How to achieve growth at low prices? Let you know Xiaomi's business model

How to achieve growth at low prices? How to make money? Hardware does not make money, but services and value-added services make more money. Xiaomi 's way of making money is to solve user pain points with low-priced high-quality products, gain user growth , and then make profits through high value-added service fees.

1. The success of a business model lies in solving business problems

1. The cost of acquiring customers through the Internet is high

The core competition in the mobile Internet is the competition of customer acquisition costs. The lower the customer acquisition cost, the more competitive the enterprise will be. With the intensification of competition in the mobile Internet, the cost of acquiring customers has risen from the initial few yuan to hundreds of yuan now, and there is a trend of continuing to rise. The most frightening thing is that users have no idea of ​​this customer acquisition cost.

Customer acquisition costs disclosed in Xiaomi's prospectus:

2. Xiaomi’s business model innovation

Xiaomi defines its business model as "triathlon", namely hardware + new retail + Internet.

Xiaomi has compressed all processes to the maximum extent possible, and after the compression, all costs are used for product research and development and product development. Therefore, in the early days, Xiaomi did not invest in any market advertising, but built its own website to sell mobile phones, saving all advertising costs, achieving zero channel budget, and then pricing based on cost.

• Eliminating all unnecessary intermediate links as much as possible is the core feature of Xiaomi's supply chain. Through information technology, Xiaomi directly faces end customers and efficiently realizes the direct connection of product flow, capital flow and information flow. Xiaomi sells products, customers place orders online from Xiaomi Mall, and the products are delivered directly from Xiaomi's warehouse to consumers without any middleman;
• After consumers place an order and pay, the funds go directly to Xiaomi and do not stay in the middle. Therefore, a high capital turnover rate is a major feature of the Xiaomi model.
• After consumers receive the goods, they can directly contact Xiaomi customer service, discuss on forums, leave messages in the product review section, etc., to avoid delays and distortions caused by middlemen transmitting information.

This is also why Xiaomi must not only do hardware research and development, but also retail, greatly improving intermediate efficiency.

Although pricing products based on cost and selling them at retail improves efficiency, it will create new problems: the company will not make money or may even suffer losses. "Low price and high quality" generally means higher costs and lower profits for the company. For many companies, it will be very difficult to maintain the operation of the company relying solely on low profits. Therefore, the realization of the "price pain point" requires support from other corporate behaviors in order to achieve sustainable user growth.

Xiaomi strictly limits its gross profit margin, hoping that it will be as low as possible. If the company does not make money, it will be difficult to hire outstanding talents, find investment, and continue.

From a business perspective, it is unsustainable for a company not to make money. According to the rules of traditional hardware companies, they will generally adopt the strategy of "winning by quantity", which is commonly known as "small profits but quick turnover". That is, when the profit of a single product is low, how to form economies of scale by expanding sales volume and achieve an increase in overall profits.

Without Internet services, Xiaomi would be like a standard hardware company, and it would be difficult for the company to achieve sustainable development under the premise of strictly limiting gross profit margins.

How to achieve growth with low prices: win by volume, innovate models, and reduce costs.

The company does not make money from hardware, but makes money from services and value-added services. It cuts off traditional offline channels, relies on e-commerce direct sales channels, and takes social media as the core, with "word of mouth being king."

Low-priced high-quality products solve user pain points, gain user growth, and then make profits through high value-added service fees. What needs to be emphasized here is that user growth alone is not user growth, but the growth of valuable users is the real user growth.

This is a typical case of "the dog pays for the wool, and the pig pays the bill." The wool refers to profits, the dog refers to consumers and users, and the pig refers to advertisers or investors. The essence of “free hardware” is to establish a strong connection with users, either through software, through fans, or through the hardware ecosystem.

Mobile phones and televisions have become the main force in the "free hardware" trend. Their confidence lies in the fact that they can charge for software and content, that is, "live off the hook." But how can we drive strong connections among users? It all depends on one key point: word of mouth.

As a hardware company, making high-quality products requires high costs (good designers, excellent engineers, top-notch components and good processing plants). Selling them at half the price is not commercially feasible. The business model must be a closed loop. If Xiaomi does not provide Internet services, the company will not be able to develop sustainably.

