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Alexey Rom
Founder of http://scoutoutapp.com with a passion for music and tech.

Digital vs Physical Products

Recently, I’ve been doing research on different products, USPs and growth strategies of top companies and I wanted to summarize my thoughts about the differences of selling digital vs physical products in 2016.

If you’re anything like me, you come up with new business ideas on a daily basis. Most of those will never get executed because they’re just silly. As for the rest, there’s generally much more research that needs to be done before committing to a new venture. Let’s talk about some key points to consider before you get into researching trends, niches and whatnot.

Digital Products

Many people consider digital products to be the bee’s knee’s of today’s business models. Low-to-nonexistent distribution costs, painless scalability and instant delivery to your customer. However, all of that is overshadowed by the simple fact that people have a much lower propensity to actually pay for software. If there’s an sort of free alternative, the masses will flock to it. Let’s break it down.

Advantages:

  • Great profit margins
  • Low distribution costs
  • Scales well
  • Instant delivery
  • Good analytics about how customers use your product
  • Low rate of product returns / minimal costs associated with returns

Disadvantages:

  • Consumers are much less willing to pay for software compared to a physical product
  • Freemium model is recommended as a method to attain large userbase and convert small percentage to paying customers
  • Product must be extremely popular to succeed as a consumer product
  • If product is a B2B SaaS, a sales team is required to educate and sell to your clients. (See Slack Case Study)
  • Product should provide increasing value the longer the user uses it. This increases the lifetime value of a customer and cuts the user churn rate.

Physical Products

Physical products may seem to have fewer advantages initially, but it is important to understand what you can leverage in each situation. Note: this list focuses on moreso ecommerce products, rather than the traditional manufacturer + distributor + retailer model.

Advantages:

  • Users higher willingness to pay for products. (Customers don’t expect to get a free T-shirt with limited usability and be prompted to upgrade to a sweatshirt in 30 days. Actually, maybe that’s the future. Oh man.)
  • Higher perceived value of the product because they can hold it in their hands.
  • Ability to sell bespoke / limited runs of products. This can be used leverage the scarcity principle as a means of marketing.
  • If sold through a large marketplace like Amazon, much of the traffic /marketing can be driven organically with minimal ad spend
  • More perceived value when sending promotional units for reviews to bloggers and influencers. This also applies to running giveaway contests, which can drive a lot of traffic per dollar spent (See Gleam.io)

Disadvantages:

  • High distribution costs (50%+ of your total product cost could be air/sea shipping from China)
  • Have to pay for shipping again to get product to customer OR use a fulfillment service. Have to also handle returns.
  • Generally lower profit margins for utilitarian products. Have to produce at scale to maintain margins. However, premium/luxury product margins are usually healthy.
  • Giving away promotional products actually costs you money.
  • Depending on the nature of the product, reviews/testimonials may play a big role in driving conversions. This usually means running discount promotions or once again giving away products in return for reviews.
  • Much harder / more lead time to get feedback about how customers are using your product.

Hybrid Products

I always wonder if companies that sell hybrid products do so out of sheer marketing shrewdness, or only because they originally set out to make some gadget and a bloke was like “maybe we should make an app too”. Regardless, it is a solid combination because it makes the customer feel like they have a valuable tangible product, while also having the potential scalability of a digital product.

Here are a few examples that I came across lately:

Will these products succeed on a global scale? I doubt it. But that’s because they’re more about entertainment rather than creating a product people can’t live without. The founders probably knew that when they started. Personally, I think key metrics for any business should be user retention and the lifetime value of a customer. These companies might not perform well in terms of those metrics, but then again, not every company is set up to change the world. Having a good side hustle is okay too.

Conclusions

Are all these points extremely generalized opinions on the real truth? Yep. But if you’re brainstorming your next venture, maybe it will sway you from one idea to the other. While I acknowledge that it’s important to do all your research, what I’ve found to be more helpful is taking your idea and pitching it to 100 random people. Go to local Meetups, comment on forums, cold email founders of small companies. You don’t ask, you don’t get. Do whatever it takes.

The advice that I’ve gotten from talking to real people has always far outweighed spending hours reading case studies, doing keyword research and especially registering as a LLC. No one’s going to steal your idea or sue you. Put your guard down and just do it.