Consumer-to-Manufacturer (C2M) Models: Is Temu Changing B2C Digital Commerce?

The launch of Temu by China's PDD Holding in 2022 is significant for the digital commerce sector and possibly heralds the rise of a new generation of e-commerce marketplaces. As of May 2023, the platform has over 100 million active users in the USA. Despite growing criticisms on issues like inefficient shipping, low product quality, and environmental concerns, Temu's popularity in Germany is also rising fast, reaching 26% of the population by mid-2023. Every day, around 200,000 packages from Temu are shipped to Germany. From September 2022 to June 2023, Temu's total sales soared from $3 million to $1 billion. However, since PDD Holding does not officially report these figures, this exceptional growth is not definitively confirmed 

Despite the controversial aspects, Temu's growth in e-commerce is remarkable. The platform increasingly positions itself as a competitor to giants like Amazon in Western markets. What makes Temu unique, and does it truly have the potential to disrupt established digital commerce players like Amazon? 

Understanding the New Digital Commerce Era: The Consumer-to-Manufacturer (C2M) Model 

At the heart of Temu's strategy is the Consumer-to-Manufacturer (C2M) model, a concept that prioritizes consumer demand and preferences and directly connects manufacturers as sellers on the marketplace. This approach allows for a dynamic and efficient marketplace where production is optimized based on consumer data. 

Innovations brought by the C2M model include: 

• Data Innovation: The C2M model is strongly data-driven. Consumer preferences are quickly and accurately gathered and interpreted, allowing manufacturers to tailor their production to meet these demands precisely. 

• Supply Chain Innovation: By cutting out middlemen such as wholesalers and retailers in Europe (including Germany), items like shoes sold for €30 at traditional stores can be purchased on Temu for €10 or less. This model eliminates intermediaries and gives manufacturers direct access to customers through Temu's platform, supported by significant marketing expenditures, including discounts. 

Key Driving Elements of Data and Supply Chain Innovation

Reverse Manufacturing Model

In the C2M model, consumer-led demand triggers production processes. Temu uses data analytics and social listening tools to accurately gauge consumer preferences, sharing these insights with marketplace sellers in China. This data-driven strategy ensures that offerings on Temu are closely aligned with consumer needs, creating a marketplace highly responsive to consumer preferences. 

Small Batch Production for Testing

Direct interaction with consumers not only ensures competitive pricing but also minimizes the risk of overproduction. Manufacturers on Temu can quickly validate consumer preferences by producing small test batches, significantly reducing excess inventory and increasing both cost efficiency and sustainability. 

Cost Efficiency Through Direct Manufacturer Ties

A major benefit of the Temu model is cost reduction. By directly involving manufacturers in China as sellers on the marketplace, Temu eliminates the middleman, cutting additional costs typically associated with sales on platforms like Amazon or Zalando. 

Temu’s Aggressive Customer Acquisition Strategy

Like Amazon in the early days, Temu focuses on aggressive growth and market share expansion. For instance, the domain www.relentless.com still redirects to Amazon, highlighting Amazon's relentless battle for market share. In Q3 2023, Temu's parent company reported $3 billion in marketing expenses—nearly a third of its $9.4 billion revenue. Temu does not shy away from incurring losses on individual orders to dominate the U.S. market with lower prices, with a reported loss of $30 per order in the USA in 2023 according to Wired. 

Core Question of Temu's Strategy 

The crucial question is whether Temu can transform these initial bursts of customer acquisition into lasting, profitable relationships. Will customers remain loyal if prices increase? Prospects appear positive because Temu's Consumer-to-Manufacturer (C2M) model enables it to consistently offer prices lower than those of competitors, and its data-driven production approach precisely aligns with consumer demands. 

Impacts and Implications 

Currently in Germany, online pure-players like Amazon, mail order companies such as Otto, and fast fashion omnichannel players like KiK face the challenge of adapting their e-commerce strategies. The question is: who should be worried about the competition from China? 

Our thesis is that any company and intermediary selling interchangeable products without significant brand value should be concerned. For instance, retailers selling branded products like Bosch, Makita, or Einhell in the tools sector are less vulnerable since the brand serves as a differentiator. However, retailers like Lidl or Kaufland may face issues especially if they are offering non-branded wrenches manufactured in China in their non-food sections. For consumers, there may be no compelling reason to shop with these retailers online since price no longer serves as a differentiating factor. Temu, by connecting directly with Chinese factories on its platform, can offer significantly lower prices. 

At the moment, Temu doesn't allow customers to filter products by quality. The quality of non-branded items from China on Temu varies, and this can overwhelm consumers. Additionally, the quality often doesn't meet Western standards. This presents an opportunity for local stores like Lidl to stand out by performing strict quality checks and offering products that meet safety standards, certified by marks like CE. 

A Warning to Established Retailers 

Established stores shouldn't become complacent. Manufacturers in China are capable of producing high-quality goods, as seen with products from the outdoor retailer Decathlon. Temu also has the tech expertise to eventually offer high-quality products that meet customer expectations. Therefore, local retailers need to keep innovating and maintaining high standards to stay competitive. 

Shopping at Temu? We Tried It. 

We placed a test order on Temu. Here’s what we experienced: 

• User Experience: The UX of both the app and website is very well thought out. Temu uses strategic techniques such as nudges like time-limited offers, conversion-optimized headlines, and CTAs, discount prices, and displays of savings in percentages. Despite these, Temu manages to make its website look comparatively neat and professional. From a user’s perspective, the multitude of product images from different angles and usage videos are also a plus.

• Ordering Process: We randomly selected several items from different categories and paid via PayPal.

• Delivery: The items were delivered by DHL, arriving 6 days after placing the order.

• Packaging and Product Quality: The items were tightly packed in a plastic bag, which partly damaged some of the packaging. The products had a strong chemical smell and seemed substandard, except for one item (a small tablet for kids to draw on).

• One small electronic item was defective. A return was not feasible (as it was too costly for Temu), but the payment was promptly refunded to the original payment method. 

Would we order again?

From an ethical standpoint: no. For practical reasons: yes. For instance, Temu offers very affordable spare parts for tools and appliances. A pack of three air filters for a Dyson vacuum cleaner costs only €12.79 on Temu, compared to €39.00 in a retail shop. 

Final Thoughts 

The quick rise of Temu likely signifies more than just a temporary success. It appears to be part of a broader evolution within the e-commerce sector. The Consumer-to-Manufacturer (C2M) model breaks from traditional marketplace approaches and introduces new standards for engaging customers, setting prices, and adapting production based on what consumers want, as seen in social media trends and behaviors. As Temu grows, its approach could lead to a new generation of e-commerce platforms that are finely tuned to meet consumer demands efficiently. 

Interested in learning how Temu's growth could affect your business strategy and what changes you might need? Get in touch with us!