NIO unlocks its potential by standout consumer operations

NIO, China’s main sensible electric-vehicle (EV) firm, has attracted consideration for its distinctive user-centric working mannequin. Nevertheless, the mannequin has additionally triggered heated discussions about profitability and sustainability. NIO’s cofounder and president, Lihong Qin, sat down with McKinsey’s Mingyu Guan and Tony Zhou to make clear the corporate’s technique. He described the logic behind NIO’s consumer operations strategy, mentioned enter–output economics, and thought of the implications of the corporate’s modern strategy for the trade.

This interview has been flippantly edited.

The underlying enterprise logic of consumer operations

McKinsey: Consumer operations is without doubt one of the areas during which NIO actually stands out. Why did NIO select consumer operations? What’s the underlying enterprise logic? How does it enhance NIO’s competitiveness?

Lihong Qin: From a enterprise mannequin perspective, the success of consumer operations relies on whether or not an organization has pure, long-term touchpoints with its customers. Let me share an instance in actual property and property administration, which I labored in earlier than I cofounded NIO. The property administration enterprise is of course appropriate for consumer operations as a result of property homeowners can keep in a property for ten years. Actual-estate transactions, nonetheless, should not—the client and vendor mainly cease contacting one another as soon as the deal is finished.

Within the automotive trade at present, most conventional automobile firms don’t personal many consumer touchpoints. Let’s check out the everyday transaction circulate of a standard OEM. The presales stage focuses on attracting potential clients by varied advertising and marketing strategies. Within the transaction stage, all the enterprise circulate is accomplished after the car is delivered from the OEM to the seller. Within the after-sales stage, except the automobile is recalled there may be little engagement between the OEM and finish consumer. Due to this fact, by the car life cycle, conventional OEMs have hardly any consumer touchpoints, which suggests there is no such thing as a alternative for consumer operations.

At NIO, we get pleasure from long-lasting consumer touchpoints by direct gross sales and providers, so we meet the pre­situation for consumer operations. As for why we favor consumer operations, there are two key concerns. First, as a result of we have now so many long-lasting contact­factors and a lot in-depth engagement, we create hard-to-ignore worth potential by the consumer life cycle. So the query actually is whether or not we are able to unlock worth by consumer operations. Second, we hope that our automobile model can create premiums from consumer operations.

Based mostly on these concerns, we have now constructed a collection of consumer operations protocols. A client’s willingness to pay is at all times pushed by each rational and emotional components. To satisfy the rational wants, we try for excellence in product R&D, the availability chain, and manufacturing. Nevertheless, we additionally goal to construct long-term buyer satisfaction by consumer operations—an vital lever so as to add worth to the model. [See sidebar, “McKinsey commentary: A new path to long-term customer satisfaction.”]

Let’s say NIO didn’t do direct gross sales or consumer operations and easily copied the distribution and dealership mannequin of conventional OEMs. How a lot would our vehicles promote for? My private hunch is perhaps 20 {7e44665ad31c7163a3225b5cdeca12ae8e1ba5a9651d05b2285576263eb8f3ac} under at present’s worth. For a very long time, Chinese language automobile firms had been topic to a pricing ceiling. For a similar product, even the place Chinese language vehicles had been higher, they might be priced at $3,000 lower than South Korean vehicles, $5,000 lower than Japanese vehicles, and far decrease than German vehicles. That gave the impression to be the one option to promote Chinese language vehicles. May Chinese language OEMs dare to say no to those costs and even set the worth greater than these of German manufacturers? How might they justify that? Though it is a hypothetical query, it was an vital subject of dialogue again after we began our enterprise.

By way of concerted effort, together with consumer operations, NIO has achieved a really easy outcome: a good model premium. NIO’s present transaction worth is greater than that of some conventional German luxury-car manufacturers—loads greater, truly. If the normal technique means pricing at hundreds of {dollars} decrease than German luxurious manufacturers do, and our precise worth is now hundreds greater, the distinction between the 2 worth factors will be seen as our worth added. This is without doubt one of the most direct accomplishments of our efforts in consumer operations.

McKinsey: Moreover the worth premium, you additionally talked about unlocking worth all through the car life cycle. Are you able to share some insights on this? Additionally, some individuals say that the “consumer operations” merely implies that the salesperson manages the connection with the shopper higher. What’s your view on this?

