How Does OnePlus Make Money?


The Oneplus business model:

  1. Low made in China unit costs
  2. Aggressive, invite based, just in time manufacturing
  3. Minimized working capital, notably inventory dollars and inventory risk
  4. Asset turns focused financial model
  5. Direct sales and distribution
  6. Higher margin accessory and app bundling
  7. Viral marketing

Phew. What does that all mean? Let’s talk start on the mobile phone industry, use Apple as a benchmark, and then get back to OnePlus.

The smartphone industry

This is an industry with historically high barriers to entry, cyclical price taking suppliers, extremely aggressive competitors and importantly carriers that encourage high sim-free or off contract handset prices.

The cliche about industries is you either want to be the lowest cost player or the premium player. If you aren’t one of these then you spend your days getting sand kicked in your face.

The number one in mobile phones tends to be both. When you look at the evolution of the dominant handset maker Motorola to Nokia to Apple, at the top they make the most phones, have the most scale and are the lowest on unit cost. But really it is the demand they generate that keeps them there and the demand comes from having the leading phone at that time coupled with a punchy brand.

The leading phone is a license to make money.

When they lose their cachet and leading handset position, the business model will deleverage – they sell less phones, so they make less phones, so costs go up, margins get crushed, and their next phone get worse and worse.

Apple – The guy everyone wants to be

Apple continues to make the leading phone and to market themselves extremely well. They are persuading people on average to low incomes to buy phones they really shouldn’t buy – on top of dominating the market of people with more money than sense.

Let’s talk about the economics of the iPhone. I’m going to use an average selling price (ASP) of $600. You can either assume I’m rounding this down or I’m talking about the 5S generation, because the 6S and 6S+ are pricier. Go here to read about how Apple makes money.

The $600 breaks up as follows: $210 for the components and assembly, $100 other Hon Hai costs, $15 Hon Hai profits, $20 in royalties, $90 in Apple operating expenditures (opex), and $35 in reported US corporation tax. This leaves a net income of $130 per iPhone.

Now what is interesting about Apple is that they probably make 85% profit on the extra storage they sell. Yep when you jump to 64GB or 128GB, essential to store all your apps and music, that is almost pure profit. Probably three quarters of the $130 of net profit per phone is coming from that storage.

This is capitalism at its finest. You are clever in 101 ways, deliver an innovative quality product, all of that so you can make money on probably the most basic element of what you do.

Foxconn is the Taiwanese company Apple use to make all their products. Their other costs are not only the managers and engineers, but also stuff like depreciation on the machines they buy. This is why the tear down bill of materials is only half the story of half a story. It ignores the expensive equipment that forms the production line.

Apple’s operating expenses are typical central costs but also the marketing and advertising. $90 of opex a phone translates into total company opex of $12 billion. I don’t know how much of that is on marketing but its a lot of adverts!

When you buy a smartphone without a contract, the high end Samsung phone tends to be at the same price as the Apple iPhone. However Samsung sells phones to the Verizon’s and Vodafone’s of the world at much lower prices than this. To offset this lower ASP, their primary strategy is to dominate and vertically integrate as many of the components as possible. Think the NAND memory and Samsung’s Exynos processors. Think of the $200 of iPhone components above and remember that each of the suppliers in there are making a little margin. Samsung gave it a good shot but ultimately failed to brand up to Apple’s level, so instead are internally sourcing components to compete. This strategy can work but then you become one of the price taking, highly cyclical suppliers.


So how can the OnePlus 2 be priced at $329 and $389?

In the simplification above Foxconn is delivering the iPhone to Apple for $345. OnePlus is jumping in at the Foxconn point and saying, hey instead of spending $6bn on advertising and marketing and handing over $30bn to Best Buy and Carphone Warehouse, why don’t I sell through a website, take payments via PayPal and post the handset via UPS?

If I had a stab at OnePlus’s math I’d estimate a $375 average selling price, a few dollars of profit per phone, $190 of component costs, $130 other manufacturing costs, and $50 of admin and marketing.

$50 per phone in marketing on 2 million handsets would be $90 million. I don’t know how accurate that is since they’re quite reticent about giving away sales numbers, but as you can see its a fraction of what their competitors are spending.

This is a massive barrier to entry. $90m in advertising should lose against their competitors billions. But they are surviving.

OnePlus have a viral brand which is enabling this low marketing cost. This may not be sustainable as it becomes more mainstream. But as they scale they can advertise in more traditional ways.

Part of the viral brand is the invite purchasing system. As a reminder OnePlus requires an invite to purchase a handset.

Why do humans love the people and things that treat them badly? I have no idea but its successfully generated both cachet, desirability and cheap marketing.

One other thing it does is it allows oneplus to keep its working capital and inventory risk insanely low. Instead of trying to calculate everything per phone, let’s think about per year. Measuring businesses is much more than measuring unit profit. Other key aspects are how many units you shift and how much capital you needed to shift those units. Let’s start this way, you run a tiny grocery store, would you rather sell two cartons of milk at $100 with huge profits or would you rather sell a thousand cartons a day at a fair price making cents on the dollar?

What OnePlus flips into this decision is the cost of the grocery store as well. Because they effectively build to order, not only are they taking advantage of selling more because the price is low, but they’re keeping the cost of the store low. They’re keeping their invested capital rock bottom and therefore generating higher returns on their capital.

The invite system also means they don’t have to have end of season discounts on phones no one wants. This is weird to imagine, but when you go to the Black Friday sales, everything that is discounted there is raising the sticker price you saw the rest of the preceding year.

They have successfully created a scaled business and a hot brand. There definitely have been hiccups along the way but I hope they can keep it going.

Image: flickr commons, TechStage

This is the link to my post on Apple. But even more interesting is how did Nokia fail.

The contrast is huge. But really you love underdogs, so go here to check out Mozilla Firefox and four maps that show how Chrome is taking over the world.

Yuen Lo


  1. Excellent company, I wish her success in the future

  2. You can’t be Apple unless you develop your own Eco-system of OS, Development tools, Applications, desktops, laptops, smartphones, smartwatches and tablets, cloud services, Retail Stores, music Store, streaming music, App Stores, and of course making a consistent 40% of Gross Margin, 20% Net Profit.

    Just making a product that looks like an Apple product is just a facade. Making your website kinda look like Apple’s, again, a facade.

    These wannabes will come and go because they simply don’t price their products for profitability and that’s what ultimately destroys their business. Look at what happened to HTC. They were Number 3 at one point, but for whatever reason, even the $1 Billion cash infusion by Google couldn’t help them. Now, they laid off 25% of their employees and they’ll either be force to sell, or forced out of business, because it’s unlikely they’ll make a come back. One Plus, Oppo, Vivo, and others are just wannabe Apple’s and they just lack what Apple has and does and how they operate their business. They may stumble here and there, but they seem to make things right.

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