun for their target audience – customers between 25 and 44- by offering discounts and other incentives through a spin of the wheel game on their app and other promotion strategies.
They pop up wherever you turn, offer low costs, and present stimulating incentives – it is no wonder their website visits are presently at 358.2 million visitors.
7. A willingness to take Losses
Perhaps the most significant reason why Temu can sell products so cheaply is that its goal is to secure a large percentage of the U.S. market instead of making profits – at least for now.
Goldman Sachs estimated that the company loses about $6 on every order. However, this claim is unverified as Temu does not make its books public as a privately held company.
Can Your E-commerce Store Thrive With Temu as a Competitor?
Although Temu’s business model is attractive to many customers, your e-commerce store can still stand out in the market by staying true to its unique business model and taking a few lessons from Temu’s business model.
Here are some tips.
1. Define WHY you are in the market.
Temu’s mission is to own a large share of the international market, and they identified low prices as the perfect way to do so. Even if they make any loss, with their overall goal being met, they still succeed.
So, if you will stand out from other competitors in your market, define clearly why you are in that market. Are you there solely to make high-margin profits? Are you there to establish a brand that will be recognized and respected down the line? Are you there to get quick turnovers and incur low costs?
Define why. A clear definition helps you determine the perfect business model for your business. For example, if you intend to build a recognized brand name, you would make provisions for losses that might occur in a bid to satisfy the customer and communicate that you are a brand that can be relied upon.
2. Explore Direct Sourcing
Dropshipping outfits offer the privilege of getting your products directly from a source. This helps you cut costs considerably and eliminates warehousing fees and other expenses incurred in buying from a wholesaler or distributor and keeping stock.
3. Take Data Seriously
Customer satisfaction is not random. It is impossible to know your customer’s preferences without adequately researching and collating the data.
Invest in sales tools, trend prediction, and customer preference analysis software. A data-driven approach helps you target your marketing accurately and anticipate your customer’s needs.
4. Focus on Value
It is vital to build a brand that competes based on its value, not just its price. As much as customers love cheaper products, they are also looking for a brand that can assure them of quality.
Ensure you position your online store as consistent and reliable, invest in quality branding and packaging, and also cultivate customer loyalty through excellent customer service. The goal is to build trust and have loyal customers.
5. Offer Fast Shipping
Customers value fast delivery services, and you have an edge over Temu here if you invest in faster shipping options. Consider partnering with fulfillment centers that are close to your target market.
Remember that preferred fulfillment centers have a solid and verifiable reputation, as it is always advisable to satisfy your customers.
6. Invest in Marketing and Customer Nurturing
One of the strategies that gives Temu an edge is its heavy investment in marketing. Apart from their persistent ads, they also took out an ad during the Super Bowl, drawing the attention of millions of Americans.
Marketing is the first step in getting and keeping your customer’s attention. Take out social media ads, study analytics, and rinse and repeat, fine-tuning the ads according to data. You can also use influencer marketing to introduce your product to a broader and newer market. The key here is never to stop talking about your brand.
Also, ensure that you follow up with your customers. Create email newsletters and keep them updated on all your offerings.
7. Offer Incentives, Promos and Loyalty Programs
Temu’s gamified incentives are another reason why they are so popular. Discounts and other bonuses are given to customers when they share their app on their social media platforms. This means when they get one customer, they can get at least ten more through that same channel.
Customers respond to promos. Offer loyalty programs, seasonal discounts, referral bonuses, and even gamified incentives. Make it fun, too.
Final Thoughts
Without a doubt, Temu has changed the e-commerce scene. Nonetheless, e-commerce businesses can adapt and thrive if they understand their business model and utilize cost-saving techniques.
E-commerce businesses can still successfully carve out a position in the market and compete with Temu by accepting change, adjusting their tactics, and putting the needs of their customers first.
