Xiaomi, the top smartphone maker in China, recently sold 2.12 million smartphones during a 12 hour "Mi Fan Festival" flash sale to celebrate the company's fifth anniversary.
That sale, which set a Guinness World Record for the most phones on a single "platform" (Mi.com) sold within a day, generated $335 million in smartphone revenues. Apple (NASDAQ:AAPL) notably sold 4 million iPhone 6 and iPhone 6 Plus units with the first 24 hours, but those were sold across multiple "platforms," including online stores, retail stores, carrier stores, and third-party locations. During the flash sale, Xiaomi also sold 38,000 Mi TVs, 200,000 fitness bands, 247,000 power strips, and 770,000 smart appliances.
The "Apple of China"
Xiaomi is often referred to as the "Apple of China," but that nickname isn't quite accurate. Whereas Apple appeals to the high-end market, Xiaomi pursues the low to mid-range markets by selling powerful Android devices at low prices. Xiaomi's Mi Note Pro, for example, offers a comparable display, more RAM, and more storage than Samsung's (NASDAQOTH:SSNLF) Note 4 for roughly half the price.
Xiaomi keeps costs low by spending less on marketing than its rivals, manufacturing devices in small batches to control inventory, and relying entirely on online sales rather than brick-and-mortar partnerships. Xiaomi inflates demand by announcing limited-time flash sales on social media, which sends fans into a buying frenzy.
That strategy helped Xiaomi become the fifth largest smartphone maker in the world with a 4.4% market share in 2014, according to IDC. Those booming sales pushed Xiaomi's market valuation to $46 billion, making it the world's most valuable start-up.
The business of flash sales
Xiaomi's rivals are already imitating its flash sales strategies. Lenovo (NASDAQOTH:LNVGY), which became the world's third largest smartphone maker after acquiring Motorola's handset unit from Google last year, sold 25,000 A6000 smartphones within three seconds in February on Indian e-commerce site Flipkart.
That same month, Micromax, the top smartphone maker in India, sold 15,000 Yu Yureka smartphones within four seconds. Selling limited quantities of handsets at steep discounts is a clever move, since the publicity generated across social media can reduce the amount needed for traditional marketing campaigns.
Samsung, which is consolidating its mid-range devices into the Galaxy J line, hasn't embraced a similar strategy yet. However, third-party retailers have occasionally held unofficial flash sales for Samsung devices in the past.
Market share over margins
Xiaomi reportedly earned $56 million in net profit on sales of $4.3 billion in 2013 (according to Reuters), giving it an operating margin of just 1.8%. By comparison, Apple and Samsung respectively booked operating margins of 28.7% and 18.7% in 2013.
Xiaomi accepts those lower margins because it values ecosystem growth over profits. Back in 2013, Xiaomi CEO Lei Jun told Reuters that Xiaomi should be compared to Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) instead of Apple or Samsung. In other words, Lei wants Xiaomi to build a massive smart home ecosystem on top of its cheap smartphone foundations. That's why it started selling smart TVs, fitness bands, air purifiers, and other smart appliances.
The common thread that weaves through many of those devices is MIUI, a forked version of Android. Since Google Play is mostly blocked in China, Xiaomi users in China must download apps from Xiaomi's Mi App Store, which topped 10 billion downloads last November. Xiaomi also recently partnered with e-commerce giant Alibaba to launch a mobile payments platform to rival Apple Pay and Samsung Pay.
This growing app ecosystem, combined with Xiaomi's widening selection of devices and growing market share in smartphones, could eventually turn the company into the Amazon or Google of China.
The U.S. is next ...
In February, Xiaomi announced that it would launch its online store in the U.S. later this year. Xiaomi won't start selling its smartphones stateside yet, due to inevitable patent issues and their lack of mainstream recognition. Instead, it intends to use it to sell non-smartphone products like headphones, fitness bands, and power banks.
All those devices follow Xiaomi's strategy of selling high quality products at paper-thin margins. Its fitness band costs just $13 in China, while its Yi Action Camera costs just $64. These products could steal market share away from companies like Fitbit and GoPro (NASDAQ: GPRO). If Xiaomi's products start gaining recognition in the U.S. as a low-cost high-quality brand, it could pave the way for its smartphones to eventually take a decent amount of market share.