Xiaomi’s Cost-Effective Business Model: The Ultimate Sincerity to Users

  There is a joke on the Internet called “Don’t talk about money, talking about money hurts feelings”. In fact, doing business is about talking about money. Why would something so normal hurt feelings? Because in public perception, most people lack sincerity when talking about money, and they all want to take advantage of others, which of course hurts their feelings.
  Taking advantage of this kind of thing must be based on information asymmetry, and in the Internet age, any information asymmetry cannot last long.
Experience beyond expectations

  When Xiaomi was most difficult in 2015, someone once recommended an executive of a semiconductor company to me. From the perspective of performance, he is very powerful. When he took over, the company’s annual revenue was about 9 million U.S. dollars. In just 4 years, it reached 400 million U.S. dollars.
  When talking to me, he was very proud and said that he had the ability to sell straw into gold bars. However, the more I listened, the colder my heart became. Before he finished speaking, I knew that Xiaomi didn’t need such a person. I have started my business for more than 30 years, and I have met countless people like this. What he said is not the direction that our business development should pursue.
  When I started Xiaomi, I didn’t want to be a scammer, and I really didn’t like people who sold straw into gold bars. We are like farmers farming the land every day, we reap what we sow. We don’t do things that cheat people, that’s not our philosophy. What is real material? What does it mean to be friends with users? If one day you learn that your friend sold you straw at the price of gold, is he your friend? He is definitely not your friend. I don’t want a marketing master who sells straw into gold bars. What I want is someone who works in the fields every day like a farmer, and then earns a reasonable profit with hard work and sweat. I think such a person will last, and such a person can have real friends.
  I talked about this with my company colleagues during an internal training. When the public relations team looked through the past video materials, they put this speech into the documentary when Xiaomi went public in 2018. After the documentary was disclosed online, this passage resonated with many users. This is indeed what I really think: Are we really used to a life of intrigue? Can we have a company that is worthy of the trust of users and is really a friend of users?
  So when I do every business, I think: When I sell the product to a friend, how can I recommend it to him? How can I show my sincerity? My answer is 8 words: “Moving people’s hearts, and the price is kind.”
  Touching people’s hearts means that the product must have an experience that exceeds expectations. If the product is not good, no matter how low the price is, no one will like it. The price is kind, which means that the pricing must be sincere, otherwise when users need to use their wallets to vote, they will not pay in the long run. So these 8 characters are like two sides of a coin, a relationship between two sides of one body. It seems ordinary, but it is not easy to do it. To really do it, you must have enough sincerity and the ruthlessness to restrain greed.
  Xiaomi was very lonely when I started to practice this road. It wasn’t until I met a market maker in the United States that I realized that someone had already walked this road.
Learn to restrain greed

