The Real Reason Temu Is So Cheap

Thanks to a social media referral campaign, giveaways, and a prime Super Bowl ad Temu has become the most downloaded free app in both the Apple App Store and Google Play Store. Despite being barely over a year old, the company is already outselling older brands like Shein in the U.S., with an eye toward taking on larger retailers like Amazon. At first glance, Temu's business operates similarly to Amazon's: It's a third-party marketplace. Increasingly, however, the company's policies are making third-party sellers in China less willing to work with it.

It's also important to mention that customers here in the U.S. are less than pleased with their Temu experience. As of October 2023, Temu boasts only a C+ BBB rating with just over 2.5 stars (out of five). Complaints have included everything from missing packages to incorrect orders to a lack of customer service. Temu is also facing multiple copyright infringement lawsuits in addition to claims that the company pressures its supposedly independent third-party sellers to lower their product prices in order to undercut rival businesses (like Amazon). While the bargain prices might be tempting for some, potential Temu shoppers should be wary of getting more than they bargained for with this app.

How Temu keeps its prices so low

Although Temu technically has a Boston-based address, the company is operated by and runs exactly like its China-based sister app, Pinduoduo. They both share the same model of selling low-quality products to customers by shipping directly from Chinese factories and warehouses within the company's supply chain. This direct-to-consumer model allows Temu to cut out middlemen like wholesalers, distributors, and retailers who do ultimately inflate the cost of goods (but also provide some measure of customer service and quality control). Critically, this strategy also allows Temu to bypass tariffs and other regulatory requirements that would cost the company more money. 

It's important to mention that Temu is not actually profitable. In its bid to expand market share and create a customer base, the company loses an average of $30 per order. In fact, it's estimated that the company is losing between $588 million to $954 million per year. This tactic is intended to replicate the success of the Pinduoduo app in China, which followed the same strategy. Another element of Temu's plan is to flood the market with advertising, which anyone on social media today could attest to. In the U.S. alone Temu spent $1.4 billion on advertising in 2023 and intends to go up to $4.3 billion in 2024. A major part of Temu's advertising strategy involves the social media sharing of existing shoppers. Customers are promised app credits in exchange for convincing their friends and family to purchase from the app (which sounds suspiciously similar to some of the signs of a pyramid scheme).

The problem with Pinduoduo

Pinduoduo is one of the largest online shopping platforms in China, and they launched Temu in 2022 as a way to help the company reach the American market. However, the company has faced troubling claims that it mistreats employees, claims at issue in the 2021 deaths of multiple employees. While abusive labor laws throughout China have created generally unhealthy work cultures, Pinduoduo is a particularly bad example.

Another concerning business practice of Pinduoduo has to do with the predatory nature of their data collection. Early in 2023, the Pinduoduo app was actually blocked from the Google Play Store after malicious software was discovered in some versions. The malware was found to not only collect personal user data but also bypass cell phone security settings in order to monitor user behavior on other apps including reading private messages, texts, and notifications. Sources have claimed that Pinduoduo intentionally crafted software that specifically targeted weaknesses in Android operating systems (since ¾ of smartphone users in China use Android systems).

In many ways, Temu is simply the international version of Pinduoduo. So while Pinduoduo and Temu are technically sister companies and apps (both under the umbrella of PDD Holdings), they have quite a bit in common. Knowing that the basis of Temu's business is modeled on the app successes of a company as problematic as Pinduoduo should give potential consumers pause. The bad business practices of Pinduoduo, and PDD Holdings in general, do not bode well for the future of Temu.