Temu, one of the fastest-growing online marketplaces in recent years, captures more than 292 million hearts monthly since its launch in the U.S. in 2022. With its vast range of products and low prices, Temu encourages shoppers to “shop like a billionaire”. But what lies behind the platform and its low prices?
Understanding Temu’s Business Model
Temu uses a business model called Consumer-to-Manufacturer (C2M), which connects consumers directly to manufacturers. This removes intermediaries such as traditional retailers, allowing them to offer lower prices for their products. Instead of managing complicated inventory like other online marketplaces, as for example Amazon, Temu works with manufacturers who produce goods based on customer demand. In other words: Temu offers a certain volume of products and then reorders or replaces them if a customer demands for it.
The platform focuses on a so-called customer-centric approach, making customer satisfaction the number one priority. By that, Temu does not just sell products, it also tries to make the shopping experience even more rewarding. Features like group- buying-, and gamified experiences, help make people spend more time on the platform as usual. And indeed, research has shown that users spend twice as much of time on Temu compared to their well-established competitor Amazon. While its 11 minutes for an average Amazon shopper, its 22 minutes for a Temu shopper. However, a longer time spent on a platform does not necessarily lead to increased sales. Instead, these features appear to be part of a strategy to enhance engagement, and customer loyalty and, in the end, brand building.
Temu’s growth is also driven by its advertising strategy. For example, in 2023, Temu spent an estimated $21 million on three out of five Super Bowl ads. The use of the chance to stream it on one of the most watched sports events and by also offering additional $15 million in giveaways and coupons, Temu showed how committed they are to building brand awareness and reach even more people with its deals. The ads alone lead to an increase of 47% in downloads of the mobile app on the day they were aired.
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Figure 1 Superbowl Temu Ad 2023; Source: Youtube
Lastly, Temu has benefited from the U.S. De Minimis rule, which allows packages valued under $800 to enter the country without additional taxes for consumers shopping internationally. This has contributed to maintaining low prices and facilitating a shopping experience comparable to visiting a local mall.
The Global Supply Chain
What sets Temu apart from the other already well-established online marketplaces, is its unconventional approach to logistics. The company primarily operates without owning its own warehouses, even though it has begun utilizing third-party fulfillment centers in key markets such as in the U.S., Europe and more. This process allows products to be shipped straight from the manufacturers to the doorstep, significantly lowering logistic costs, and passing a part of the savings on the shoppers in the form of lower prices. Sounds good for now, right?
While this shipping approach helps Temu to keep prices low, it still has one big hitch: long delivery times. Since most products are shipped internationally, they often travel by cargo ship or plane. As a result, deliveries can take up to several weeks, sometimes even longer during peak shopping seasons like Christmas or Black Friday.
Critical Factors to Address
With Temu’s rapid growth, there are also some critical factors that are important to be addressed. The platforms focus on affordability often comes at the cost of poor quality, with lots of reports of items being cheaply made or even containing harmful materials. In one case, a UK toxicology lab found dangerously high levels of lead in a tested necklace, ten times higher than actually allowed, making it a danger to people who decided to buy and wear it.
Temu’s platform design has been also criticized for using manipulative tactics like gambling for discounts, and “dark patterns” that pressure customers to make quicker purchases. Temu’s parent company Pinduoduo also known as PDD, has even faced allegations of extreme working conditions, raising serious concerns for Temu’s ethical promises stated on their website.
Copyright concerns have also been raised, as there have been accusations that designs of luxury brands have been copied. In addition, there are serious concerns about poor data privacy standards, which could leave customer information at risk of misuse.
In Germany, the consumer advice center Verbraucherzentrale, which is a network of nonprofit organizations that provide legal counsel especially interesting in consumer rights, even filed an admonition for some of the mentioned critic points above, citing serious concerns for consumers using the platform to get bargains from.
Outlook on the future
Looking into the future, Temu can potentially face several challenges very soon. Shifting trade dynamics and tariffs imposed by the U.S. government will significantly impact costs and demand, especially among customers who have come to expect low prices.
The tariffs, particularly from the U.S. on Chinese goods, are expected to increase with additional 10% on any tariff yet to come, which will most definitely result in a decrease in demand of these once cheap products. People will be reassessing, whether it is really worth it to order from Temu, or instead go to the Dollar Shop in town.
In addition to tariffs, the US Senate is considering the De Minimis Amendment. As mentioned above, this currently allows packages worth up to $800 per person, per day to enter the U.S. without paying additional import taxes. If the bill is passed, it could hit Temu hard, forcing the company to change their pricing strategy and supply chain operations.
In response to such challenges, Temu is expanding a more localized approach in Europe. Temu has adopted a strategy of encouraging local merchants to sell on its platform, with the aim of creating a more regionalized shopping experience. As part of this strategy, Temu has formed partnerships to enhance its logistics network. In Spain, for example, Temu has partnered with Correos, a state-owned postal company, with the intention of speeding up delivery times and increasing customer satisfaction.
Conclusion
Temu has reshaped the online shopping landscape, offering consumers low prices and a gamified shopping experience. However, the platforms success also comes with potential risks that shoppers should be aware of as they continue to engage with the platform.
