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How Does Xiaomi Keep its Costs Below the Competition?

January 19, 2015 - Written By Cory McNutt

Xiaomi, the new number one smartphone manufacturer in China and the number three manufacturer of smartphones worldwide – only behind Samsung and Apple – have a slightly different philosophy on how to market and sell their devices.  This difference is what has allowed Xiaomi to sell a high-quality product for relatively low price…up until now their flagship Mi devices sold around the $300 mark.  Their newest high-end device, the Mi Note Pro, at $532, finally breaks the $500 barrier – but this is a true flagship in every sense of the word – with a QHD display, Snapdragon 810 octa-core 64-bit processor, 4GB of RAM and a great 13MP camera with dual-tone LED flash and OIS.  On the opposite side of the spectrum, their Redmi family of devices is under $150, while the Apples and Samsungs of the world are selling for close to $900, how does Xiaomi keep their costs so low?

Xiaomi’s own Hugo Barra spoke to our source, TechCrunch, on that very topic and said it was because of a few of Xiaomi practices…direct online sales, a small portfolio of devices and a longer average selling time per device.  Xiaomi has always sold online, but as they branch out they are beginning to ‘test’ partnerships outside of China – for instance, it is running a trail partnership with Airtel in India and has found other partners in Taiwan, Malaysia and Singapore.  Many outside markets have a prepaid tariff added on that makes keeping the price down even a more difficult task, however, Xiaomi knows that they need to eventually move beyond their China and Asian borders…one of the reasons they brought in Hugo Barra from Google in the first place.  It is a formula that allowed them to sell 60 million smartphones last year and one that gives them an even brighter future for 2015.

Managing a smaller portfolio allows them to keep costs lower by having more control over the components within their supply chains – remember the scale of economics – the more parts Xiaomi can purchase, the cheaper the price.  Barra says,  “The vast majority of the components [in our devices] are still the same, so in terms of supply chain and component sourcing, we’re on the same supply contracts as Redmi 1, which means we’re still getting the same discounts on components.  We can continue to ride the cost curve, so the importance of having a very small portfolio is significant — the fact that we only launch a few products each year, and (the fact that) we only have two product families.”  Some people might think at first that you need more models to be successful, but their sales figures do not bear that out…look at Samsung for instance, they have so many models, specs and model numbers that their customers get confused.  What is wrong with having one low-end, one middle-tiered and one high-end device – how many do you really need.

Barra points out that a longer shelf-life means that they can cut prices of older models as the new ones come out – but they are also careful to upgrade and service the older models and this keeps the customers both happy and loyal.  He said, “A product that stays on the shelf for 18-24 months — which is most of our products — goes through three or four price cuts.  The Mi2 and Mi2s are essentially the same device, for example.  The Mi2/Mi2s were on sale for 26 months.  The Redmi 1 was first launched in September 2013, and we just announced the Redmi 2 this month, that’s 16 months later.”  Compare this to LG, HTC, Sony and Samsung that come out with a new flagship model at least once a year.  They completely stop manufacturing the older model and the retailers and carriers lower the price just to get rid of them – like the year end car sales.

Focusing on these strategies has catapulted Xiaomi into a force to be reckoned with in Asia.  Please hit us up on our Google+ Page and let us know what you think of Xiaomi’s strategy and will it work on the US consumer – do you think a couple devices is better than several by one manufacturer…as always, we would love to hear from you.