Tag Archives: business model innovation

Why Xiaomi is The Future of Smartphone Industry?

What is the world´s fourth and China´s biggest smartphone company?
Hint: It is not Nokia.

It is actually company called Xiaomi, four-year old Chinese company, who does really affordable smartphones and has been dubbed as the Apple of China. it has taken China by storm and is now eying for world dominance. So forget the usual players for a moment and take couple of lessons from the new rising star of mobile:

1.Smartphone market will be commoditized, be cheap
Smartphone is not a status symbol anymore or anywhere in the world. The latest innovations in smartphones have majorly been in terms of size. Xiaomi´s operating margin was only 1.8 percent compared to 28.7% Apple and 18.7 Samsung. Part of it is due to their aggressive growth strategy, but other part is the commoditization. Profits will definitely shrink in smartphone category. Especially when the main source of growth will come from developing markets.

2. Copy with pride & style
One of my colleague ordered new Xiaomi phone. When I tested it out, it was quite a revelation for a devoted Apple user. Actually it was probably the first Android phone I thought of actually, so striking was the similarity with iPhone. Whereas many other copycat products I have seen, it did not feel cheap or shady at all. The package was nice and the phone felt way more premium than its price. So it would be unfair to categorize Xiaomi phones only as copycats, but it would be unfair not to mention that aspect either. It is not coincidence that Lei Jun, the founder of Xiaomi, rocks black turtlenecks and jeans in their product unveilings. Technologic innovation is expensive, so Xiaomi bypasses that one and innovates in other areas of their business.

3. Innovate the business model
Xiaomi is not technologically innovative, that is true. From business perspective, they have been really disruptive. Xiaomi keeps their phones longer in the market than other competitors (even to 18 months compared to 6 months of Samsung). Apple has to come up with new products constantly to keep up their margins. Xiaomi is more betting on component cost drop-off during those two years and prices their product initially close to the component cost. Selling phones (they also have tablets and tvs) is just one side of the coin; their main goal is to actually sell services and apps through the phone.

Next year will be important litmus test for their approach as they are rapidly expanding beyond China. They concentrate on markets with large populations, e-Commerce infrastructure and weak telecom carriers. The initial response from India was great, although now the sales have been blocked because of potential patent infringement. The focus on India, Indonesia, Brazil & Russia is wise strategy, but there might be actually some opportunities in more developed markets as well. My colleague was not the only Singaporean who has bought their new phone. During this Christmas season Xiaomi phones have been more popular lucky draw prizes than iPhones. At least for a while, the slick design and renegade attitude has certain aspirational cool factor, not normally attributed to budget versions.

4. Innovate the distribution
Xiaomi has a digital-first approach to the sales of their phones. They partner with big e-Commerce retailers (like Tmall in China and Flipkart in India), and sell their phones through them. They never sell through brick & mortar stores. By selling directly to consumers, the company can collect and administer all the feedback and built it into the next generation of their phones.
They are also well known for their flash sales, which resemble more of buying rock concert tickets than traditional mobile phone sales. In China, during Single´s day, they sold over 200k smartphones in less than 3 minutes. In India they sold out in their flash sales in 4 seconds. Flash sales work both from branding and business perspective. They create demand and buzz around the phone. Flash sales are not just solitary transactions; they are actual events. One of the main reasons why they sell limited quantity of phones each week is to keep costs down by having smaller inventory.

5. Being cheap does not mean that you do not have brand
Xiaomi phones are entry-level phones, but creating brand affinity with teens is not necessarily a bad strategy. Xiaomi is not just a cheap phone for their devoted fans. It resembles more like religious cult. Part of it is that Xiaomi is probably the first technology brand, that Chinese can really be proud of. It does help to have charismatic leader to go with it as well. Xiaomi launch events are real festivals and people even buy tickets to attend them. Over 60 million watched the livestream and some even took 15h ride to attend those launch events. The events, flash sales and the product serves as marketing. Xiaomi does not really do conventional advertising and uses only 1% to marketing. Their devoted fans and devoted leaders are the best marketers. When Lin Bin (Xiaomi co-foudner) had a “planking” competition with their management team this December, the photo was shared over 3000 times. Not necessarily something that would happen with more traditional companies.

