Xiaomi and OnePlus proved that it is possible to start a successful smartphone company, even with limited resources. Here's their strategy in a nutshell:

  • Create a compelling product for tech enthusiasts
  • Sell it direct as a loss leader
  • Limit production to create scarcity
  • Build awareness and demand
  • Sell profitable related products and services
  • Scale production once component costs drop
Editor’s Note:
Jeffrey Yuwono is CEO and co-founder of Feecha, a hyperlocal news app for neighbourhoods. A Stanford MBA and Duke undergrad, Jeff writes insightful observations about technology once a day on his blog The Cornerplay and now on this weekly column on TechSpot.

Small Chinese companies like Xiaomi and OnePlus were able to create markets even while competitors like Apple and Samsung spend billions in advertising their smartphones. Their success is a blueprint for others to follow, whether you're running an established smartphone company or starting one.

The Wall Street Journal wrote how Xiaomi became the leading smartphone vendor this quarter in China with a 14% market share. Samsung had 12%. The differences in momentum is stark; in the previous quarter, Xiaomi had 11% while Samsung held 18%.

According to Canalys analyst Jingwen Wang

The installed base of its own interface MIUI, which has a lot of localized improvements, is more than 50 million in the world.

OnePlus' parent, Chinese manufacturer Oppo, may have deeper pockets, but is nowhere near the class of Apple and Samsung. Yet, there is an organic buzz about the OnePlus One, even in this crowded, highly competitive smartphone market. The International Business Times called it "the most talked about smartphone in 2014."

Xiaomi and OnePlus built its success on the strategy of compelling products, made scarce and sold direct as loss leaders.

1. Create a compelling product for tech enthusiasts

To be a successful smartphone company, you must have a good product. Xiaomi built its reputation on Apple-quality phones. While some accuse Xiaomi of being too Apple-like, Xiaomi's products are in fact highly localized.  For example, Xiaomi phones are highly customizable, which is anti-Apple.

OnePlus created what they called a flagship killer -- a phone so good it can stand toe-to-toe with the most expensive phones and with a design to match. The Cornerplay agrees the company has succeeded in its objective.

Xiaomi and OnePlus are smart to target tech enthusiasts. They didn't create for people uninterested in gadgets and just want a phone that works, they created phones for people who cared about performance, hardware design and user experience. For brand awareness to experience viral growth, this is a segment you must win.

If you want to be a successful smartphone company, you must be able to make a good smartphone for tech enthusiasts.

2. Sell it direct as a loss leader

Xiaomi and OnePlus both avoided setting up third party distribution channels or costly retail stores; instead, they sell directly to consumers through e-commerce. This saves on costs and time.

The disadvantage with selling direct is that it's usually harder to get noticed. Xiaomi and OnePlus combat that by selling their phones at cost. A phone which would cost $600 if from Samsung, Sony or HTC, now being sold for just $300? And to great reviews? When the value proposition is this obvious, it's easy to reach customers.

In this situation, sellers don't have to approach buyers -- buyers are the ones beating a path to sellers' doors.

3. Limit production and create scarcity

You can probably sell a lot of phones that should cost $600 but are priced $300. However, small companies have limited manufacturing capabilities and lack the capital to go big. Moreover, if every phone sold is just break-even, it might be better to wait for component costs to go down before ramping production.

So at first, you limit production.

There is a big upside to this and that is creating scarcity. Apple used scarcity to great effect with iPhones and iPads; the harder it was to get an already compelling product, the more desirable it became.

Xiaomi and OnePlus both deliberately created scarcity and their hard-to-get phones have become status symbols among the technorati. Xiaomi sells out their phones in seconds, and invites for the OnePlus One remain rare.

Not only have Xiaomi and OnePlus delivered functional value (this is a great phone), they've also created emotional value (owning this phone makes me feel special).

The other upside to limiting production is that Xiaomi and OnePlus don't have to carry inventory; no expensive warehouses are necessary as they can ship directly from the factory.

As an aside: isn't the fact that Chinese phones have become so sought after a sign of changing times? The Middle Kingdom has risen.

4. Build awareness and demand

Not only have Xiaomi and OnePlus innovated on product and pricing; their go-to-market strategy is also different.

Xiaomi utilizes the power of flash sales in their marketing. They announce on their website, social media and through the press whenever they have phones to sell, and because those phones sell out quickly, followers hang on to their every word. This creates hype and a strong relationship with their audience. Every time Xiaomi has something to announce, they know people will listen. Contrast this to traditional brands that have to invest in marketing campaigns to reach customers.

OnePlus went beyond even Xiaomi. To buy the OnePlus One, you must receive an invite. These invites are issued to the most passionate and socially influential. You had to share on Facebook, tweet, etc. just to be considered for an invite as part of the former. Journalists, bloggers and Youtubers got their invites and, as expected, reviewed this hot new phone. Because the phone's value proposition is so strong, coverage led to more people wanting to purchase the phone, and more people sharing on social media to get an invite. The result is a virtuous cycle of free marketing and the kind of awareness that's difficult for money to buy.

5. Sell profitable related products and services

If you followed the above four steps, you can succeed in creating enormous hype and market demand for a phone that you're selling at break-even. So, how do you actually make money? This is a business after all.

The answer is to sell products and services that do make money. For Xiaomi, those are accessories, an e-commerce site in Tmall.com and online services through the phone (e.g. purchasing themes).

OnePlus is selling an expensive bamboo case for $50, which many people will buy anyway as a status symbol. Attention to OnePlus also often leaks to parent company Oppo, who sells decent phones for a profit. Many websites like The Verge reviewed both phones together.

There's no reason a big company like HTC can't also take this approach. Designate a loss leader to drive awareness, demand and hype; this will bring the HTC brand top of mind for tech enthusiasts, and a halo effect for HTC's other phones (which are in turn sold for a profit). Can you imagine the excitement a $300 HTC One M8 would generate?

This is a strategy that retailers use all the time. Advertise a product at an unbelievable price in limited quantities to draw people into their stores. Those customers then tend to buy other things in the store to make up for the loss leader.

6. Scale production once component costs drop

Even though Xiaomi and OnePlus may start selling a phone at cost, it doesn't mean costs stay the same. Component costs get cheaper over time and in the smartphone industry, often very quickly. A phone that's break-even at launch might be profitable six months later. For example, Xiaomi's Mi3 sells for about $240 and today costs less than $157 to make and distribute, according to Fomalhaut Techno Solutions.

“I think they are making at least 100 dollars of profit with the Mi 3,” estimated Minatake Kashio, Fomalhaut’s director.

I expect OnePlus One production to ramp up this holiday period, just as the phone's internals become last generation.

Declare an amazing price to get attention, limit production and create excess demand; and then hope that demand remains once costs go down, production has increased and profits can be made.

Xiaomi and OnePlus have shown the way. It's up to bigger, established phone companies to humble themselves and learn from these two Chinese upstarts.

Want to start your own smartphone company? Now you know how to succeed.