Economics of Temu

In recent years, Temu has become one of the most recognizable e-commerce platforms globally due to its aggressive marketing campaigns and rapid international expansion. I would go as far as to claim that chances are, even if you didn’t use Temu yourself, you probably know at least one person that did so.

So what is the big deal?

What is Temu and why is it so popular nowadays?

To start things off, Temu is an e-commerce platform—an online marketplace that is open 24/7, often with a global reach, which delivers orders to your very doorstep.¹ An important question is why Temu has managed to achieve significant popularity even in markets such as Bosnia and Herzegovina, where consumers are traditionally more cautious toward online shopping and digital payments.³

People are not that used to such a way of buying and taking a risk by spending their hard-earned money on something they can’t review, try out, feel, or even see in person before buying it. After all, Amazon has been a thing for years before Temu even came to existence! It all comes down to a single factor—risk. The biggest fear people face when buying an item online is not getting what they’ve been promised, getting it in an already faulty state, or just being straight-up scammed.

But, there are two approaches to minimizing that risk: the first one is to build up a flawless reputation, provide 24/7 customer support, and a rather simple refund system (the Amazon approach), or, alternatively, just lower the price to the point where it is illogical to not at least consider buying from the brand.¹

Temu? Well, they opted for the latter. The entirety of Temu’s reputation relies on it being dirt-cheap, often to the point where taking the risk of buying its products bears a much higher reward than actual risk.⁵ To put it in perspective: imagine you have decided to buy a smartwatch. For a regular smartwatch in your local store, you would pay about $65 (Fontele.ba). On Amazon, you would probably pay around $145, or if you are going for the cheapest option, around $15 plus shipping.¹ On the other hand, a solid smartwatch on Temu might cost you $15–$30, while you could find entry-level options as low as $4.50. Suddenly, taking a risk of $5 by buying a smartwatch online to potentially save $40 doesn’t seem all that bad. Your local store probably isn’t too happy about this, but it sure provides you a great opportunity as a consumer!

However, if low pricing strategies are so effective, it is important to examine why competing companies do not apply them to the same extent. In other words, why aren’t other companies fighting back using the same pricing strategies?

How does Temu operate?

How is Temu even able to do this? As it happens, it has developed a very delicate strategy used to cut costs, as well as a highly developed logistics network.

The Direct-to-Factory Model

For instance, other e-commerce brands place their orders in large bulks, ship them, store them in warehouses that need to be maintained (bearing additional costs), and only then deliver them to the customers. Amazon has bet that cutting delivery time is more important than cutting prices, which is a worthy trade-off for better user experience.¹ And to a certain degree, Amazon was right. As an example, we can take Wish. Although Wish was significantly cheaper than Amazon (which it achieved by cutting the middleman and shipped right from factories from China), the wait time for its delivery was often a month, and sometimes even longer, which turned out to be too long for most customers.

Temu found a "silver lining" in between. Similar to the platform Wish, Temu cuts out the middleman and ships directly from Chinese factories.⁶ Furthermore, it uses a "Next-Gen" model (C2M) where it feeds data on consumer behaviour back to these factories to reduce their inventory risk. This creates "economies of scale," where producing massive amounts of a popular item lowers the cost for everyone. Since Temu is a massive customer, it can negotiate deals that keep prices lower than anywhere else.⁶ And unlike Wish, you do not wait a month, but rather two weeks (on average), because Temu uses planes instead of cargo ships.

Navigating the Tariff Loophole

But there are more benefits to this model. While companies like Amazon pay considerable tariffs, Temu was able to navigate a loophole called "de minimis" to avoid these trade restrictions. For example, in the US, if a shipment was under $800, it was not subject to tariffs.⁷

While this structural advantage powered Temu's rise, the rules are changing. As of August 29, 2025, the U.S. government suspended this duty-free treatment for all countries, meaning every shipment is now subject to taxes and fees.⁸The European Union is following suit; starting July 1, 2026, they will abolish the €150 duty-free threshold and introduce a flat €3 customs duty per item category.¹⁰ In Bosnia and Herzegovina, shipments under the 300 KM threshold currently remain exempt, which still gives Temu a massive edge over local retailers who pay tariffs on bulk stock.¹¹

PDD

One fact that may not be too well known is that Temu is owned by the Chinese company PDD Holdings Inc. (formerly Pinduoduo). PDD is a massive entity, reporting total revenues of approximately $61.8 billion in 2025.¹²

The "Burn-to-Scale" Strategy

This allows them to “burn cash” on everything Temu needs, from subsidized prices to enormous advertising spending.¹³ High estimates suggest Temu may lose up to $30 or $40 on every single order as they try to buy their way into the market.⁵ This isn’t a mistake; it’s a calculated investment.

But those are not the entirety of Temu’s costs. Remember those ads? Temu spent $14 million on Super Bowl ads in 2023 and nearly $2 billion on Meta platforms (Facebook and Instagram) by 2024.¹⁴ They are effectively spending billions today to ensure they are the only ones left standing tomorrow.

…why?

The basic rule of thumb in business is that you want to earn more than you spend. In this case, that formula is flipped upside down. So, what is the grand idea? Temu is playing the long game in two major ways: market share and a returning, addicted customer base.