Lihong Qin: You possibly can’t merely equate consumer operations with relationship constructing or different superficial inter­actions. Consumer operations requires the help of a whole set of system capabilities. NIO targeted on constructing its personal ecosystem from the very starting, together with the NIO app, NIO Home, the Fear-Free Service, and NIO Life. These not solely assist us enhance consumer satisfaction and create a model premium but in addition profit us considerably by unlocking worth all through the consumer life cycle. Taking NIO Life for instance, the present penetration fee is over 50 {7e44665ad31c7163a3225b5cdeca12ae8e1ba5a9651d05b2285576263eb8f3ac} amongst present customers, and the typical annual spending per consumer is $300. However after all a few of the merchandise are purchased with redeemed NIO factors.

You possibly can’t merely equate consumer operations with relationship constructing or different superficial interactions. Consumer operations requires the help of a whole set of system capabilities.

Is it onerous to implement consumer operations? Nicely, it’s onerous but in addition not onerous. Why not onerous? Give it some thought. A consumer who spends $60,000 to $80,000 on a automobile will stick with NIO for no less than 5 – 6 years. So long as the consumer expertise is nice, it is rather probably that some extra spending might be generated. Let’s take one other instance within the property administration enterprise. Say the proprietor of an opulent home could be very happy with the property service. Then the property operator launches another value-added providers, comparable to dwelling equipment restore or little one pickup. Assuming that the worth is truthful and the proprietor strongly trusts the operator, it’s apparent what the shopper will select.

Then why are consumer operations onerous? First, it’s not sensible for OEMs working a dealership mannequin. How can they bypass sellers to promote value-added providers? Second, the normal working logic and company construction of the automotive trade doesn’t help consumer operations. The departmental KPIs of a standard OEM might not absolutely have in mind the long-term pursuits of the corporate.

For instance, for advertising and marketing to launch any initiatives, it should first show their ROI inside a yr. However at NIO, the monetary returns on what we’re doing proper now is probably not realized for a number of years. Due to this fact, consumer operations can solely be rolled out by those that have absolute management over an organization and, on the similar time, are absolutely invested on this mind-set. The identical group of individuals should make choices and execute.

The enter–output economics of consumer operations

McKinsey: Consumer operations requires actual funding. From the consumer perspective, I might be completely happy to see NIO spend extra. However from the attitude of buyers, isn’t it pure to be involved in regards to the profitability of the consumer operations mannequin?

Lihong Qin: Relating to the monetary returns, we have now our personal mannequin to judge the revenue and lack of a car by its life cycle. That features two vital gadgets: first, advertising and marketing and gross sales price per automobile and, second, service price per automobile for its whole life cycle.

Advertising and gross sales price per automobile contains issues comparable to promoting and new-car launch bills. If we adopted the normal mannequin, NIO’s prices on this space would by no means be decrease than these of conventional luxury-car manufacturers. In actual fact, they might be a lot greater. For instance, we might pay the identical as established manufacturers for a 30-second TV business. However a standard model’s promote­ment can generate a million gross sales a yr, so the spending per automobile is considerably decrease than that of NIO. It could be unimaginable for us to cowl such an enormous hole, even with excessive effectivity and exact placement. To compete with conventional OEMs with scale benefits, our play must be totally different.

Easy methods to replicate the differentiation? We predict there is just one variable to concentrate on: consumer referrals. The one viable technique for NIO is to systematically enhance the proportion of latest customers referred by present customers. That comes again to consumer satisfaction, as a excessive referral fee comes from excessive satisfaction. Nevertheless, satisfaction alone doesn’t essentially result in a excessive referral fee. There must be a conversion mechanism as nicely. This requires us to extend the frequency of our occasions—particularly offline occasions—and to make the situations for referral as spontaneous as doable, in order that customers’ mates can have a nice expertise with none “promo awkwardness.” The sort of play is vastly totally different from widespread promotional occasions within the trade.

Aside from consumer referrals, one other vital technique is to host massive occasions with an enormous influence. Take the primary NIO Day, on the finish of 2017, for instance. The variety of orders obtained inside 24 hours of the occasion, when calculated by subsequent deliveries, was equal to a yr and a half’s supply quantity. After all, the manufacturing capability of the brand new manufacturing facility was restricted at the moment, and the lengthy supply time led to some order losses. Ultimately, the precise orders amounted to a full yr’s deliveries.

