How will Yanxuan’s business model serve and provide premium goods at low cost?
As mentioned above, Yanxuan adopts the ODM model to achieve what it was meant for. That is to sell premium products at a lower price. In essence, what works best is Yanxuan’s full involvement in optimizing every link of the value chain, which includes such steps as research and design, the purchase and manufacturing of raw materials, storage and logistics, distributing, marketing, online sales and after-sale services.
Exactly how involved is Yanxuan in the whole process?
First of all, Yanxuan was able to take advantage of the temporary decline when many China’s manufacturers were experiencing a harsh time seeking for a transformation to boost profits. They have been caught in the situation of gliding profits under the background that China is experiencing a slowdown in economic growth, as a result of underpricing from global branding businesses. These global branding businesses shifted their manufacturing center from southeastern coastal China to SE Asian countries. Yanxuan approached those manufacturers with cooperation terms of higher gross margin than what they are earning.
Secondly, the partnering manufacturers of Yanxuan are ODMs. ODMs are those who design and sell products to branding businesses, and manufacture the products as specified, while in the end, the products will be rebranded by those branding businesses for sale.
Yanxuan would usually decide what items to launch before choosing which manufacturers to cooperate with. It has its own team of buyers to decide, select and purchase the most popularly daily used items within the various categories. This is then followed by a business development team which approaches manufacturers for cooperation. There are certain standards of criteria for choosing manufacturers, including its ranking in the industry, its scale, its experience in partnerships with international branding businesses, and much more. According to a 2016 report by DT Finance, approximately 43.6% of the manufacturers who have partnered with Yanxuan are experienced in manufacturing for global big names.
Samples, designed by manufacturers, will go through a process of tests and modifications by Yanxuan’s team before mass production orders can be placed. Suggestions of modification will be made in designs, usage of raw materials, functionality, customization, and so on. Products generally become finally ready for sale after being first assembled together, packaged and placed in the warehouse for storage (coupled with rounds of quality examination).
Yanxuan can control the quality of goods by being a part of the process or processes between the product design and manufacture stages. They also make the head decisions in order to cut cost by making optimizations in the latter stages, which include distributing, marketing and online sales. This technique resembles Xiaomi innovative smartphone retailing strategy, which was done by directing sales through self-owned online platforms. By doing this, Yanxuan limits the brand premium as well as the cost of layers of intermediary distributors. In terms of marketing, Yanxuan already has a head start due to its association with NetEase’s email service and its online content platforms.
Yanxuan’s is attaching more and more value to its own designing capability, whether that may be product design or visual design (including product packaging, website UI, etc.). According to Chinese reports, in May there were more than 100 employees of its own designing team, and several hundred contracted designers from all over the world. One of its next strategic focus is increasing the proportion of original product designs.
The reasons behind the ever-growing importance of the designing capabilities under the ODM model includes the following. First, it includes an effective way to get rid of the blame of copycatting from global brands and to build up its own brand recognition among consumers with differentiation in product design. Secondly, it includes the rising aesthetic needs from Chinese customers. It is widely known that China is experiencing a trend of consumption upgrading. Yanxuan targets young city dwellers, who pursues a high-quality life while still being price sensitive. Yanxuan provides satisfying goods in terms of quality, good taste and affordable price. According to data tracking service Jiguang, 70% of Yanxuan users come from first-tier and second-tier cities, with Beijing, Shanghai, Hangzhou, Guangzhou and Shenzhen topping the list. In terms of age, those between the ages of 20–29 accounts for 33%, and 54% for the 30–39 age group. Individuals with a bachelor’s degree and above take up as high as 96.77%.
Apart from Yanxuan, ecommerce giant Alibaba and phone maker Xiaomi also followed the trend to launch their own self-operating platforms earlier this year. In regards to some of their products sold, it was clear that they mimicked the steps taken by Yanxuan, in dedicating themselves to providing a better quality life for all Chinese consumers. However, in the road of being an initiator, challenges go side by side with chances. First of all, such a heavy operating model means risks in the supply chain management and a high demand of cash flow. The second problem is how to effectively increase SKUs (Stock keeping units) and expand in scale, since the CEO of NetEase aims to increase its GMV to 20 billion RMB in 2018. Long-term challenges also include building a more recognizable brand and its own R&D (Research and development) capacity to increase bargaining power against manufacturers.