Why is Temu So Cheap? How Does Temu Work?

Introduction

Temu, the e-commerce platform owned by PDD Holdings, has gained significant popularity in the US and other markets for its remarkably low prices. The question on many consumers' minds is: how is Temu able to offer such affordable products? In this article, we delve into the factors contributing to Temu's low prices and explore how its operational model works.

Amazon vs Temu, How are They Different?

As Temu enters the US market, it will directly compete with giants like Amazon and Walmart. One of Temu's biggest advantages may be its pricing, which is significantly cheaper compared to Amazon.

Temu's pricing is related to its operating model, which differs from Amazon in certain aspects. Temu's suppliers are different from third-party sellers on Amazon. Amazon sellers have pricing autonomy, while Temu's suppliers do not. For instance, if the cost of a pair of jeans is $10, a seller on Amazon can set the price at $20 or $60. When the seller sells at $20, they make a gross profit of $10; when they sell at $60, they make a gross profit of $50. However, a seller selling jeans for $10 on Temu, assuming they negotiated a price of $12 with Temu, would have a fixed gross profit of $2. Regardless of how Temu prices the product, it has no bearing on the seller. To some extent, Temu's low selling price is obtained by squeezing the profits of suppliers. Amazon also allows sellers to dropshipping from Alibaba, here is the guide for Alibaba Amazon dropshipping.

Suppose there are 2000 sellers selling jeans on Amazon, they set prices based on product features and market demand. Among these sellers, about 10% make significant profits, 20% may make satisfactory profits, 20% break even, and 50% lose money.

How Does Temu Work?

The model of Temu is as follows: suppose 2000 sellers apply to Temu, only about 10% may pass, these 100 sellers will send samples to Temu for a second round of screening, Temu selects the lowest-priced product among similar products, and ultimately only about 20 suppliers may be selected. These 20 suppliers must ensure that their product prices are the lowest. Finally, sellers can offer jeans for $10 to Temu at a price of $10.50, and Temu can sell to consumers at $12. This is much lower than the minimum price of $20 on Amazon. Temu's 20 suppliers must always maintain the lowest prices, and once new factories enter and can offer similar products at lower prices, Temu will ditch higher-priced suppliers. If the product is taken down, Temu will not lose much because Temu only pays suppliers when the product is sold.

Unlike buying bulk items for resale, as a supplier, survival on Temu requires minimizing costs. Therefore, Temu's sellers are different from Amazon sellers. Amazon sellers need to be good at marketing, while Temu sellers need to be proficient in supply chain management and product manufacturing. These sellers cooperating with Temu must minimize costs to the maximum extent. With the development of Temu, many factories will engage in fierce competition, and the few winners who survive will gain all the profits in the market. Why is Temu's price so low, and how is the product quality? The requirement for suppliers is that when consumers request returns or exchanges, if it is not a product quality issue, Temu will bear all the losses. However, if it is a quality issue, the supplier will be fined five times the product cost. So, from this perspective, Temu's sellers must ensure both the lowest product price and good quality.

Why Is Temu So Cheap?

1. Direct-to-Consumer Model
   Temu operates on a direct-to-consumer model, cutting out intermediaries like wholesalers and distributors. By connecting customers directly with manufacturers, Temu eliminates additional costs associated with middlemen. This streamlined approach significantly reduces expenses, allowing Temu to offer products at lower prices than traditional retailers.
2. Leveraging China's Manufacturing Capabilities
   Most of Temu's suppliers are based in China, leveraging the country's vast manufacturing capabilities. Through its parent company's software, Temu matches China's manufacturing capacity with consumer demand. This optimization of production ensures efficient use of resources and minimizes costs, contributing to Temu's ability to offer competitive prices.
3. Supply Chain Optimization
   Temu employs innovative supply chain optimization techniques, including data analysis and demand prediction. By accurately forecasting demand and optimizing logistics, Temu enhances efficiencies throughout the supply chain. This results in cost savings that are passed on to customers, further driving down prices.
4. Exploitation of the De Minimis Exception
   Temu reportedly takes advantage of the de minimis exception, which allows shipments below $800 to enter the US without inspection or taxation. By shipping products directly to US customers and bypassing customs scrutiny, Temu reduces shipping and import costs, enabling lower retail prices.
5. Low Manufacturing Costs
   Temu pressures its manufacturers to lower their prices even further to meet the demands of cost-conscious consumers. This often results in manufacturers operating on slim profit margins, with Temu absorbing the majority of international shipping costs. By driving down manufacturing costs, Temu maintains its competitive pricing strategy.
6. Knockoff Products
   Many of the products sold on Temu are unbranded "dupes" or knockoffs of popular, branded items. Mass production of these knockoff products in China contributes to Temu's ability to offer extremely low prices. While these products may lack the branding and quality standards of their original counterparts, they appeal to budget-conscious shoppers seeking affordable alternatives.

Conclusion

Temu's ability to offer products at exceptionally low prices stems from a combination of factors, including its direct-to-consumer model, leveraging China's manufacturing capabilities, supply chain optimization, exploitation of the de minimis exception, pressure on manufacturers to reduce costs, and the availability of knockoff products. Its pricing strategy and operational model will undoubtedly influence the future of online retail.