Why are Temu’s prices so unbelievably cheap? A closer look at their business model

In a surprisingly short period, Temu has stormed the global e-commerce stage with prices that seem too good to be true—$3 watches, $5 wireless earbuds, $2.50 electric toothbrushes. In my small village, everyone is in “Temu fever.” Every home, garden, and even the kids’ toy collection. Temu's development is a complete reimagining of the online shopping experience. But how do they keep their prices so cheap?

Explosive Growth by the Numbers

Temu’s popularity is no coincidence—its growth metrics paint a clear picture of its rapidly expanding influence. As of April 2023, Temu boasts over 100 million active users in the U.S. alone, outpacing competitors like Shein and even giving Amazon Prime’s growth trajectory a run for its money. The platform's website, Temu.com, attracts a massive 503 million visits monthly, ranking as the 41st most-visited site globally and the 6th largest marketplace in the U.S. Temu's Gross Merchandise Volume (GMV) has skyrocketed, reaching $1 billion by June 2023, up from just $192 million in January. Revenue estimates for the first half of 2023 indicate approximately $3 billion, projecting an annual total of around $6 billion. Since entering the U.S. market in 2022, Temu has expanded to 79 countries by mid-2024, including recent launches in Thailand.

The secret behind Temu's ultra-low prices

The driving force behind Temu’s success is its parent company, PDD Holdings. Temu's ability to offer low prices to consumers stems from several strategic approaches. By adopting a direct-to-consumer model, the company connects buyers directly with manufacturers, eliminating intermediaries like wholesalers and retailers. This reduces traditional retail markups and passes savings onto customers. Leveraging data analytics for supply chain optimization enhances production planning and inventory management, minimizing overproduction and excess inventory to further reduce costs.

Temu also benefits from economies of scale through its large-scale operations, enabling bulk purchasing and production that lower per-unit costs. Additionally, by utilizing the U.S. de minimis exception—which allows goods valued under $800 to enter the country without import duties or taxes—Temu ships individual packages directly to consumers to avoid additional costs. Here’s where it gets even more interesting: product sales account for just 21% of their revenue. The real revenue engine is their marketing services platform, which brings in 78% of their income by charging manufacturers for visibility and promotion on the site.

A different kind of shopping experience

What really makes Temu different is the engaging shopping experience it offers. The platform uses mobile gaming elements—mini-games, spinning wheels, flash deals, and an endless stream of discount codes—layered with advanced, AI-driven data management to keep shoppers coming back for more. As I said in the beginning, in my home village, this has translated into an almost collective obsession with Temu. Neighbors chat about their latest purchases, swapping stories about decorative lights and inflatable furniture that now fill their gardens.

For traditional e-commerce giants, this is a serious wake-up call. Products that once went through multiple layers of distribution are now sold directly from manufacturers at significantly lower prices. While some criticize Temu’s aggressive approach, it’s worth noting that most Western brands already manufacture in Asia—for example, 97% of Adidas shoes are made there.

Amazon sees Temu as a strong competitor, especially in the low-cost shopping space, and is adapting its approach to keep up. With Temu’s success in attracting price-sensitive shoppers, Amazon is planning to launch a new store focused on affordable items shipped directly from sellers in China, much like Temu’s model. This move is aimed at appealing to budget-conscious customers who are drawn to Temu’s ultra-low prices, allowing Amazon to better compete in this growing segment of online shopping.

What lies ahead

Despite processing hundreds of thousands of packages globally each day, Temu currently faces delivery times of 6 to 20 days. Shipping delays may be one of the platform’s weak points, but given their pace of innovation in other areas, this challenge might not last long. For traditional retailers, relying on regulatory intervention won’t be enough. Temu’s blend of ultra-competitive pricing, aggressive marketing, and gamified shopping represents a fundamental shift in the retail landscape. The question is no longer if Temu will succeed, but how much of the global e-commerce market it will capture next.