  In 2012, I went to the United States for a meeting with executives from Kingsoft. Dr. Zhang Hongjiang, then CEO of Kingsoft, stayed in the United States in his early years and was familiar with the country. He rented a car as soon as he got off the plane and went straight to Kaishi Ke. I thought he had a procurement task, and he told us after he came back that he bought most of his things in the United States for more than 10 years after returning to China. As soon as he publicized, other colleagues went. When I came back in the evening, everyone said that the things were great. One of the colleagues said that he bought two big boxes of things, which were really hard to carry, so he bought two boxes on the spot, but the two boxes shocked him again: New He bought one each of Xiuli’s large and super-large suitcases. At that time, the price in Beijing was more than 9,000 yuan. 150 US dollars, equivalent to more than 900 yuan. I was overwhelmed after listening to it, and then took the time to watch it for 10 minutes, and the feeling was that it was incredible.
  For Market Opener, the more I study it, the more I admire it. It is a truly great company in my mind. Later, I tried my best to introduce it on various occasions. Here I will take the trouble to introduce the greatness of Market Opener again. and a few simple rules laid down by its founders.
  First, any product must be approved by the boss before it can be sold on the shelves.
  Second, there are only two to three options for any category of goods, and all SKUs (minimum stock keeping units) add up to only more than 4,000, which prevents users from having a headache for selection.
  Third, the gross profit margin of any commodity shall not exceed 14%. To exceed that would require board approval, which has not happened since the company was founded.
  Let’s look at it one by one, and Kaishike actually does two things: help users make selections and restrain greed. Among the three rules mentioned above, the first and second ones ensure that the product has enough sincerity. The first is to resist the urge to sell everything, do something, and not do something. When only two or three options are available in each category, it is imperative to choose the best product. Moreover, the product has been tested by the boss himself, and it has been checked for users. The third is to restrain greed, and only earn small profits on any commodity. In fact, the gross profit margin of Kaishike’s products has remained at around 7% for a long time (it has been around 12% in recent years).
  These rules sound simple, but they are difficult to implement. In the United States, land, rent, and labor are very expensive, and Wal-Mart, which has low prices every day, must achieve a gross profit margin of about 25% to survive. The gross profit margin of customers who open the market is very low, and it is easy to lose money if there is a slight problem in operation. This model is very difficult to operate. In the 1990s, the company was on the verge of bankruptcy and the founders had to sell the company. But the founder doesn’t care about owning the company at all, what he cares about is whether he can stick to the cost-effective model and let the market opener realize his ideal.
  The cost-effective model is very risky, but once it succeeds, it will be extremely powerful, because the cost-effectiveness will win the trust of users, occupy the minds of users, and make users buy with their eyes closed. Today, Kaishike has already stepped out of the trough and has become a leader in the global retail industry, with a current market value of over 200 billion US dollars. “Stock God” Buffett especially admires market openers, claiming that market openers are one of the stocks that he will never sell until he dies.
Cost performance is the greatest sincerity

  The success of Market Opener gave me great confidence. Xiaomi has been open to making friends with users from the very beginning. We made products together with users. In the early years, we even cut off all the complicated channels and marketing expenses, and directly priced at cost, providing users with high performance, high value, A cost-effective product.
  The cost-effective model has brought Xiaomi great success, but whenever we encounter a trough, there are voices that Xiaomi’s problem lies in the cost-effective model.
  In 2016, we released the first full-screen mobile phone Mi MIX, which was priced at only 3,499 yuan. At that time, we had internal discussions, and many colleagues hoped to set this epoch-making product at 6,000 yuan or more than 8,000 yuan. I think this is not in line with the cost performance that Xiaomi insists on, so it is still priced at cost. Afterwards, many friends who cared about Xiaomi felt very sorry, thinking that we had the opportunity to set a high price, so that Xiaomi could instantly stand in the high-end market. Since then, in the process of Xiaomi’s impact on the high-end road, there are many “mi fans” who suggest that we raise the price a little bit, and don’t stick to the price-performance ratio.
  I can understand my friends’ concerns, but I still have to say that they misunderstood the price/performance ratio. Cost-effectiveness is not absolutely low price. Adhering to cost-effectiveness can also make high-end and high-end products. For example, when the Redmi 98-inch smart TV was first launched, it was priced at 19,999 yuan, which was already very expensive in terms of price, but it was still the ultimate price-performance ratio, because the average price of a giant-screen TV of the same size was around 150,000 yuan at that time.
  Therefore, cost performance is not about discussing absolute price, let alone low price. The price-performance ratio focuses on comparative advantages, that is, the performance is the best at the same price, and the price is the lowest at the same performance.
  The ultimate price/performance ratio is no longer a means of competition, but business accomplishment and strict self-requirements to express sincerity to users. The most powerful evidence comes from our 5% red line – we promised that the comprehensive net profit margin of the hardware business will not exceed 5% in 2018. Now that a few years have passed, Xiaomi’s high-end mobile phones have stabilized at a price of 6,000 yuan. The financial reports in recent years show that the average price of Xiaomi’s mobile phones has increased significantly, and our revenue and total net profit have both increased significantly, but the net profit margin of hardware has remained at about 1%.
  For the Xiaomi model, cost-effectiveness is not a matter of business, but a matter of belief, a long-term commitment to users, and the greatest sincerity to users.

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