3. Xiaomi Business Model Canvas

1. Important cooperation

• Supply chain companies: raw material suppliers, manufacturers
• Ecosystem companies: Huami, XGIMI
• Third-party e-commerce: JD.com, Taobao, Pinduoduo

2. Key business

• Hardware manufacturing: mobile phones, smart hardware
• New retail: online stores, offline stores
• internet
• Industry + Investment (Using Eco-chain to Improve Product Portfolio)

3. Core Resources

• "Word of mouth is king" with social media as the core
• Hardware low-cost customer acquisition (hot products)
• The triathlon combination is hard to replicate (hardware, new retail, and the Internet)
• Knowledge resources: intellectual property, patents, user data
• team
• capital
• Mobile phone as the core: mobile phone peripherals, smart hardware, daily necessities

4. Value Proposition

Make good products that move people's hearts and are reasonably priced

5. Customer Relationship

Self-service: official website, online e-commerce, offline stores, customer service

Community: User forum, Mi Fan culture, making friends with users

6. Channels

• Cut off traditional offline channels, e-commerce direct sales
• Self-built channels: Xiaomi Mall, Xiaomi Youpin, Xiaomi Home
• Third-party channels: JD.com, Taobao, Pinduoduo

7. Customer Segmentation

Mass customers:

8. Cost structure

• Raw materials and manufacturing costs, R&D allocation costs, marketing and advertising costs, sales and channel costs
• Xiaomi Mall, Xiaomi Youpin
• Taobao, JD.com, Pinduoduo
• Xiaomi Home
• Logistics costs

9. Sources of Income

• Services and Value Added: Advertising
• Hardware Sales
• invest
• Brand Usage

4. Detailed explanation of Xiaomi’s business model

1. Xiaomi’s hot-selling model

The essence of all business is traffic. Hot products are the lowest-cost and most cost-effective way to acquire traffic, and they are also the nuclear weapons to explode the market. Xiaomi's hot-selling products are an important part of Xiaomi's business model, and can also be said to be the product of Xiaomi's business model.

Xiaomi’s earliest product was the mobile phone, but Lei Jun repeatedly mentioned that Xiaomi was not making traditional mobile phones, but Internet phones. He also particularly emphasized the triathlon of Internet phones: hardware, software, and services.

• Hardware naturally refers to mobile phone hardware;
• Software refers to the operating system, Xiaomi calls it MIUI;
• Services refer to various applications, which are called Apps today.

If we separate the Internet and mobile phones into three parts, these three major industrial chains of mobile Internet will have huge growth opportunities.

The first product Xiaomi made was not mobile phone hardware, but the instant messaging software MiTalk. As China's first instant messaging software developed for mobile phones, MiTalk developed very well in the beginning. Unfortunately, not long after that, Tencent's Zhang Xiaolong launched WeChat in Guangzhou and started the "shake" crazy mode, and MiTalk was quickly surpassed.

Later, Xiaomi launched the MIUI system based on Android. Because the native Android was too difficult to use, the good human-computer interaction made the MIUI system the first choice for geeks. They flashed their Android-based HTC phones, Motorola phones, etc. to the MIUI system, which became a trend at the time.

In 2011, Xiaomi mobile phone was officially launched. With the huge momentum of mobile Internet, the user reputation accumulated by MiTalk and MIUI systems in the early stage, Lei Jun's personal influence, and of course the price advantage of Xiaomi mobile phone at 1,999 yuan, Xiaomi mobile phone came out of nowhere and became one of the most important events in the history of China's mobile Internet. Xiaomi achieved huge success, and for a time "Lei Jun" became an idol for major entrepreneurs. Xiaomi has always insisted that it is an Internet company, not just a mobile phone company.

2. The main characteristics of Internet companies

The first factor that Internet companies use to measure their size is the number of users. I heard that Alibaba's goal is 2.7 billion users. Tencent has attracted more than one billion users through WeChat, games, etc. The number of people searching on Baidu is also calculated in the billions.

The core of Xiaomi's business model is users, and the entire Xiaomi business model is built around users. Xiaomi insists that it is an Internet company and is trying every means to expand its user base. The number of 5 billion users is an expectation, or a dream, proposed by Lei Jun. It is definitely not possible to rely solely on the mobile phone business.

No mobile phone company can have 5 billion users, not Samsung, Apple, or Xiaomi. So to achieve this goal, new strategies are necessary. Xiaomi’s strategy is to sell mobile phone peripherals and products that users need.

The picture of Xiaomi Business Model 2.0 is a picture of Xiaomi's development trajectory, and also a picture of Xiaomi's continuous expansion of user base.