Winning the Market Share Game

When talking about the market share, Temu is fighting in an already established e-commerce market. If it was only slightly better in any of the aspects (delivery speed, prices, quality of products), it would not be enough to penetrate the market. This is because people that are customers in this (e-commerce) market, have already picked their brand of choice (Amazon, Wish, Shein or maybe even Alibaba), and in markets like these, which bear quite the risk, people are not too keen on experimenting unless they have good incentive to do so. Temu is aware of this, and, as per the "Ansoff Matrix"—a tool used to plan growth—Temu is using strategy that is described as an aggressive "Market Penetration" strategy.¹⁵ They are entering a market where everyone already has a favourite brand (like Amazon or eBay) and using prices so low that competitors simply cannot match them.¹ By putting smaller players out of business and acquiring a massive share of the market, they make it harder for you to find alternatives if they eventually decide to raise prices.¹

The Casino in Your Pocket

The second part is even more interesting. Temu’s goal is to get you to download the app and use it as much as possible. While many apps like Amazon or AliExpress use some games, Temu has perfected the "gamified" shopping experience.¹⁷

From the moment you open the app, you are hit with a lucky-wheel spin, puzzles, or card games for "absurd" discounts. This is designed like a casino to keep you engaged. They use something called the Zeigarnik Effect—a psychological principle where our brains hate leaving things unfinished.¹⁸ When you see you are "only $8 away from free delivery," it creates a mental tension that you can only relieve by buying more stuff.²⁰

Picture the next scenario; You enter the app to find that one cute gift wrap you wanted to buy, or that packet of stickers, or maybe that one very niche component that just broke down, but look, this smartwatch is only $5! Where else could you find such a deal? Oh and this phone case, yours was just getting worn-out anyways. Oh but look at this set of pens. Set of 12 pens and pencils for only $2.5? It would be illogical to not take the deal while they are still 70% off! But now you are only $8 away from free delivery, I mean there must be something else of interest that you can find to reach that threshold and get the free delivery. And all of the sudden you forget why you even opened the app in the first place. Thinking that you got a bargain, you just got tricked into buying 6 additional items you had no need for and had no intent of buying. And that is how it works. They get you addicted to spending without you even realising it, to buy things that you don’t even need, and in the end, after spending way more than you actually intended, they even get you to feel good about yourself because “you saved money” by buying all those items on such a discount, increasing probability of you returning in few days to repeat the pattern.

These "Black Hat" tactics—like countdown timers and "only 5 left" alerts—trigger an impulsive urge to buy before the deal is gone.¹⁷ Research shows these variable rewards can increase compulsive checking of an app by 37%, even if the user isn't actually enjoying it.²¹

Data indicates that this is not the end of it. The company that owns Temu, PDD, has already done this pattern in its main market (China), but also after surpassing these strategies introduced “social shopping”, mixing addictiveness of previously mentioned strategies with those of social media. In its essence, social shopping is a model combining online shopping with social media to offer discounted prices through group buying. Users share product links on platforms like WeChat to form teams, lowering costs by purchasing directly from manufacturers. Some analysts point out that this might be Temu’s next big move.

Is it really safe?

While the prices are low, there are "hidden costs" regarding quality and safety. Recent reports from the European Consumer Organisation (BEUC) in 2025 identified systemic safety failures. Tests found that some toys contained toxic chemicals (phthalates) at 240 times the legal limit, and 52 out of 54 tested USB chargers failed safety checks, reaching temperatures over 100°C.²² Waterproof jackets were also found to contain "forever chemicals" (PFAS) which are banned in many regions due to health risks.²²

Conclusion

While this article did point out a lot of hidden problems, the goal was not to discourage you from using Temu, but rather to help you understand where you are being manipulated. You should use the opportunity of low prices while they last, but you must also safeguard your experience.

Here are a few tips that can serve as a rule of thumb:

Avoid overly expensive items: The refund process is often intentionally complicated to discourage you from claiming money back on high-value products.
Be careful with what touches your skin: Because of concerns regarding toxic materials in clothing and toys, your health is worth more than the $10 you save.²²
Make a shopping list on paper: Before you open the app, write down what you actually need. This helps you avoid the "impulse loop" and the $8 free delivery trap.¹⁷

Behind those "stupid" or absurd ads sit teams of professional marketers and psychologists whose only job is to get you to buy. Overall, as a consumer, you should approach these platforms with awareness and informed decision-making.

Happy and safe shopping!

Alen Kahriman

References

²² BEUC (2025). Under the Microscope: Tests of Temu Products by Consumer Groups. ⁶Alibaba (2025). How Does Temu Work: The Secret Behind Low-Priced Products. ²² BEUC (2026). Product Safety Violations and Chemicals Found in Temu Products. ²¹ UX Magazine (2025). Designing for Dependence: When UX Turns Tools into Traps. ¹⁸ Medium (2025). The Zeigarnik Effect and its Design Implications. European Business Magazine (2026). Who Is Behind Temu: The Business Model. ¹⁴ EcomCrew (2026). Temu's Explosive Growth and the April 2025 Advertising Collapse. ¹⁶ ClearPoint Strategy (2025). Ansoff Matrix Guide: Growth Strategies. ¹⁷ Yu-kai Chou (2026). Octalysis: Top 10 E-commerce Gamification Examples. ¹¹ Sarajevo Times (2026). EU Introduces Customs Duties on Packages Under €150. ⁸ DHL (2025). The End of the U.S. De Minimis Rule. ¹⁰Portless (2026). The EU is Ending De Minimis Exemptions: July 2026 Update. ¹² Moomoo / PDD Holdings (2026). FY2025 Annual Report Financial Summary.³ Ecommerce Germany (2025). European Ecommerce Overview: Bosnia and Herzegovina.