A few weeks ago, a phone company called Ringing Bells hogged all the headlines in the Indian media. Their promise was simple – they are making the world’s cheapest smartphone. It costs INR 251 and it’s called the Freedom 251.

After the announcement, Ashok K Chaddha, President – Ringing Bells, was seen visiting with some of the biggest names in the Union Ministry in a bid to convince them that the company is here for the long haul and must be taken seriously.

But the question on everyone’s mind was ‘How?’

The cheapest phones in the world today are made by the Chinese. You will find that they are sold in a price range of INR 2000 – INR 2500. This, arguably is the best price in the market. But Ringing Bells is selling one at one tenth this price. Is it a lie? Is is even possible to survive with such an outrageous proposition? And more importantly, what’s happened to companies that have tried something like this in the past?

Ryanair Ltd., a low cost airline, struck gold by creating an entirely new market by selling ridiculously cheap fares and flew routes full-service carriers didn’t. By doing this, they meticulously captured budget customers from other carriers. It was an expertly orchestrated strategy that worked for the company.

Let’s give Ringing Bells a chance and understand how they can focus on revenues when their product’s selling price is INR 251. Alternative streams such as pre-installed apps, tie-ups with telcos and advertising are worth exploring to cover production costs.

Ponzi Scheme

Having said this, if the company’s intent is not to survive and run with people’s money (they already have crores of pre-orders) then it has all the makings of a classic Ponzi Scheme.

Named after Charles Ponzi (1882-1949), an Italian immigrant to the US who, during 1919-20 collected more than fifteen million dollars from some 40,000 eager people by promising to double their investment in 90 days. It’s a Scam in which a gullible group is enticed with the promise of very high returns in a very short time, but is based on paying off the early ‘investors’ from the cash from (hopefully ever increasing number of) new ‘investors.’ The whole structure collapses when the cash outflow exceeds the cash inflow. The originators of the scheme, however, usually disappear with large sums a few days before the crash.

Here is a great video on how to spot a Ponzi Scheme –

In summary, do you feel Ringing Bells is a Ponzi company? Or will you trust them with your money with the hope that they’re disrupting the smartphone industry? The call is yours, but look out for the signs.