Why is Temu so Cheap in USA? [2024]

Temu is a relatively new e-commerce platform that offers extremely low prices on a variety of products. Launched in September 2022, Temu is the latest retail venture from PDD Holdings, the same Chinese company that operates Pinduoduo, China’s largest e-commerce site. Temu promises “to enable consumers to discover the joy of value shopping,” with many items priced at under $10.

So why is Temu able to offer such low prices in the US market? There are several key factors at play:

Direct Sourcing from Chinese Manufacturers and Suppliers:

One major reason Temu can offer steep discounts is that it sources products directly from manufacturers and suppliers in China, completely cutting out middlemen. This allows Temu to get bottom barrel wholesale rates on huge quantities of goods. As a group buying platform, Temu leverages the bulk buying power of its tens of millions of users in China to negotiate rock-bottom costs that more traditional retailers simply cannot match.

By going directly to the source and buying directly from factories at mass scale, Temu is able to slash retail markups significantly. The company then passes a portion of those cost savings on to American consumers in the form of extremely cheap everyday items.

Minimizing Operating Costs:

In addition to supply-chain cost advantages, Temu also runs an ultralight e-commerce operation designed to keep expenses low. As a digital-only storefront without any brick-and-mortar presence, Temu does not have the overhead costs associated with running physical retail outlets.

With a streamlined staffing model and limited marketing budgets, Temu is able to reduce operating costs substantially compared to big box stores. These savings translate into further discounts for shoppers. Temu also relies heavily on user-generated content for marketing and product discovery vs paid advertising spending.

Low-Margin, High-Volume Sales Strategy:

Temu strategically pursues a high-volume, low-margin sales model common among major Chinese e-commerce sites like Pinduoudo. The company prices items at razor thin margins, but aims to turn profits based on selling very large quantities across its catalog.

Even markups of just a few percentage points allow Temu to be profitable when selling tens of thousands of units daily. This stands in contrast to more traditional Western retailers that rely on higher margins but lower sales volume per product. By keeping margins slim, Temu can discount heavily to drive demand.

Minimal Product Selection:

Temu intentionally offers a much narrower catalog compared to Amazon and big box names like Walmart and Target. Whereas most retailers stock hundreds of thousands or even millions of SKUs, Temu’s product selection is purposefully streamlined. With fewer items to manage in its inventory, Temu can consolidate wholesale orders and negotiate better rates. A curated catalog also helps Temu reduce operational complexity. The end result is lower costs and lower consumer prices.

Strategic Loss Leaders:

Temu utilizes loss leading pricing strategies on select marquee products to hook shoppers. The company is willing to lose money upfront on featured daily deals and doorbuster sales, using them as bait to reel in buyers. The expectation is that once on the site allured by crazy low prices, consumers will tack on additional items with healthy margins.

These strategic loss leaders help amplify word of mouth and viral social sharing around Temu’s pricing. Generating conversion-driving buzz is viewed as more valuable than short-term profits on the radically discounted items used specifically to incentivize traffic.

Questions Around Sustainability of Ultra-Low Prices:

While Temu’s rock-bottom pricing is undeniably appealing to bargain hunters, major questions remain around the sustainability of its discount model in America. Critics point to thin margins, pressure from stakeholders, and whether sufficient volume can be achieved profitably over the long haul.

There are also concerns over Temu’s ability to maintain quality controls despite races to the pricing bottom. Only time will tell whether Temu’s tactic of pushing prices to extremes can serve as a successful, viable retail model stateside.

Can Prices Remain Low as Popularity Grows?

One major open question is whether Temu can maintain its rock-bottom price points if order volumes scale exponentially. Currently, prices are feasible partly because Temu serves a niche market Stateside. If monthly active users were to reach tens of millions in the US alone, it may compromise Temu’s discount economics.

At a certain threshold of growth and demand, Temu would lose bargaining power on wholesale rates. Suppliers have no incentive to keep prices extremely low without capped order volumes. Higher operating expenses could also accompany a rapid expansion of customers. There are logistical and talent recruitment challenges pending as well if Temu outgrows its infrastructure.

In short, the long-term trajectory is unclear. Temu’s discounts may be short lived if its user base snowballs too fast before operational foundations are solidified. The company will need to strike a delicate balance between growth and preserving margin viability.

Fulfillment and Last-Mile Delivery at Scale:

Temu offers free shipping across the US on orders above $49. At its current size, Temu can swallow shipping expenses to boost buyer conversion. But absorbing 100% of fulfillment logistics costs becomes less feasible as order activity accelerates across larger geographic regions.

Generating millions of single-item orders would strain distribution networks optimized traditionally for bulk pallets and containers. Temu may have to choose between raising minimum free shipping order sizes, charging nominal delivery fees, or facing losses from fragmented small parcel fulfillment.

Managing fulfillment and last-mile delivery at national levels while keeping customers happy with free, fast shipping will be an inflection point to monitor. Growing demand could force Temu to make tough decisions limiting its shipping flexibility unless major infrastructure investments are made.

Conclusion:

In conclusion, Temu extraordinarily low prices in America stem largely from direct sourcing relationships in China, ultra lean operations, Bulk order negotiating power, and a desire to spur viral, word-of-mouth marketing. However, questions loom around merchandise quality control issues and particularly whether Temu discount model is built to last sustainably amid scaling customer demand.

Maintaining quality logistics and fulfillment capacities could also surface as pain points down the road absent further infrastructure expansion. For now, consumers stand to benefit from the market disruption, although it remains to be seen whether sub-$10 pricing is simply too good to be true over the longer term.

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