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Xiaomi has capped how much money it makes from hardware, forever

Xiaomi has announced that it's capping the net profit margin earned from hardware sales to a maximum of 5% after tax.

Published onApril 25, 2018

Xiaomi has announced that it will permanently limit the net profit margin earned from hardware sales to a maximum of 5 percent after tax.

Xiaomi CEO Lei Jun made the announcement earlier today, and it will affect Xiaomi’s entire hardware range — from smartphones to lifestyle products.

Xiaomi has made a name for itself in part due to its aggressive pricing strategy — releasing hardware that often dramatically undercuts the competition. The company has traditionally avoided expensive marketing campaigns and relied little on third-party resellers to ship its products.

Its business model has been said to rely heavily on after-sale purchases like accessories or content from its digital store, rather than direct sales of major products like its smartphones.

Xiaomi’s hardware profit margins were always thought to be low — and few smartphone manufacturers are likely to make much more than 5 percent net profit after tax from hardware anyway — so the 5 percent maximum net profit figure itself won’t come as a surprise to many people.

What’s more of a shock is the company’s promise itself: no matter how much it may potentially make by increasing prices in the future, it will be restricted to that same net profit margin. More interesting still, TechCrunch notes that, if Xiaomi exceeds the 5 percent amount, it will give some of the profits back to customers ” by reasonable means.”

Xiaomi reportedly seeking $65 billion IPO valuation, may file as soon as May

Xiaomi’s pledge doesn’t necessarily mean that consumers are always guaranteed cheap products, however. The company could decide to release a $250,000 dollar USB stick and still keep its promise of a 5 percent net profit cap.

That being said, Xiaomi simply won’t have the same incentive as other hardware manufacturers when it comes to increasing retail costs. Why would it sell a phone for $500 when it could potentially make the same per unit selling it for $400 — and get its brand into more users’ hands?

What do you think of Xiaomi’s announcement? Let us know in the comments.

Up next: The best Xiaomi phones

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