The truth that orders generated from one occasion had been equal to at least one yr’s supply capability means we didn’t must put money into massive commercials through the subsequent yr, and that contributed to substantial and systematic price financial savings. The sources saved might then be invested in providers for customers, with prices a lot decrease than these of buying new leads by massive commercials.

Moreover the advertising and marketing and gross sales prices per automobile, one other vital side of our monetary mannequin is the service price per automobile. Within the first few years, when our gross sales had been restricted, the unit price may very well be horrendous, however as gross sales went up the unit price steadily reached regular ranges. Take our highway service crew for instance. When gross sales had been nonetheless comparatively low, comparable to in 2018, a highway service specialist may solely serve one order per day. However by 2021, every of them was serving almost six orders per day on common. That’s an enormous enhance, truly reaching the restrict of an eight-hour workday.

One other instance is Energy Swap Station, NIO’s battery-swapping station, which prices loads in preliminary funding. Nevertheless, this will depend on the way you take a look at it. I informed the pinnacle of NIO Energy that if NIO didn’t straight function the battery-swap service by itself however bought the service externally and nonetheless needed to realize the identical satisfaction ranges, the buying price would positively be a lot greater than beneath at present’s in-house mannequin. Consumer service might present a loss in monetary statements, however it may also be interpreted as an funding in buyer satisfaction, which I feel is the extra acceptable perspective.

To sum up, NIO leverages differentiation to optimize gross sales prices. By way of service prices, we search excellence with up-front funding after which optimize the service price per automobile by scaling up, till in the end reaching breakeven.

Aside from bills, providers may also generate earnings for NIO all through the car life cycle. Our enterprise scope is wider than that of a standard automobile firm. On prime of standard enterprise, NIO additionally offers in peripheral merchandise, used vehicles, etcetera. Underneath the normal mannequin, the worth chain is serviced by greater than a dozen firms. At NIO, it’s totally different. Providers like automobile wrap and caliper change are undertaken by ourselves. Furthermore, as a result of simplification of distribution steps, pricing will be decrease than that of conventional sellers—benefiting customers whereas sustaining cheap margins.

NIO additionally affords choices, comparable to NIO Pilot and NOMI Mate, unique to sensible EVs. Because of a strong product expertise and wholesome consumer relationships, the take-up fee could be very excessive—between 50 and 60 {7e44665ad31c7163a3225b5cdeca12ae8e1ba5a9651d05b2285576263eb8f3ac}. On the similar time, an increasing number of customers have gotten accustomed to accessing paid-for providers at NIO Home—for instance, drinks and venue leases. After all, a part of the cost
is through NIO Factors.

We’re presently within the stage of fame constructing, so we’re completely happy to reinvest a part of our service revenues in consumer providers. To make sure that all of those initiatives greatest serve the pursuits of our customers, whereas preserving in thoughts monetary efficiency, we established a completely fledged Consumer Relations Division. Conventional OEMs do not need such a perform, however consumer relationships are crucial in NIO’s system. We’d like this division to outline guidelines for our consumer neighborhood. Its position is corresponding to that of the Roman Senate. In some instances, even when William Li

and I decide, the division can rise up and say, “No, this can harm customers’ pursuits.”

McKinsey: NIO Life is a particular piece of NIO’s enterprise. However some individuals say that for a automobile firm, investing in NIO Life looks like messing round with an irrelevant enterprise. What’s NIO’s view on this?

Lihong Qin: NIO Life is principally accountable for the event and sale of our peripheral life-style merchandise. Beginning with three individuals, it has grown to a 100-strong crew at present. We outline and design the merchandise ourselves and let the availability chain implement and ship. We search excellence in employees recruitment, provide chain constructing, and high quality requirements, and it’s no exaggeration to say that the division is as competent as main firms within the corresponding industries.

For instance, we have now not too long ago been engaged on pink wine and have developed a direct partnership with French wineries to collectively develop NIO’s unique vineyards. One other instance is our top-selling thermos bottle. We designed the bottle, outlined the standard normal, chosen the producer, and our high quality employees oversaw the supply inspection. New merchandise, colours, and ideas are developed twice a yr. We hope that by offering customers with high quality providers and merchandise, they are going to really feel they’re getting nice worth for cash. On the similar time, NIO can guarantee cheap margins by optimizing the system’s effectivity.

