Why is Xiaomi still valued at 100 billion US dollars after suffering a loss of 43.9 billion?

It is reported that Xiaomi has officially submitted its IPO application documents. This will be the world's largest IPO since 2014, and its valuation will be at least 70 billion US dollars.

However, between 2015 and 2017, Xiaomi Group's net profits were: -7.6 billion yuan, +492 million yuan, and -43.9 billion yuan respectively.

Overall, Xiaomi's losses are on the rise and the gap is getting bigger, but why are investors still so optimistic about Xiaomi? How does Xiaomi make money when it always insists that its hardware comprehensive net profit margin does not exceed 5%? Is Xiaomi stupid or are the investors stupid?

Come, let’s look at a story first:

Last Sunday, I attended an anime festival event, and my painting style that day was roughly like this.

The picture comes from the Internet

After the event ended, it was already past 9 o'clock in the evening. On my way home, I passed a bar and was stopped by a young man standing at the door. He said to me:

Hello beauties, we have an event in our bar today, all girls can eat for free, would you like to know more?

This boss seems very stupid. He is doing business at a loss. How can he make money if all girls are given free meals?

Don’t worry, let’s first analyze the business philosophy behind the boss, which is divided into three steps:

So, the bar owner and Xiaomi are not stupid, they used the same routine.

This strategy is very advanced and full of Internet thinking. Both the bar and Xiaomi can make profits in the end. This "first loss , then profit" model is called the "three-stage rocket" in the Internet industry.

1. What is a three-stage rocket?

The "three-stage rocket" was proposed by Zhang Yunfan, director of Perfect World Holdings Group and CEO of Zongheng Literature. It is a business model that consists of three steps:

Take 360 ​​as an example:

Back then, when Zhou Hongyi was working for others, antivirus software was still in the paid era, and the market was dominated by companies such as Rising and Kingsoft. Zhou Hongyi "ignored" industry rules and launched 360 Security Assistant, pioneering a free model that quickly gained hundreds of millions of installations and defeated all competitors.

1) 360's first stage rocket - safety assistant

However, since it is free, it cannot make a penny; moreover, in order to maintain these hundreds of millions of free users, it has to burn a lot of investors' money (such as the money of Sequoia Capital's Shen Nanpeng).

Money will eventually run out, what to do next? A second stage rocket must be built.

2) 360's second-stage rocket is software manager

If you went online 10 years ago, you might remember that computers were very easy to get infected with viruses back then. Because the market was still very wild at that time, all the software were rogue software, and various bundled installations; all the websites were rogue websites, with various Trojans and viruses.

Zhou Hongyi launched 360 Software Manager, which provides purified software for users to download, including 360's own software (such as 360 Browser ). 360's move allows users to finally use clean software.

However, the software manager and the software it provides for download are also free, which means more money is burned. Therefore, it is necessary to continue building the third-stage rocket.

3) 360's third stage rocket is navigation and search

Among the software provided by the second-stage rocket (software manager), the most popular one is 360 Browser. Through the browser , 360 finally found the third-stage rocket that could bring profitability - navigation and search.

The next step is very simple: the default homepage of 360 Browser is 360 URL Navigation, which is covered with densely packed advertisements ; the most conspicuous position on the navigation page is the 360 ​​search box. I believe you are very clear about the profit model of search, so I will not elaborate here.

At this point, 360's three-stage rocket is finally completed:

360 three-stage rocket

2. Why do we need a three-stage rocket?

The three-stage rocket model looks impressive, but if I describe it like this, it feels a bit off:

First make a money-losing product, then develop a second money-losing product, and finally transition to a scenario that can make money.

In other words, in order to make money in the end, I have to make two money-losing products first.

This logic is rather suspicious. I think there are at least two issues that need to be discussed:

1) Can’t I just find a profitable project instead of doing the first two money-losing projects?

The answer is: very difficult .