Although you would not necessarily switch to Xiaomi phone, their disruptive business model is something to follow and watch out for in 2015.

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How Shopping Bags Revolutionized Retail

Have you heard about Walter H. Deubner?
 
If you have not, you should be ashamed. By simple observation and great insight, he was able to create good business for himself and the same time changed the way we shop.
 
He invented shopping bag.
 
Small business grocer Deubner noticed in 1912 that his customers always bought as much they could carry. Not more and sometimes less. He designed the way for customers to buy more items on one go. He patented the idea and in just three years he was already selling over million shopping bags a year.
 
That invention revolutionized shopping, as we know it.
 
Quite often our consumers would actually buy more, but they do not realize the opportunity or have barriers for doing it. Too often we are too fixed to the traditional way of selling our product that we do not recognize the barriers that prevent current consumers to buy more, or new consumers to enter our category. Coming back to the post I wrote earlier this week about subscription model, there is huge potential in rethinking the way we sell:
 
Could you sell single item in bulk?
Or bulk item as a single?
Physical product online?
Online product in retail?
Supersize it?
Minimize it?
 
Walter H. Deubner essentially created post-purchase service. Consumer journey seldom starts or end in the transaction.

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Could You Sell Everything with Subscription Business Model?

There has been a surge of subscription-based businesses lately. I am not only talking about subscription entertainment services like Netflix, Hulu or Spotify. There has been also surge in subscription models both in mundane physical (Dollar Shave Club) and in high-interest software (Adobe Creative Cloud).

Naturally the model is not new, newspaper subscriptions have been around for almost 300 years. You could also view library institution as some kind of a precursor to Spotify and other entertainment subscription services. You “subscribe” by paying taxes (in Finland), or by paying nominal fee (in Singapore).  Digital has enabled more smoother service and also more innovative business models (Birchbox). In catalog-era Birchbox model would not have been feasible, but thanks to Internet you can convert people more easily from receiving the samples to buying the actual products online.

The upside for the companies with subscription model is two-folded, firstly lifetime-customer-value will likely be higher and the business becomes more predictable. For consumer the main benefit is of course the convenience. You are getting new socks every month, they are invoiced automatically and you do not run out of socks.

“All the evidence suggests that consumers love subscription content models — it’s the original model of magazines and newspapers and cable, and now it’s the power behind Netflix.”
James McQuavey (Forrester)

Subscription model is not right approach for every company, but might be something to consider. Whether you are working in product or service, it might be interesting addition to your portfolio or differentiator against competitors. Some considerations I have noticed based on subscription based models:

1. It has to be habitual usage for products
Tie-a-month works for snappy-dressed businessman but is not necessarily appealing to a person, who puts on the tie only to weddings and funerals. Usually the cycle is monthly, but could subscription model work with longer breaks? Your computer would be updated yearly? Your car would be updated every second year? Maybe not.
Interesting examples:
Miru (Monthly subscription to contact lenses)
French Cellar (Monthly subscription to French wines in Singapore)
The main challenge with product subscriptions is that you end up with lots of stuff. For many people that is not necessarily a problem, but as people. That is why I think there is definitely some kind of opportunity with combined subscription & swapping/recycling service (Such as Swapstyle or Boxcycle). It is definitely route to explore.

2. Subscribed Service is about access you value
Actually with Spotify you are not really paying for ability to listen to the music you are paying for the access to the music. You might not listen to music that much, but you want to pay for the access to that Barry White song on just the right moment. This is especially easy to see with Priority Pass. The knowledge that you could go to lounge in Airport makes already your travelling more enjoyable, whether you entertain that access or not.
Interesting examples (besides the abovementioned):
Ordergroove: They actually create subscription model platforms for their clients. I am not sure if they have some kind of subscription based compensation system build in their billings, but it would make sense.
One opportunity comes to mind with services. I like to go to different culture events, but the information for those comes many times too sporadically. You might notice interesting exhibition when it is already over. You have to search for the info from different sources, which takes time. What if you could have subscription-based culture package? You would select your level of commitment: from light once-a-month to heavy-user once-a-week. Then you would get access to an event on a fixed date. The model could also have range from just recommendation to total turnkey solution with tickets and transportation. That would be also at least worth an exploration.

Could you change your business to subscription model?

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