At the raucous September release event for Chinese smartphone maker Xiaomi Inc.'s latest device, fans with glow sticks and company shirts shouted loudest when founder Lei Jun announced its price.
At 1,999 yuan ($326), its Mi3 handset sells for roughly half the price as Apple Inc.'s AAPL +0.98% new budget iPhone 5C. It is priced similarly lower to devices with comparable specs made by heavyweights such as Samsung Electronics Co.
The discount pricing has helped fuel Xiaomi's torrid growth in the world's largest smartphone market. In the three years since Mr. Lei founded the company, Xiaomi has captured 5% of China's smartphone market as of the second quarter of 2013, overtaking Apple's share in the country, according to research group Canalys.
Xiaomi intends to sell 20 million handsets for this year, after selling roughly seven million last year, according to the company.
"We use an Internet thought process," the 43-year-old Mr. Lei said in an interview. "On the Internet the best products—the products used most frequently—are all free. Email is free, most content is free."
"It's through a free model that you can most quickly attract users," he added. "So we try to sell our products as close to the cost of materials as possible."
Xiaomi—the name means "millet" in Chinese and is pronounced similar to "sheow-me" in English—is worth $10 billion, based on its most recent round of fundraising. Revenue last year totaled about 12.65 billion yuan ($2.07 billion). Its profile was further burnished last week when China President Xi Jinping included Mr. Lei in a meeting with other technology executives during a tech-themed Politburo event.
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