Xiaomi gained millions of users starting with MiTalk and MIUI system, and later gained hundreds of millions of users by making mobile phones.

Xiaomi makes boxes and TVs to attract home users, and routers are the first entry point for users to access the Internet. Xiaomi.com was a byproduct of mobile phones back then, but it quickly grew into China's third largest e-commerce company (now surpassed by Pinduoduo and others), and it is also a huge e-commerce user portal.

Later, Xiaomi began to make ecological chain products, such as bracelets, power banks, headphones, and power strips, which attracted many users who were not Xiaomi mobile phones or Xiaomi TVs, and rapidly expanded the user base. Xiaomi also cooperated with Taobao and JD.com to convert users of those user platforms into Xiaomi users.

Through this continuous accumulation, Xiaomi's user base has grown rapidly. By the first quarter of 2019, Xiaomi MIUI had 261 million monthly active users, smart TVs and Xiaomi boxes had 20.7 million monthly active users, the number of devices connected to the IoT platform reached 171 million, and Xiao Ai had more than 45.5 million monthly active users. As you can see, this is the charm of the Xiaomi model. It has the ability to acquire users in multiple dimensions, not only gaining a large number of mobile phone users, but also becoming the world's largest IoT company to date.

For a business to operate normally, it is not enough to have users, it must also make profits. A business model that has users but cannot monetize them is not a good business model. How does Xiaomi make a profit?

The first number is the monthly active users MAU, which means how many users are using our products every month.

Taking Xiaomi mobile phones as an example, Xiaomi’s quarterly report for the first quarter of 2019 showed that the MAU of Xiaomi MIUI was 261 million. So how many users are using it every day? Let's make a simple guess. Since the activity rate of mobile phone users is very high, the monthly active users are divided by 2, so the DAU (daily active users) is 130 million. This is just speculation and not the real data of Xiaomi.

The second number is the number of times each person uses their mobile phone every day.

This number is very interesting. No matter whether the user is making a phone call, using WeChat, watching a video, or shopping, as long as it is used once, it is counted. In fact, readers can also estimate how many times they use their mobile phones in a day. According to statistics, each mobile phone user in China uses the phone 150 times a day on average.

The third number is the unit price of the advertisement, that is, if there is an advertisement every time you open the page, then what is the unit price of each pop-up advertisement?

How is this advertising charged? The most common one is CPM, which stands for charge per thousand impressions. Generally speaking, startup ads are more expensive, and you can earn 30 to 50 yuan. Of course, each app varies greatly, and some can only achieve a CPM of a few yuan. Let's calculate it a little higher this time, say 50 yuan, which means it's 5 cents each time. Multiply the three numbers together: 130 million users per day, each user uses it 150 times a day, and the advertising cost is 5 cents each time. Multiply the three numbers together: 130 million × 150 × 0.05 = 975 million. The larger the number of users, the more opportunities there are to monetize, and as the number of users increases, the profits are also staggering.

Of course, startup ads are not the only monetization model. There are many applications on mobile phones, such as browsers, app stores, videos, etc., which can all be operated and generate revenue. When these things are added together, the income is still considerable.

Xiaomi acquires users by making its hardware good and keeping its profits low, then acquires Internet traffic, and finally monetizes the Internet. From this logic, Xiaomi sells hardware to acquire users, and the real profit comes from Internet monetization, which is the core of Xiaomi's business model.

3. The cleverness of the business model

(1) Customer acquisition cost

By the end of 2017, there were 137 Xiaomi Stores in China. The company's customer acquisition has begun to shift from a single channel to an omni-channel retail system covering physical stores, e-commerce, mobile terminals and social media. How to further leverage the Internet and new technologies to achieve online and offline joint customer acquisition innovation has also become the key to e-commerce profitability.

Xiaomi's business model subsidizes this customer acquisition cost into hardware products. Since hardware is visible and tangible to users, the product price will be clearly displayed to users. In addition, the profits of traditional companies come from the gross profit of the hardware itself, so the cost will naturally be added to the price of the product. Xiaomi's customer acquisition model regards the act of selling products as a cost, which means that not only can the product itself not make a profit, but the company can also provide partial subsidies.

As a result, the price of Xiaomi products is naturally much lower than that of traditional products, and users are keenly aware of this price difference, so the competitive advantage is very obvious. This multi-dimensional differentiated competition model has completely deprived traditional companies of their voice in pricing, thus losing their market initiative.

