Xiaomi’s ‘Take the Money and Run’ Business Model Leads to Customer Defection- Final Part

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August 21, 2014 by ...

Final part of a three part post about Xiaomi’s ‘build it by a train-station’ ie take the money and run business model. The previous posts essentially explained that many Chinese firms prefer short and shallow interacitons with customers as they are more profitable. They do not want to engage consumers post sale as it increases costs. As a result, they look for quick hits and constantly seek out new clients. This flies in the face of the US notion of customer retention as the way to save money. This idea is truly foreign in China. Many of my clients have told me as much. To them old customers are a drain and the new are the life blood. 

Chinese markets are controlled
Part of the reason for the ‘build it by a train-station’ mentality is that Chinese markets are controlled. This leads to fewer quality choices and monopolies. Monopolies are definitely not good at bolstering customer satisfaction, as has been proven time and again.

Many Chinese firms do not focus on quality because China’s market controls preclude competition and efficiency. Perfect markets do not exist, but free markets are better than controlled or protected ones.

Benefits of free markets
Markets are like the jungle where Darwinism is at play. They are dog-eat-dog worlds where the good get bigger and the small and weak get dead. This is the virtue of free markets.

Lacking external control mechanism, good firms outdo the bad and the latter ups its game or goes the way of T-Rex.

China’s controlled markets
China’s market meddling perverts all of this. In order to promote local firms and innovation, Beijing favors firms which should be dead. By sustaining their lives, it decreases the value of goods sold in China. The markets are flooded with substandard gear but Chinese have no choice.

Lacking options, they are less likely to identify strongly with one brand. After all, why should they when they are force fed brands they would not consume if given the choice. Their defection rate would increase and so it has.

The question new becomes if this is par for the course in China. If this is not only the Xiaomi but China model. As referenced before, this would be in line with the notion of ‘quality fade’ put forth in the book, ‘Poorly Made in China’.

Quality problems
The author asserted that initial quality from Chinese manufacturers is the best and then degrades from there. He is referencing manufacturers whose time frame is longer term than those in consumer products. Thus, it could be argued that due to the nature of the markets in China, the ‘build it by a train-station’ model makes sense. In his book, Pual Midler says that suppliers want to keep their customers and do anything to get them on the hook, ie sign a long term contract. But once they have signed, quality degrades.

In the consumer products market, there is no need to hook them with quality, but merely with hype. By promising the world and showing a shiny gadget, they are hooked already. By the time they realize the truth about quality and poor after sales service, it is too late.

Train station model
Essentially, Mr Midler, was talking about the ‘build it by the train-station’ model. The conscious effort to minimize quality in order to save costs while simultaneously disregarding customer needs in order to use resources in acquiring new customers. The model works in a land of 1.34 billion people who have to a certain extent, limited choices.

These choices are limited by economic as well as political factors. Beijing ensures that local brands are protected by levying hefty fines and foreign firms. In addition, access to foreign goods can be flat out denied. Consider that foreign companies that want to sell cosmetics legally in China must test their products on animals. Most international firms refuse to do so due to the animal rights fall out of doing so. Thus, if a foreign firm wants to sell cosmetics in China, it is in a tough position. Most demure, leaving Chinese companies to freely sell, while it is the consumers who suffer. (Interestingly enough, Chinese firms do not have to abide by this law).

It is fairly obvious that the market system in China does not engender nor inculcate long term thinking on the part of local businesses. They need to earn money, and focus there energy on that. Existing clients are seen as a sinkhole vis a vis complaints and a cost with no benefit.

Client defection is high due to the nature of the oftentimes adversarial relationship between Chinese companies and consumers. This leads to a vicious cycle of antagonism, lower quality and even higher defection rates.

The question becomes if this is a constant in Chinese industry today. Paul Midler spoke of something similar in his book, ‘Poorly Made in China’. However, he was referencing longer term relationships. The notion of ‘build it by the train-station’, however, refers to companies engaged businesses with shorter time frames. An example is that Xiaomi customers will not reengage the firm with a purchase for one to two years. In the meantime, tasks associated in dealing with them represent a cost with no foreseeable return.

This mentality has been rife in China due to the incredible amount of potential consumers they have. By angering an ‘India’ of people, they still have an ‘Americas’ worth to sell to. In light of this, why should they worry about customer retention?