We perceive the exterior puzzlement and even criticism, which you talked about. However we really feel
that functionality constructing inside NIO Life shouldn’t be seen as being in battle with our essential automotive enterprise. At present, the penetration fee of NIO Life has exceeded 50 {7e44665ad31c7163a3225b5cdeca12ae8e1ba5a9651d05b2285576263eb8f3ac} amongst
NIO customers, and can rise additional as capabilities in a number of areas are put in place. With the scale-up of car supply, the funding right here just isn’t placing extra stress on us, however will as an alternative develop into a brand new supply of worth development.

To take the concept a step additional, it’s truly more economical in the long run to put money into capabilities and fame at present. Let’s take a look at a pure speculation. If a complete of 10,000 vehicles had been delivered within the first yr and the typical loss per automobile was $1,000, the entire loss can be $10 million. Nevertheless, when you have got a million customers, you possibly can simply make $10 million, even when the typical revenue per automobile is just $10. If the capabilities are all in place and every automobile makes $100 in revenue on common, the payback might be $100 million.

Due to this fact, all the things we do at present is meant to help cheap and sustainable earnings when the consumer base grows giant sufficient. And it’s essential to calculate, primarily based on that, what degree
of funding is required at current.

McKinsey: NIO Fellows are a really particular group. You additionally talked about earlier that NIO must optimize prices per car by increasing its consumer base. Does the Fellow mannequin assist NIO obtain this optimization? There’s at all times a restrict to the variety of consumer interactions one Fellow can preserve. What’s your view on the scaling of the Fellow mannequin?

Lihong Qin: The authenticity of the Fellow mannequin and the higher restrict of customers served per Fellow might be extraordinarily vital subjects for us going ahead. Relating to authenticity, in our early days, given a smaller consumer base, we adopted each consumer referral and different extra conventional advertising and marketing fashions. However the proportion of consumer referrals has been rising greater and better. Due to this fact, we have to enhance the authenticity of the Fellow mannequin and to regulate our wage mechanism in order that Fellows have extra incentive to higher serve customers.

Relating to the higher restrict within the variety of customers served per Fellow, there is no such thing as a normal reply. You want to continually experiment alongside the way in which—for instance, by elevating the higher restrict by stronger digital empowerment and systematic division of labor. After we began the enterprise, I had a discus­sion with an govt in high-end personal wealth administration. They created an working mannequin with very robust buyer stickiness, which is sort of outstanding. For instance, when this firm’s clients transfer to a different place, the quick response that involves their minds is to not contact a transferring firm however to hunt recommendation from their monetary adviser.

How did the financial institution obtain such robust buyer stickiness? The reply is optimized division of labor so that everybody performs to their greatest. Of their crew, there may be one position devoted to on a regular basis affairs, like an enormous sister. Such a job might not want particular monetary information however requires a very excessive EQ [emotional intelligence]. One other position may very well be devoted to assist­ing clients with complaints, and so forth. By way of the suitable division of labor, the fight effec­tive­ness of an infantry squad made up of seven well-coordinated troopers will exceed that of seven instances as many particular person troopers—an apparent analogy. With the twin concentrate on digital and organi­zational capabilities, the potential of an NIO Fellow is huge. After all, we’re nonetheless removed from there,
however the thought will get us excited and exhibits that we nonetheless have plenty of room for development.

McKinsey: NIO is increasing to European international locations, comparable to Norway, and intends to introduce the consumer operations system to the European market. How is that progressing?

Lihong Qin: We’ve simply began in Norway. Qualitatively, the consumer satisfaction and enthusiasm we obtain are the identical as in China. We frequently assume that Norwegians are very reserved. That’s flawed. Social wants are widespread throughout humankind. After we recruited an area consumer advisory group earlier than promoting vehicles in Norway, greater than 800 individuals signed up. We picked greater than 200 to offer opinions protecting our app, NIO Home, and the take a look at drive course of. We’ve already began car deliveries in Norway, however within the quick time period we see plenty of stress from logistics.

The implications of NIO’s consumer operations for the trade

McKinsey: NIO’s consumer operations mannequin has clearly develop into a benchmark for the trade. Many OEMs are testing fashions much like NIO’s or utilizing the company mannequin. Do you have got any feedback or recommendation on these makes an attempt by your friends?

