Luckin Coffee, China’s convenience-focused Starbucks rival, is reportedly preparing for a US IPO with a valuation of around $3 billion. A key part of Luckin’s IPO narrative is that it’s a legitimate challenger to the java giant. At the end of last year, Luckin announced plans to overtake Starbucks in both number of physical stores and coffees sold in China.

Luckin CMO Yang Fei reckons the company has what it takes to get there. He’s got confidence that freebies and discounts can be used to attract and build a stable core of loyal users. In this article we’ll take a deep dive into the theory that has made him a cult figure among Chinese startups.

Yang Fei is an unlikely star: in five years, he’s gone from prison to C-suite. In 2015, Yang was sentenced to 18 months’ imprisonment (Chinese link) for violations of China’s advertising law. Without going into excruciating detail, Yang supervised a systematic whitewash of negative reviews about his firm’s clients when he was head of a local marketing outfit.

China’s judiciary announces sentence for Yang Fei, second from right, in 2015 (Image credit: Captured from Supreme People’s Court website)

Due to time served on remand between arrest and sentencing, Yang was released in April 2015. However, citing media reports, local sources (Chinese link) estimate Yang was announced as UCAR’s CMO in March 2015, the month before his release. That means the entire recruitment process took place while Yang was in remand.

Growth guru

How this exactly transpired is deeply unclear. Not much is known about Yang’s arrest, remand and subsequent sentence and release between October 2013 and April 2015. Even less is known about his appointment as UCAR’s CMO.

What is clear, however, is that within two years of his release, Yang literally turned his life around. His achievements as CMO of UCAR netted him “CMO of the Year” in 2017, a spot on the governing council of China’s peak advertising industry body and consulting gigs with state-owned rice wine producer Wuliangye and food-processing giant COFCO.

Luckin CMO Yang Fei (Image credit: Luckin)

Yang’s miraculous success was built on a series of growth hacking principles and techniques called “fission marketing,” which he subsequently compiled and published as a book (Chinese link). Yang claims to have used this set of growth hacking techniques to help take UCAR’s ride-hailing service from incubation to $5.5 billion IPO on China’s NASDAQ-equivalent in less than 18 months.

Yang has the numbers to back it up (Chinese link). In his first year as CMO, UCAR’s paying ridesharing users increased fivefold. Over the same period, he took users’ average fare to four times that of competing ride-hailing services. Excluding promotional offers, UCAR’s ride-hailing service was close to profitable at a time when Didi and Uber were burning stacks of cash.

This achievement earned Yang a cult-like following within China’s startup community community—the same kind of status Dropbox’s Sean Ellis or Andreessen Horowitz’s Andrew Chen enjoy in the US. But in 2019, Yang Fei’s growth challenge is monumental. By the end of this year, he’s been tasked with getting Luckin to sell as many coffees as Starbucks (Chinese link). This is perhaps going to be the biggest test of Yang’s much-vaunted growth hacking system.

Luckin Coffee’s push to sell as many coffees as Starbucks this year involves aggressive spending on physical locations, operations, promotions and loyalty programs. Some might think this is pissing money away, ride-hailing and sharebike style. I can’t rule that out. But, before passing judgement, it’s worth looking at where and how that money is spent.

Whether it’s ride-sharing or coffee, Yang Fei’s brand of growth relies on freebies to get the product in the hands of as many potential users as possible, using special offers to repurchase and refer new users, and then a strong loyalty program for loyal customers with above-average purchase frequency. In other words, make it easy to try, easy to try again, and work on the number of those that make it a consumption habit.

Java sales funnel

What makes most observers cringe is Luckin’s never-ending stream of freebies and special offers. Yang doesn’t harbor such concerns. In his first year as UCAR’s CMO, Yang carved out 6 million paying users from 21 million who took advantage of a “top up RMB 100, get RMB 100 cash-back” offer. RMB 100 is just under $15.

Sources close to Yang have told me he’s well-aware freebies can play on human irrationality, sparking increased demand and prompting consumers to impute imaginary benefits to free products.

Some quick-back-of-the-envelope calculations make probable that free coffee works out closer than acquiring a new customer through other forms of advertising. Food industry analyst Zhu Danpeng reckons (Chinese link) that, even with physical stores added in, Luckin’s cost of customer acquisition is about RMB 80. This compares favorably with online-to-offline delivery services, which may have a cost per customer acquisition between RMB 200 and RMB 300.

In December 2018, Luckin CEO Qian Zhiya claimed (Chinese link) that Luckin’s accumulated around 13 million paying customers. This gives CMO Yang Fei an interesting AARRR funnel to work on—twice as large as his paying user base back at UCAR. Yang’s not worried about throwing money at that funnel—he estimates Luckin will keep subsidies in place for the next three to five years.

But, as Luckin inches closer to a rumored IPO, observers are keen to see more data, and better scrutinize whether Yang’s pipeline can cover the costs of maintaining Luckin’s growing physical store presence.

Michael Norris is a TechNode contributor and Research and Strategy lead at AgencyChina. He focuses on how culture, technology, and digital trends affect industry and business. Michael is a TechNode Insider.

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