Because once you start making money, you will attract a lot of people to compete with you. In the homogeneous competition, unless your product is much better, there will be no chance of success.

What’s even more fatal is that once you verify that this is a profitable business, there will definitely be someone who uses free tactics to attack you - his purpose is not to make money, but to kill you.

Only if you follow Lei Feng's example and make something that doesn't make money (such as 360 Security Manager), others will think it is a money-losing product and will then let you go and give you room to develop.

By the time you reach the second stage of the rocket, it’s still not clear that you can make money.

Only when you reach the third stage of the rocket can you start making money, and you can make money with more confidence.

Why?

Because you have laid a solid foundation and the transition to user needs is very clear, others cannot directly copy your third level.

For example, if you are jealous of the high returns of 360 Safe Browser, you also form a team to develop one, claiming that it is safer than 360 Safe Browser. Is it possible? It won't work.

Because through these two money-losing products, Security Guard and Software Manager, 360 has established people's perception of its "security", which you cannot copy.

Here is another example:

In 2015, Luoji Siwei held a book sale. A set of books was priced at 400 yuan. There were a limited number of 8,000 sets, with 6 books in each set. The selling point was that you didn’t know which 6 books they were until you got them. The event was so popular that all 8,000 sets of books were sold out in less than an hour.

Luoji Siwei's "The Future Stands Behind You" event

There was a Taobao store owner who had a good vision. He anticipated that this event would be popular, so he grabbed 10 sets at the first opportunity.

After all 8,000 sets of books were sold out, many users asked in the Luoji Siwei group: Why are they gone? Where to buy? The boss quickly put the 10 sets of books he had snatched up on his Taobao store, raising the price by 50 yuan to sell for 450 yuan. As a result, not a single unit was sold after 2 days.

Then he lowered the price back to 400 yuan, but still no one bought it; in desperation, he sold it at a discount, but still no one was interested. Finally, the transaction data for these 10 sets of books in his Taobao store was zero.

The first-stage rocket of Luoji Siwei is its free talk show, the second-stage rocket is its community , and the third-stage rocket is e-commerce (selling books, selling moon cakes...). The small boss in the case wanted to directly intercept its third-stage rocket, but of course it couldn't happen because its real competitiveness lies in the first two stages .

The three-stage rocket of Luoji Siwei

There is a second doubt about the three-stage rocket model:

2) What if I make two loss-making products and still can’t find a way to cash in?

The answer is: either pack up and leave, or look for ways to cash out, or make a third money-losing product.

No matter which one you choose, it is not an easy decision.

When we review successful experiences, we tend to have the misunderstanding that we can succeed by summarizing a successful model and following it. However, in reality, a successful business model may only increase the success rate from one in a thousand to one in five hundred . Although it has doubled, it is still an extremely low probability event.

PS: According to Zhu Xiaohu's statistics, there are about 2 million new technology startups established in China every year, of which only 1,000-2,000 can get angel investment, and only 200-300 can get A round of financing. We use obtaining angel investment as the standard of success and arrive at a success rate of one in a thousand.

It is not uncommon for companies to go bankrupt due to lack of monetization, such as Xiaoming Bicycle, which still owes deposits to users; there are also many companies (products) that continue to burn money but have never found a good way to monetize.

For example, Moji Weather and Meitu XiuXiu have a user base of 500 to 600 million; there are also companies that continue to expand new business lines (money-losing products) and prepare big moves for future monetization, such as Xiaomi, which started to expand offline business last year.

After all, the essence of the three-stage rocket is to first seize the market and establish barriers through money-losing products, and then start to harvest users and make money after the market share is large enough and the barriers are high enough.

Why not a two-stage rocket? Because the battle line is too short. If the battle line is short, the barriers cannot be built high.

Why not a four-stage rocket? Because the battle line is too long. The longer the battle line, the higher the cost, the more variables and the greater the risk.

Therefore, the three-stage rocket is the most cost-effective result after weighing the risks and benefits.

