Executive Summary:
Temu is an online marketplace that connects consumers with thousands of sellers, manufacturers, and brands around the world.
Temu makes money by taking a percentage cut from the purchases made via its platform, which are paid by the sellers on its platform.
How Temu Works
Temu (tee-moo) is an online marketplace that connects consumers with thousands of sellers, manufacturers, and brands around the world.
The platform differentiates itself from the competition via one key aspect: its extremely low prices. Discounts can be as high as 99 percent, with many product prices being reduced by more than half.
Temu is able to offer low prices because users purchase directly from the manufacturer, which is normally located in China.
The products themselves are also shipped directly from China, thus often resulting in shipping times of 7 to 14 days (some products never arrive, to begin with).
Interestingly, both shipping and returns are free for the first 90 days after the purchase was made. Furthermore, Temu offers 24/7 customer support in case a shipment is stuck.
Customers can shop in almost any category imaginable, ranging from fashion all the way to consumer electronics.
Most of the products sold on Temu are unbranded. And the ones that are very likely to be counterfeits and not originals.
Lastly, Temu itself is headquartered in Boston and is owned by Chinese firm PDD Holdings, which also operates Pinduoduo.
How Does Temu Make Money?
Temu makes money by taking a percentage cut from the purchases made via its platform. That commission is paid by the merchants who sell on Temu.
In that regard, Temu operates similarly to traditional online marketplaces like Amazon or eBay, which both charge fees in the high single or low double digits.
Although Temu does not publicize its commission structure, it can be assumed that the company charges substantially less in fees.
The reason for that being the case is the average purchase price of a product sold on Temu. After all, you can order products costing as little as $1 directly from China.
Even if you’re directly dealing with manufacturers (and not intermediaries like on Amazon), there’s not much room for a healthy profit margin if you charge 15 percent in commission.
Another reason why Temu likely imposes a lower commission on its sellers is that it needs to build up the supply side of its marketplace in order to become competitive.
Just for reference: Temu’s sister company Pinduoduo, which we covered here, only charges a commission of 0.6 percent for each sale.
Talking about Pinduodu, we can see where Temu could be headed on the monetization side. For example, Pinduoduo also generates income via advertising on its platform, which perfectly ties into Temu’s business model strategy – comfortably the subject of the next chapter.
The Temu Business Model Explained
The business model strategy that Temu pursues can largely be described as an online marketplace, matching sellers (= merchants) with buyers.
In this scenario, Temu provides the proprietary platform on which both parties can transact. That means Temu takes care of payment facilitation, merchant acquisition and verification, product recommendations, logistics partnerships, and so much more.
As a result, sellers forgo setting up a website and simply can focus on manufacturing the best possible products at the lowest prices.
Furthermore, those sellers then get access to a pool of millions of buyers, which, given that they’re all located in Chinese, is a customer group they traditionally had a hard time accessing.
This is where one of the biggest advantages of the online marketplace business model comes in: once you have enough sellers and buyers, new ones often join through word-of-mouth, thus bringing in new users at a significantly lower cost.
For example, the search term ‘Temu finds’ has received close to 100 million views on TikTok alone – mostly all created by users who were not paid for doing so.
Temu’s focus on Chinese sellers offers yet another advantage, which is baked into those low prices customers enjoy: import taxes.
Normally, online sellers pay import taxes on the products they sell via Amazon and other platforms. Temu’s sellers are exempt from those costs, thus allowing them to underprice their competitors.
Additionally, the Chinese government lends a helping hand, for instance via programs that encourage Chinese e-commerce brands to expand abroad to offset slowing domestic demand.
Temu also took a book out of fashion powerhouse SHEIN. Both firms directly integrate with their respective manufacturers/sellers to quickly react to emerging trends and test products by producing low quantities in the beginning and then doubling down on the winners.
In fact, PDD Holdings, Temu’s parent company, has incubated nearly 1,000 factory brands since its founding in 2015.
Couple that with hundreds of millions in marketing spend (for example, on Super Bowl ads), and it’s not surprising why Temu has managed to ascend this rapidly.
Another trend that the Chinese platform has brought over to the Western world is the concept of group buying.
Temu, which literally stands for “team up, price down”, allows its users to band together and purchase products in bulk.
This drives down the overall purchase price since merchants can reduce the marginal cost of shipment, which they pass on to consumers in the form of discounts.
With that being said, Temu will have to avoid the same mistakes that plagued its competitor Wish, namely ensure that products don’t take too long to ship and arrive in perfect condition.
So far, the app has managed to amass over 300 complaints with the Better Business Bureau, indicating that not everything is going according to plan.
PDD Holdings has thus been subsidizing those costs by crediting customers or even refunding their purchases altogether.
Incurring those costs is well worth it for PDD Holdings, though. Online marketplaces can be highly profitable, in part due to the various income streams they can establish.
One of the biggest potential revenue accelerators is ads. Amazon, for instance, reported $37.7 billion in ad sales for 2022, accounting for around 10 percent of all digital ad spending.
Advertising in the commerce space can be particularly attractive because customers are already interested in making a purchase and are thus much easier to convert. Advertisers, namely the sellers on the platform, are willing to pay for access to those customers.
As a result, it remains integral for Temu to focus on seller growth since advertising is conducted on an auction basis, meaning sellers bid against each other for ad slots. Consequently, the more advertisers compete for an ad spot, the higher the price ends up being.
Temu Funding, Revenue & Valuation
Unfortunately, Temu’s parent company is currently not disclosing any key metrics about its new business.
Temu, in all likeliness, continues to burn through hundreds of millions of dollars every year in an effort to gain market share.
Its Chinese counterparts TikTok and SHEIN followed a similar strategy, which has led both of them to allegedly be valued at over $100 billion.
PDD Holdings, which also owns the Chinese group-buying marketplace Pinduoduo, is currently valued at close to $100 billion as well.
For the fiscal year 2022, the holding firm generated $18.9 billion in revenue, up $4.2 billion from the year prior ($14.7 billion).
Interestingly, the group’s total operating expenses ballooned over 57 percent to US$3.2 billion. Of that, $2.6 billion went into sales and marketing expenses, which climbed roughly 56 percent. Most of that increase likely went into its Temu investment.
With that being said, the group still posted a profit of $4.4 billion, indicating just how profitable Pinduoduo is and how much potential Temu consequently possesses.
