By Assistant Professor of Marketing Chen Lin

Bicycles with bright orange wheels are now a common sight along the streets of Shanghai and Beijing. It began this fall when mobike became all the rage. But why has this Tencent Holdings-backed start-up become such a hit?

Mobike’s operational model is simple: download the app, deposit 300 yuan and then pay 1 yuan per half-hour ride. The app provides the location of nearby bikes and they can be dropped off anywhere after use. One reason behind mobike’s success is that it makes customers feel as if they are getting a great bargain, paying 1 yuan to enjoy a 3,000 yuan bike. Second, the mobike looks cool and many users have taken to sharing WeChat Moments of themselves riding them. Mobikes have now become a kind of social currency, synonymous with cool, green (environmentally friendly) and definitely in. Finally, the mobike was destined to be a hit because of its flexible return system which is perfectly in line with the post ’80s and ’90s generation lifestyle trend of “own nothing, reject nothing and be responsible for nothing”.

Thus despite the fact that the mobike business model is commercially illogical in many ways, it has sparked public interest with some even going as far as calling it a Unicorn in the making. But is mobike really a money-making machine?

According to the company’s own projections, its annual profit may be as much as 1.6 billion yuan; that’s more than the profit level of 90% of A share listed companies!

A closer look at their numbers (see chart above) shows that, based on the various assumptions of their calculations, mobike could immediately increase their profit to 30 million yuan by simply adjusting the number of users and bikes. However, I believe the number of users doesn't influence the company’s bottom line that much. The final profit is determined by the number of bikes offered.

Contrary to what many people think, the deposit paid by each initial user doesn’t have a huge influence on mobike’s profit margins. On the other hand, when the number of uses declines, profit falls rapidly.

However, the importance of the deposit cannot be underestimated. The capital pool, made up of the deposit plus non-refundable payments left over when the bike is recharged, is the most important source of funding. After all, a large deposit is the equivalent of an interest-free loan for the company. It is like an ultra-low-cost capital pool, which significantly reduces the pressure on the company's need to access external financing.

But looking ahead at mobike’s long-term operations, it will be vital for the company to explore other sources of funding. Maybe it can generate new streams of revenue by placing ads on its eye-catching bright orange wheels.