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How Xiaomi Profits from $100 Phones

Investopedia logoInvestopedia 19-08-2015 Vanessa Page
How Xiaomi Profits from $100 Phones© shutterstock How Xiaomi Profits from $100 Phones

You’ve probably never heard of Xiaomi Inc. Founded in 2010, the Chinese-based company is quickly becoming a major player in smartphone manufacturing. Despite only officially having smartphones for sale in some Asian countries and Brazil, Xiaomi has quickly become a $45 billion company — but with its cheapest phone selling for $78, how is the company profitable?

History of Xiaomi

Xiaomi was co-founded primarily by Jun Lei, formerly of Kingsoft, and Bin Lin, who used to work at Google Inc. (GOOG). In 2010, they set about creating a software called MIUI, which was released to all Android phones in August 2010 and is still the main OS of Xiaomi’s phones.

In 2011, the company released its first smartphone, the Mi 1. This phone faced huge demand and was originally sold for about $300. Since 2011, Xiaomi has created a variety of different smartphones with different features and different price points. For example, the Mi4 is a standard smartphone, whereas the Mi4i, which was released specifically for the Indian market, comes with a strong battery, slower processor and lower price to meet market demands.

Xiaomi also has a lower-priced line of phones called Redmi. Redmi phones come in a range of sizes, starting with cheaper 4.7-inch models all the way up to their latest octo-core phablet(See also Cheap Smartphones That Compare To Apple And Samsung’s Flagship Models.)

The company has also diversified away from smartphones and now sells wearables, televisions, tablets, routers, scales and cameras.

Keeping Costs Down

Xiaomi has found ways to keep its costs to a minimum to help sell its products at unbelievably low prices. The company does very little advertising but instead relies on social media and word of mouth to spread its brand. Xiaomi employees are known to read forums and social media to fix software bugs and get ideas for new features, a practice consumers love because it allows the company to move faster than its competitors to correct or improve its products.

In addition, Xiaomi can save costs by only selling its products online and keeping a small inventory. By cutting out the middleman (retailer), the company is able to save 20-25% of the sales price. By implementing a just-in-time manufacturing strategy, Xiaomi doesn’t need to maintain a costly inventory and potentially have to write off a billion dollars in out-of-date smartphones like Blackberry Ltd (BBRY) had to in 2013. (See also Blackberry: A Story of Constant Success & Failure.)

Sales Strategy Reaps Profit

Another reason Xiaomi’s products are so cheap is because it sells its smartphones at near their cost of production. This strategy is similar to one used by video game companies and Inc (AMZN) Kindle, where hardware sales have small margins but the software generates large profits.

Xiaomi has even gone as far as saying that it's a software company rather than a smartphone company. Xiaomi’s OS MIUI is downloadable for stock Android phones, and the company sells themes that users can buy to customize the OS.

Another way that Xiaomi differentiates itself from other phone companies and how it made $56 million in profit in 2013 is by selling its smartphones for a longer period of time to eke out more profit per product. With its popular phones famously back-ordered, it’s not as if this strategy is leaving customers bored with the offerings or seeking different companies for newer products.

The Bottom Line

Xiaomi is the next big thing in smartphones. The five-year old company has only just begun selling its smartphones outside of Asia, and its Mi Note Pro ($485) is already being heralded by the American media as “The Best Smartphone You Can’t Buy In America.” With an iPhone costing almost $1,000, it seems that Xiaomi’s $100 phone can’t get to America fast enough.

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