The Advantages of Hardware

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Time and time again people present the disadvantages of building hardware products and businesses. There are many, so I don’t blame them. Atoms are inherently more expensive to move around the globe than bits.

Prototyping cost, manufacturing cost, slower iteration time, inventory risk, forward/reverse logistics, and scrap rates all drive this.

Customer Acquisition Cost: SaaS’ dirty little secret

Yes, I know, SasS is the bee’s knees when it comes to business models. Many well-known software/web startups are able to build massive user-bases and collect large piles of investor cash but then struggle to convert to a self-sustaining business. The most common reason for this is a mismatch between CAC (customer acquisition cost) and LTV (lifetime value of a customer). If it costs $300 to get a new customer that’s paying $10/mo for a SaaS app, it takes 2.5 years to recoup the cash the company spent to onboard that customer. When these dynamics are scaled with churn factored in, the financial saliency of SaaS operating businesses gets far more complex than most investors would have you believe. The solution to this problem is the intersection of a high LTV and low CAC.

Hardware Advantage #1: People like buying atoms more than bits

Humans have been exchanging money for goods since the advent of fiat currency. But the idea of paying for software is pretty new. Every time I spend $10 on a monthly SaaS subscription, I question if it’s worth it. But I liberally spend a few hundred dollars a month on Amazon for all kinds of random stuff. It’s not just my personal addiction to Prime: the average American spends more than 10x on hard goods each year as they do software/digital products.

  • Assembly + QC + pack + FOB + logistics: $8/unit
  • Retail margin: ~$50/unit
  • Cost of retail (advertising + insurance + repack): $4/unit
  • Customer acquisition cost: $94/unit, Gross Margin: 37%

Advantage #2: On-boarding is cheap, recurring revenue is valuable

Okay, so we can sell a product and make money on that sale in 6 months, but what about Lifetime Value? If the point-of-sale purchase of the hardware is the last dollar you see from the customer, you’re probably stuck with an abysmally low operating margin. This is where connected devices (will) shine.

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Written by

Product designer and lover of hardware. EIR @EclipseVentures. Previously founded @BoltVC.

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