What did Xiaomi do different?

Samsung fell, Apple grew, and Xiaomi exploded

That was the headline of an article by Philip Elmer-DeWitt posted on December 16, 2014 in Forbes

How Xiaomi in 2014, sold 61.12 million smartphones which was 227% and 135% growth respectively from the year before. And how Samsung in the same year had a dip in profit which fell 36 percent from a year earlier, the firm’s first annual earnings decline in three years.

Clearly there was some difference that resulted in the above figures. Let us discuss few things that Xiaomi did in 2014 and what Samsung has been doing traditionally over few years.

At the core Xiaomi’s business model is the HERO which made the difference. Rather than following a traditional hardware OEM business model they implemented a mixture of AMAZON and GOOGLE and found a sweet spot of doing their business. Xiaomi did not spend millions of dollars on marketing/advertisement for their products. Rather they built a set of loyal fans over social media and let them do the word of mouth marketing for Xiaomi. According to Xiaomi’s top official statements, they spend less than 1% of their sales revenue on marketing. This is like the least among all the Smartphone OEM in today’s date. This unconventional marketing and model did prove to be disruptive.

Samsung on the other hand spend an estimated of $14 billion on their marketing and advertisement in 2014 according to Reuters. Just to build an image that they are most innovative company and are on par with APPLE. In this obsession to beat APPLE of the perch they forgot that the markets keep changing and people change their perception about a Company very soon eg. Nokia. People are slowly drifting to accept new products as long as they are on par with their competitors. People look for more Bang for Buck rather than see a fancy product launch of the “Next Big Thing” at Broadway, NY.

People are realizing that it’s their money which companies use to host such events. Xiaomi understood this better than Samsung and gave that margin back to the consumer by not having any events like Samsung does. That’s how they have their handsets priced so aggressively that Samsung just cannot match it.

Xiaomi’s top end model ($400) vs Samsung’s top end model ($750)

The other big difference was their Sale model. Xiaomi till date has flash sales to sell their handsets. They do not any have physical stores selling their phones. Rather they partner with e-commerce websites or sell using their e-commerce site (mi.com). This saves lots of cost in terms of stocking huge numbers in warehouse and thus again giving that margin back to consumer. This results in low cost of all models of Xiaomi.

Another major reason how they keep the price so low and yet make profits is their product cycle of manufacturing. While Samsung Galaxy series have a product cycle of 9–12 months, Xiaomi has about 18–20 months for every model. As we all know that prices of conductors etc. keeps reducing exponentially year on year. Xiaomi makes profit by selling the model at the same price which they started throughout the product cycle of 18 moths. Whereas Samsung has a fluctuations in the price throughout its 9–12 months of product cycle. And at the end of 9 months they have a new model.

Xiaomi also has few SKUs of 5 compared to 100+ SKUs of Samsung’s profile. This is again one huge difference in their strategy of both forming their marketing mix. This has an effect on having that product cycle longer than usual 9–12 months and having it extend to 18 months.

So if one reflects all those above points it can be simply put in the following points:

  • Avoid competing with the big brands in marketing spending.
  • Instead, offer a product that’s built (at least partially) with the feedback of enthusiasts/loyal fans.
  • Build up buzz for the products through affordable, unconventional channels.
  • Sell it at a cut-throat price, made possible by doing away with conventional marketing and sales methods.

This worked wonders and Xiaomi is tipped to close the gap further more this year. It is estimated that Xiaomi is targeting to sell 100 million handsets up from 60 million it sold last year.

No one in the industry can doubt that figure as they are growing at a pace which has been unprecedented to say the least if not magical.