Lihong Qin: The company mannequin was adopted by totally different gamers many instances prior to now. All of it
wants to face the take a look at of time in the long run. To meld theoretical magnificence with sensible enterprise calls for may very well be an enormous problem. In any case, the frontline gross sales and repair employees should not direct workers of the OEM.

However, after all, each OEM has a unique scenario. The common worth of NIO vehicles has reached roughly $70,000. We’ve deliberate for a car’s full life cycle worth primarily based on that pricing and use this long-term worth realization to calculate the funding ranges required at present. It’s true that many firms are actually NIO’s method of working. Most of them have been within the trade longer than us and have stronger capabilities.

My opinion is that it is probably not an excellent factor to be similar to NIO on the execution degree. As an alternative, it may very well be an excellent factor if the considering course of and underlying logic are much like ours, whereas the precise execution plan appears to be like totally different. Likewise, Chinese language individuals, irrespective of how a lot we make in a yr, at all times reunite with the entire household through the Chinese language New 12 months. One household might select to have dumplings collectively and one other might go on an Antarctic expedition. The types of reunion could also be totally different, however the nature is definitely the identical. We must always grasp this nature fairly than the precise kind.

McKinsey: If everybody’s underlying enterprise logic is similar, wouldn’t NIO lose one in all its largest areas of distinctiveness?

Lihong Qin: I don’t suppose so. I don’t consider that NIO’s enterprise might be undermined if everybody adopts the identical underlying logic. Quite the opposite, this can speed up market share features by sensible EVs over conventional ICE

vehicles, and which will profit NIO much more. The automotive trade just isn’t winner takes all. Even with extraordinarily good efficiency, one participant can take solely a ten to fifteen {7e44665ad31c7163a3225b5cdeca12ae8e1ba5a9651d05b2285576263eb8f3ac} market share at most.

I by no means suppose that NIO might flourish solely when others undergo—fairly, NIO may additionally undergo when everybody else is having a nasty time. I feel the extra vital factor within the automotive trade is
to have constant logic and robust functionality constructing. We really feel, from the underside of our hearts, that rising EV firms ought to all do higher. ICE vehicles nonetheless have a 70 to 80 {7e44665ad31c7163a3225b5cdeca12ae8e1ba5a9651d05b2285576263eb8f3ac} market share. Why not go for the larger market as an alternative of vying for this tiny 20 to 30 {7e44665ad31c7163a3225b5cdeca12ae8e1ba5a9651d05b2285576263eb8f3ac}?

The automotive trade just isn’t winner takes all. Even with extraordinarily good efficiency, one participant can take solely a ten to fifteen {7e44665ad31c7163a3225b5cdeca12ae8e1ba5a9651d05b2285576263eb8f3ac} market share at most.

McKinsey: One final query. Automobiles are very com­plicated industrial merchandise. Some individuals may say that so long as the product is nice sufficient, the so-called consumer operations thought is definitely dispensable. What’s your view on this?

Lihong Qin: Good merchandise are crucial, however good merchandise alone should not sufficient. There are many examples in historical past of firms with respectable merchandise that failed in the long run. And what’s
an excellent product, in spite of everything? Completely different instances have totally different definitions of fine merchandise. Throughout the similar technology, the definition might endure fixed quantitative modifications.

Within the context of sensible EVs changing ICE vehicles, the definition of an excellent product may even see qualitative modifications. Some say {that a} good automobile merely means crash security or a five-star score. Our merchandise have these, for positive, however we don’t focus our promotions on them, as they’re entry-level necessities. A number of automobile publications have completed teardowns of our vehicles and located that NIO’s high quality and supplies are nearly as good as these of conventional big-name OEMs—and even higher. For us, the pursuit of fine merchandise must be ahead trying fairly than outdated targets.

“Hit a transferring goal” is a phrase William Li typically makes use of, and additionally it is what we anticipate of ourselves. It means considering forward about targets and requirements—simply as in clay pigeon taking pictures, you need to goal forward alongside the projectile as an alternative of the goal’s present place. Due to this fact, the large subject for us now could be to outline the following technology of fine merchandise and arrive at what we have to do and the way a lot to speculate at present.

McKinsey: Thanks, Lihong, to your time and insights.