Any entrepreneur, small or big, will tell you how difficult it is to run a business. And running a profitable business is even tougher. It is no different when it comes to tech companies. In addition to building products (or services) that people want to use, the companies have to figure out the right price to sell in order to sustain and stay profitable.
Historically, tech companies, and more specifically, smartphone OEMs, have tried to keep their gross and net margins high enough to be sustainable. They also have an obligation to bring the money back to their investors, and hopefully help them make more money on top of the investment. While I have tried to drastically dumb it down, running a profitable business is a lot more complex. While smartphone OEMs like Apple, Samsung, Nokia and HTC, have mostly stuck to this way of doing business, a new Chinese company in 2011 managed to shake up the market with its innovative way of doing business.
It might not have been the first company to introduce dirt-cheap products to take on the incumbents, but it is probably the first one to actually succeed in the long term with this strategy. While the relatively short history of Xiaomi is pretty interesting to look at (it started as a software company building MIUI ROM for Android devices built by the likes of Samsung and HTC), let us focus on their current business model.
Xiaomi likes to call itself an Internet company. In fact, MI in their logo apparently stands for Mobile Internet. From software (MIUI) to hardware (smartphones) to e-commerce (Mi.com) to televisions (Mi TV) to IoT (Mi Band, Mi vacuum cleaner) to lifestyle products (shoes, backpacks), Xiaomi has a finger in many tech pies. Irrespective of the product category, the business model is virtually the same – quality products at affordable prices. In recent times, the company went on record saying they promise to never make more than 5 percent net profit on their hardware products across categories.
As brave as it might seem, ever wonder how they can stay afloat? Remember, Xiaomi is now a publicly listed company trading at the Hong Kong exchange since July 2018. Obviously, they now have an obligation to make money for their private and public investors, but the question is HOW?
One obvious answer is the ecosystem. Being an e-commerce company, Xiaomi is building an ecosystem of products, smart and otherwise, creating a trustworthy brand in the process that people would love to buy from irrespective of the product category. You constantly hear the company executives saying how they want Xiaomi to be the most loved and admired brand in the world. So their hope is to cross-sell different ecosystem products to their customers and thereby improving the GMV (Gross Merchandise Value).
But then, their honest pricing promise doesn’t let them make more than 5 percent net profit from hardware. Considering some products fail, the company might not actually be making enough profits.
Let us now talk about Xiaomi’s most popular and most important product category – the Smartphones and MIUI. As discussed above, Xiaomi managed to shake up the market (and marketing mantras) with their super aggressive pricing along with super unique marketing. Within four years of entering the Indian smartphone market, Xiaomi managed to climb up the leaderboard and even managed to push aside biggies like Samsung, Oppo, and Vivo to be the number one smartphone brand in the country.
The amazing success of Xiaomi in the smartphone market pushed others to fight Xiaomi on the price. We saw a big surge in the number of smartphone companies flooding the Indian market with a similar business model, especially from China. From LeEco to Coolpad to Meizu to ZTE, there were several companies trying their luck. Unfortunately, as I said at the beginning of this article, running a profitable business is not easy. Cut to 2019, some of them have shut shop and some are at the verge of doing so. Without proper profit margins, it is not easy to stay afloat.
Notwithstanding the aggressive price points for their smartphones, Xiaomi teamed up with content partners like Hungama to provide value-added services like Mi Music and Mi Video. While it is an attractive proposition for the user, how does Xiaomi manage to provide such services for free?
That’s right. Ads. Xiaomi is not your typical tech company. As I mentioned earlier, it is an Internet company. And Advertising has been a tried-and-tested business model on the Internet for years now. So Xiaomi thought it can tap into its huge MIUI installed base and run ads to pay for those value added services (and beyond).
Ads are not new to MIUI. The pre-installed Mi Browser has always shown ads, but ever since MIUI 10 started rolling out late last year, Xiaomi has gotten aggressive with the way they show ads on their smartphones. In addition to notification ads from different built-in apps like Mi Browser, Mi Music and Mi Video, there are now pop-up ads and display ads being shown on apps like Mi Themes, Mi Home or even Mi Search. As if those are not intrusive enough, there have been reports of ads being crammed in the Settings app which Xiaomi has rolled back since.
It is not like the users are completely helpless. Xiaomi says one can go to individual app settings and disable ‘recommendations’ to stop some of these ads. A few weeks back, we wrote a complete guide on how to disable ads on MIUI which explains the same. But sadly, there is no easy switch to disable ads everywhere.
While Xiaomi might think it is fair to show ads considering the aggressive pricing on their hardware and the additional VAS apps and services they provide, not everyone in their userbase is happy with the way the ad situation is developing in recent times. One thing is for sure: Xiaomi cannot afford to ignore this anymore and needs to address the issue before competitors jump in and turn up the heat on it. In communication terms, it needs some ad sense (pun intended).