Xiaomi’s ‘Take the Money and Run’ Business Model Causing Customer Defection- Part 1

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August 21, 2014 by ...

In China, Xiaomi is being snowed under by customer complaints and the number has only been increasing. Xiaomi is dogged by poor post-sales service, glitchy software and phones dying after a few months. In addition, there are the ever present security concerns which have crept up as of late. 

A while back I guest blogged about how many Chinese companies view old customers with scorn. To them, the old customer presents a cost. Theses users have complaints and require the time of employees who could be doing other things, such as finding new sales.

This notion of neglecting existing clients for the new runs contrary to western business models. In the west, it is commonly assumed that the cost of attracting new customers is much greater than the cost of satisfying old ones. Thus there is a premium on customer satisfaction in the west. This may not be true in countries with controlled markets like China, however.

What I mean to say is that Chinese markets are protected which precludes competition, this being the case, suboptimal choices are made in buying decisions. This condition may lead to less customer loyalty in what becomes a vicious cycle of distrust between producers and consumers. Absent trust, there is no compelling need to ensure customer satisfaction and also no need to remain loyal to a brand. 

Part 1

China’s immense market size a hindrance in customer service?

When speaking of China we talk in superlatives, largest potential market, building the most skyscrapers, mega cities and so on. The enormity of China has enabled its growth but led to problems as well.

In many ways, the vast market potential has ameliorated the need to retain customers, whom to many Chinese firms are merely a cost. Think of it like this, new clients bring nothing with them but cash. They have limited needs and no complaints, they are pure profit. Old customers, however, are the opposite. They know the company and its products, the good and bad. They too may have higher expectations or are jaded by past experience. Each complaint is a cost, an expense in doing business. This makes them dangerous in the minds of Chinese firms.

For companies seeking to maximize profit via fast growth, existing customers are a sinkhole of waste. They are a pit into which valuable resources must be plunged in order to satisfy someone from whom a company has already benefited. By accommodating this person, the Chinese firm does not make money, or so they think. To them there is no financial reward in catering to existing client needs as these people offer up no new cash.

The fact that Xiaomi leads China in customer complaints, especially in after sales service, exemplifies this belief.

Think of it like this; many Chinese companies are unconcerned with placating existing customers because these customers are already on the hook. The company has their cash. Should these people defect, there are always more potential consumers to take their place.

Here is how this was described to me when I first came to China(via guest post here)

crowded


“Xiaomi makes me think of a story I was told about Chinese businesses, quality and repeat customers when I first arrived in the PRC. I was asking what strategies local firms used to keep clients coming back and this was the reply.

‘That is a foreign idea,’ my friend said. ‘In China repeat customers are not a concern, actually it’s just the opposite. Many companies think that because we have so many people here they will always have a steady supply of new customers. Retaining old one’s is not important. We have so many people that there is no need for them to purchase more than once.’

I was confused.

She continued, ‘Why do you think there are so many restaurants near the main train station? For them it is an ideal location. They have a steady supply of people who they will probably never see again. This suits the restaurants just fine because they can skimp on quality and cut costs. If by doing so they anger anyone it is ok because the next train is due at any moment. On that train will be another batch of customers to replace the angry ones. Even if everyone leaves angry it does not matter because another train will always be arriving soon.’

What this shows is how much China is a victim of its size. In a land of 1.4 billion people China can alienate the equivalent of an India’s worth of consumers and still have an Americas’ worth left. To put it another way,  Chinese companies know that in China alone they can piss off over 16% of the people on the planet and still have a US sized market to serve. With such astronomical market potential, why worry about making people happy?

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2 thoughts on “Xiaomi’s ‘Take the Money and Run’ Business Model Causing Customer Defection- Part 1

  1. […] I am in China and researching Xiaomi. They offer a decent phone with great specs but quality concerns abound. Xiaomi, like many Chinese companies, operates under the ‘build it by a trainstation’ model. The idea is to get the customer’s cash and run. Existing clients are a sinkhole and a cost while new customers buy and do not complain. As long as Xiaomi keeps running, they do not have to face up to the negative news, or so they think. Unfortunately evidence is mounting that Xiaomi has serious problems.(explained, here and here) […]

    Like

  2. […] I am in China and researching Xiaomi. They offer a decent phone with great specs but quality concerns abound. Xiaomi, like many Chinese companies, operates under the ‘build it by a trainstation’ model. The idea is to get the customer’s cash and run. Existing clients are a sinkhole and a cost while new customers buy and do not complain. As long as Xiaomi keeps running, they do not have to face up to the negative news, or so they think. Unfortunately evidence is mounting that Xiaomi has serious problems.(explained,  here and here) […]

    Like

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