Xiaomi doesn't rely on smartphones alone to turn a profit

The global smartphone industry changed forever when Xiaomi released its first phone in 2011. Since then, Xiaomi has been rolling out handset after handset with one primary goal, which is to dominate the “value for money” marketspace.

Xiaomi promises a profit margin of no more than 5-percent on its smartphones, which begs the question: Is Xiaomi some sort of voluntarily communist charity club that gives away all of its profits?

The simple answer to this would be “no”. But we’re going one step further to explain how India’s biggest smartphone player actually operates.

Almost 70 percent of Xiaomi’s revenue comes from selling smartphones, around 20 percent from other products like power banks, TVs, air purifiers, etc. and the final 10 percent comes from Internet services – Music subscription service, cloud services, Xiaomi App Store, etc.

Xiaomi’s CEO promised to limit profit margins on the first two categories of products to under 5 percent, but not in the case of the third service.

Making smartphone hardware is not easy; very few companies have perfected the art. Internet services, on the other hand, is much easier in comparison.

Most smartphone manufacturers – LG, Sony, Nokia, etc. – look to turn a profit outright by selling their hardware. Xiaomi, on the other hand, tends to look at the consumer as a long-term investment by selling them hardware at nearly-factory cost and then use smart marketing to push their Internet services to ensure long-term gains.

Xiaomi making no money on hardware is more or less like Google and Facebook giving away services for free at first and then enticing consumers with useful paid add-ons.

Xiaomi’s revenue strategy for its smartphones is very similar to that of Apple. The Cupertino-based company continues to make money even though the number of smartphones they’re selling is on the decline.

No one really changes Rs 90K phone after a year or two years, so Apple heavily relies on its subscription services to ensure a continual flow of revenue.

And, while Xiaomi’s strategy is quite sound, it is not as effective. In fact, Xiaomi’s business model is only effective in China, primarily because Google Services is blocked in the country, so users are happy to use Xiaomi’s Services.