(2) From Xiaomi’s prospectus

Xiaomi acquires customers through hardware, and the customer acquisition process itself is profitable, while other Internet companies have high customer acquisition costs. Xiaomi's hardware sales have a gross profit margin of approximately 8.5%, and its net profit margin is estimated to be around 2%. Compared with other Internet companies, Xiaomi's hardware customer acquisition has two major advantages:

1. Internet companies typically spend a lot of marketing money to build and retain a user base. According to data provided in Xiaomi's prospectus, the customer acquisition costs of several global Internet giants with a market value of more than US$15 billion are all above US$15 per person. Xiaomi's customer acquisition has no cost and even contributes to profits.
2. The natural attributes of hardware customer acquisition determine that user stock is high, stickiness is strong, and activity is high. The ability of subsequent conversion is strong. This is elaborated in the next section.

4. Competitive barriers of Xiaomi’s business model

(1) In terms of hardware

Xiaomi's competitors are Samsung, Apple, Huawei, OPPO, vivo and other companies, which are giants in the field. As a newcomer, Xiaomi has remained among the top five in the world and has even reached the top three several times. Objectively speaking, the most competitive sector in the electronics industry today must be mobile phones. According to the current trend in the mobile phone industry, the top five companies have occupied more than 80% of the market. In other words, the head effect in the mobile phone market has become very obvious, and there is almost no room for survival for the following companies.

(2) In the new retail

Although the new retail concept has only been proposed for a few years, the competitors Xiaomi faces are no ordinary ones. China's new retail market has almost been divided up by Tencent and Alibaba. It is not easy for Xiaomi to get a share in such a gap.

Xiaomi has leveraged its unique product advantages to build a powerful new retail platform. Both the online Xiaomi Mall, Xiaomi Youpin, and the offline Xiaomi Home have achieved huge success. At the same time, the good reputation of Xiaomi products has given it a voice on platforms such as Taobao and JD.com, making it an important traffic commodity for other new retail platforms.

Xiaomi is an important participant in JD.com’s 6.18 and Tmall’s Double Eleven. It can be said that Xiaomi has also achieved very dazzling results in the new retail track.

(3) Internet services

The competition in this field is even more intense. First of all, BAT has been operating for many years and has established huge advantages. Now there are Toutiao, Meituan, and Didi, all of which are companies with valuations of tens or hundreds of billions of dollars. Xiaomi's advantage is that it has built Internet services into its hardware products. From the perspective of user habits, it is easy to change a mobile phone application, but it is relatively costly to change hardware.

A mobile phone is used for 1 to 2 years, and a TV is used for 5 to 10 years. The stickiness of this hardware gives Xiaomi an inherent advantage. At the same time, Xiaomi started with various services such as MiTalk and MIUI system, and has many unique advantages in mobile application services.

In particular, the unique MIUI system, whose human-computer interaction and user experience are the benchmark for the entire mobile phone industry, has a huge fan base. Therefore, Xiaomi services have a very good reputation at least among its own user base. By leveraging this service and reputation, Xiaomi has seized the traffic entrance to Internet services, thus obtaining the basis for Internet monetization.

(4) High offline floor efficiency

Xiaomi's offline channels include Xiaomi Home (self-built and self-operated), Xiaomi exclusive stores (built and self-operated by others), Xiaomi authorized stores (built and operated by others, at the county level and above), and Xiaomi direct supply points (built and operated by others, in county and town markets).

Xiaomi Home is the main battlefield for Xiaomi's efficient offline retail, and its expansion is unstoppable. As of February 2019, there are nearly 600 Xiaomi Homes/exclusive stores in mainland China, 1,100 Xiaomi authorized stores, and Xiaomi direct supply points have now penetrated into more than 560 counties and districts across the country. The retail sales formula is simplified to retail sales = traffic x conversion rate x average order value x repurchase rate. Xiaomi has formed a replicable high-efficiency "strategy".

Overall, Xiaomi Home’s high floor space efficiency excels in terms of traffic and conversion rate, but its average order value is not superior. Behind the extremely high traffic and conversion rate is Xiaomi's dynamic product portfolio and extremely cost-effective value proposition, especially Xiaomi's core product pool mainly consisting of consumer electronics and home appliances, which puts higher demands on product capabilities.

Author: Simple

Source: Jianyi Business