Xiaomi’s ‘Take the Money and Run’ Business Model Causing Customer Defection Part 2

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August 21, 2014 by ...

‘Build it by a Train-station Model’ Part 2

This is a continuation of the Chinese philosophy of ‘build it by a train station’ model or ‘take the money and run’.

The previous post referred to the Chinese ‘build it by a train-station’ model. When I first arrived in China this model was explained to me. In essence the idea is that if you build a business where there are many transient customers then you do not have to worry about repeat business. All of your clients soon move on. Even more importantly is that many Chinese business have embraced this idea for many and varied reasons. Part of them have to do with Beijing controlling Chinese markets and part has to do with a ‘get while the settings good’ mentality.

Key to this assertion is that consumer producer relationships can be cold in good times and adversarial at their worst. There are fewer market mechanisms which force Chinese consumers and suppliers to engage in rich commerce. As a result, buyer defection is common. This is seen as lack of loyalty by the suppliers who then reduce quality because there is no need to maintain buyer happiness.

These companies then aggressively pursue new clients while paying little attention to the old. The resultant vicious cycle is played out across the countries and industries in China.

The ‘why’.

Many Chinese business prefer customer defection- it lowers costs

This Chinese business model flies in the face of western best practices. World class MBA programs drill customer retention into our minds. It costs more to attract a new customer than to keep an old one. But in China this may not be true. Due to governmental controls which restrict access to western goods, Chinese consumers have fewer well know and higher quality choices. Lacking such options the cost to experiment may be lower.

For instance, China has literally thousands of cell phone suppliers. If the quality delta between them is minimal, then why not defect? Most customers stick with a brand due to loyalty to its identity or message and other things such as quality. Remove any or all of these components and defection is a rational choice. Many Chinese markets lack these traits, and cell phones are no exception

If this is true then a vicious circle of customer and client antipathy will occur. In the belief that customers lack loyalty, companies will be less willing to accommodate them. By the same token, customers will be less brand loyal the less accommodating companies become. As time progresses an adversarial relationship develops with no winners.

This dynamic is alive and well in many Chinese companies and even industries as well. Initially apathy on the part of companies was driven by the state model. Chinese firms fulfilled CCP mandates on product quantity with little to no regard on quality and client satisfaction. Even post-reform, this mentality still existed and does today as well.

 

The result of this is that Chinese firms frequently view markets and customers very differently. They aggressively pursue new clients while neglecting the old. Due to costs associated with taking care of existing clients, these firms see them as a waste. This philosophy is in line with assertions made in the book ‘Poorly Made in China’, by Paul Midler. The author said Chinese firms engage in quality fade. This means that the first product is made with as much precision as possible. Unfortunately it will be the only one made as such. Over time, the Chinese manufacturers tend to skimp on quality and retain the savings from doing so. This is essentially what restaurants by the subway station do as well.

 

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

  1. […] or so they think. Unfortunately evidence is mounting that Xiaomi has serious problems.(explained, here and […]

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  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) […]

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