Earlier this year, Xiaomi announced that it will cap the profit after tax on all its hardware products to 5 per cent. Later on, Xiaomi went on to become the leader in the Indian smartphone market sitting alongside Samsung with 30 per cent market share. In the market that is so volatile that we have a new smartphone launch literally every day, how is Xiaomi coping with all the competition and still delivering its products at a low price? For a company which was founded just 8 years ago, how is Xiaomi growing and growing so well? How is it making revenue? What is the Xiaomi’s business model? Let’s break this all down.
Xiaomi’s Product Portfolio
If you are still new to this name – Xiaomi – I am sure that you don’t know about the humungous product portfolio it operates with. Sure, the 70 percent of the portfolio is smartphones, but did you know that Xiaomi also sells smartwatches, air purifiers, hoverboards, pillows and even wallets? This is just a few examples to name.
If we keep smartphones aside, the 21 percent of Xiaomi’s product portfolio is made up of the Internet of Things (IoT). The remaining 9 percent is the Internet Services like its own MIUI that includes music service, browser, mi store etc. it provides to its users.
If not globally, Xiaomi is a big thing in China and in emerging markets like India. The idea of selling a competitive product at an impressively low price is what consumers in these markets seek for. Take Pocophone F1 for example. The device has all the latest and greatest hardware with some bearable tradeoffs at a price of Rs 20,990. As a result, people all around the world have gone bonkers over it. To quote an example, Xiaomi earned a revenue of about Rs 2 Billion from the first sale of Poco F1 itself. This is where the question comes – How does Xiaomi make money when it has just restricted its profit on hardware to just 5 percent?
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How Does Xiaomi Make Money?
Q2’18 saw Xiaomi gain about 152 percent jump in its overseas revenue which is valued at about Rs 16,700 crores. But how is Xiaomi doing this?
While about 90 percent of its products which includes smartphones and other hardware products fetch it a net profit of about 5 percent. The Internet Services, on the other hand, help Xiaomi get a net profit of about 60 percent.
When it initially started its operations in India, Xiaomi highly depended on word of mouth advertising to save any sort of overheads cost. This allowed the Chinese giant to sell its products especially smartphones at a lower price than its competitors which in turn helped the company to attract users.
More acquisition means more users using Xiaomi devices. Now some percentage of these users tend to become loyal to services like the MIUI, its music service, Mi Store etc. This is exactly what Xiaomi has wanted ever since it started making products. Selling the best of hardware at a lower price with an objective of acquiring some loyal customers of its internet services is the business model of Xiaomi in a nutshell.
However, things weren’t that easy for the Chinese smartphone manufacturer and Internet Company. After an initial boost to its smartphone sales, Xiaomi went down in ranking soon after players like Oppo, Vivo and Huawei (with Honor) flooded the budget smartphone market through offline streams. Even though Xiaomi was the leader in the online space, people still use to prefer buying smartphones offline.
As a result, Xiaomi began to expand its offline presence by opening Mi Home stores and partnering with local vendors. Opening Mi Home Stores did two things – 1) Xiaomi was able to sell more phones. 2) People visiting the Mi Home Stores would often end up buying other accessories like Power Banks, Earphones etc. manufactured by Xiaomi.
How does Internet Service help Xiaomi Make Money?
Xiaomi likes to call themselves an Internet Company and not a smartphone manufacturer. Most of the smartphone manufacturers leave their customers after they purchase the product but Xiaomi hangs on because this is where it earns its most profit. Getting more users to its ecosystem is one thing but retaining them is totally a different task and trust me – it’s tough.
Xiaomi forums are one of many ways through which the Chinese giant stick around with its users to deliver better products and offer quality customer service. Consequently, more and more people tend to stay in the ecosystem hence eventually end up enrolling in its proprietary services like Music, Mi Cloud, Mi Store etc.
For Xiaomi, the software has always been more important than hardware unlike companies like Apple and Samsung that are actually capable of making their own hardware.
Is Xiaomi’s Business Model Perfect?
Xiaomi’s business model is great but it is time specific. This business model has done wonders for the company till now but there are some challenges.
1) Most Revenues Come from China
Did you know? 72 percent of Xiaomi’s total revenue comes from China itself although India is slowly becoming one of the largest markets for Xiaomi. This is because Google Services is banned in China. This means for every Google Service like Maps, Music, Photos, Cloud – Xiaomi has its own app so people actually subscribe for these services. On the other hand, people outside China prefer Google Services which is technically free.
Now what this means is that Xiaomi is still highly depended on sales from China when it comes to earning money.
2) Not every loyal user subscribes for Xiaomi’s Internet Services
Xiaomi mostly deals in products which are priced low than its competitors. In other words, we are looking at customers who are extremely rationale when it comes to purchasing consumer technology. So naturally, people are reluctant to subscribe to Xiaomi services when there are free services from Google readily available.
Nevertheless, Xiaomi is doing great right now and I am sure it will have similar plans for the future as well. Till then, let us know your thoughts on what do you think about Xiaomi as a consumer technology company?
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