3. Precautions for the three-stage rocket ( how to use it )

Of course, three-stage rockets also have their scope of application, and it is not a universal formula. In the specific application process, we need to pay attention to two points.

1) Fully understand the nature of the three-stage rocket and do not apply it mechanically

As mentioned earlier, the essence of a three-stage rocket is a trade-off between risk and benefit. Therefore, there may be a situation where a company weighs its risks and benefits and finds that a three-stage rocket is not the optimal solution.

For example, some companies have awesome products and a strong moat. If such a company builds a three-stage rocket, the cost-effectiveness is not high - it can just sell the product directly without having to use so many tricks.

For example, in the field of public accounts , there are not many operators like ours that are three-stage rockets. Many public accounts are two-stage rockets - free articles + advertising monetization.

Comparison between the operation agency and other public accounts

There are also companies that have extremely grand visions, but their three-stage rockets are not powerful enough to reach such distant destinations, so they need to build more rockets to accumulate greater potential energy, such as Xiaomi, which is about to go public (Xiaomi, which insists on long-term user value operations, who knows what else it can do).

Xiaomi's multi-stage rocket

In short, the "three" in the three-stage rocket is just a figurative summary of the business model of a certain type of company . Its essence is the trade-off between risks and benefits, rather than a rigid dogma that can be applied mechanically.

2) The three-level recursion usually pushes the high frequency to the low frequency, but the reverse is difficult to achieve

For example:

We all know that Kuaishou is very profitable in live streaming , and it can easily snatch the live streaming business from Huajiao and Yingke ; however, it would be extremely difficult for Huajiao and Yingke to develop a short video function in turn and snatch away Kuaishou’s short video traffic .

Why?

Because short videos are high-frequency , more than 200 million users in China spend more than an hour a day watching short videos on Kuaishou. With such a large basic traffic, if any part of it is converted into live broadcasts, it will be a serious threat to platforms specializing in live broadcasts.

On the other hand, live streaming is relatively low-frequency , and its user scale and number of opens are far less than those of short videos. With such a small basic traffic, how much will be left after being converted to short videos? It cannot pose any substantial threat to Kuaishou.

So if a live streaming platform wants to build a rocket, how can it do it? Zhang Yunfan said that live streaming platforms could consider distributing games . A person may download a new game only once every half a month or a month, which is a less frequent product than live streaming.

Following the same logic, WeChat has been very successful in payment and has been unstoppable all the way, while Alipay has repeatedly suffered setbacks in social networking .

The fundamental reason why Moji Weather, which we mentioned earlier, cannot build the next-stage rocket is precisely here: checking the weather is already a low-frequency behavior that cannot be any lower, so where else can we find a lower-frequency direction to push in?

4. Summary

Today, we talked about a very classic business model - the three-stage rocket .

It is divided into 3 steps:

1) Build head traffic

2) Extending a high-stickiness scenario

3) Monetization

Through this model, the company can quickly seize the market and establish barriers. Once the market share is large enough and the barriers are high enough, it can then begin to harvest users and make money.

We cannot understand this model rigidly. There are actually many considerations when it comes to how many stages a rocket should have.

If the number of rocket stages is too small, the company will not be able to build high enough barriers; if the number of rocket stages is too large, the company may fall into a situation where the front line is too long, the cost is too high, and the risks are out of control. Therefore, the decision on how many stages of rocket to build should be made flexibly based on the company's specific circumstances.

Of course, using a three-stage rocket model does not mean that you will succeed. It is possible that the three-stage rocket has been built, but no monetization scenario can be found, and the company can only continue to lose money.

In addition, since the three-stage recursion can only push high frequency to low frequency , a worse situation may occur: the first-stage rocket is already very low frequency, resulting in the inability to build even the second-stage rocket, not to mention the indefinite realization of monetization.

Finally, I want to say that everyone is actually a company, so everyone can use the three-stage rocket to build their own potential energy.