The Juicero debacle is paying dividends besides simple amusement. This teardown of the (impressively overengineered) Juicero press is interesting and sort of beautiful, and it led me to other writing by Ben Einstein, who works at a hardware-focused venture capital firm named Bolt.
It’s interesting stuff, And while the following isn’t shocking to people who pay attention to startups, it is consonant with the fretting mood I’m occasionally in about excess efficiency. Consider his explanation of why hardware is unattractive for investors. From this post:
Consumer hardware startups need to understand that commoditization of their hardware is not a possibility, it is an inevitability.
As copycats are born, margin structures get compressed and customer acquisition costs increase. Few things protect against this besides a strong brand and retail/channel dominance. […]
At the time, the idea of a wearable fitness tracker was pretty new and it was obvious the concept was good. Each year as Fitbit gained popularity, the number of direct competitors at CES grew rapidly. In 2013, I probably talked to 8 or 10 copycats. By 2014, there had to have been over 100 and in 2015 the number was impossible to count. Every random Chinese company seemed to have an accelerometer on a wristband with a bluetooth app.
Despite hundreds of companies with nearly identical fitness tracker hardware, Fitbit was able to master brand, recurring customer engagement, and retail strategy.
And this one, on the kinds of business models that Bolt likes to fund:
Plenty of companies have built big businesses by selling hardware at a 30% gross margin. Why can’t you just run a Kickstarter and sell a ton of units through Best Buy when to scale up? You can, you’re just entering into a game of diminishing returns with an extremely slim chance of winning in the long-run.
Recurring revenue matters because it fundamentally changes your business. There are good reasons investors are averse to hardware but love software. One of the leading reasons revolves around future revenue. Investors pay huge premiums to own stock in companies betting on the likelihood that future revenue will be drastically larger than current revenue. If you’re in a traditional hardware business, future revenue is confined to cyclic product sales. This roughly means you get one shot at revenue with each customer per product development cycle: each sale must be painfully acquired by building a new product every 18 months or so. […]
This is where the brilliance of the Keurig model shines. The initial sale of a $120 Keurig brewer isn’t that difficult or costly. Keurig doesn’t spend a lot on marketing or advertising and the product isn’t complex to manufacture or service. In my rough estimation, the BOM for a brewer is around $40, giving Keurig about a 25% gross margin on the product. Time from PO to FOB is likely less than 2 months, yet high-margin K-cup sales start immediately and continue for years. Keurig spends less than $0.015 on each K-cup and charges 100% more per unit than bagged, ground coffee. Yet few people complain about this cost.
This is resonant; I was just complaining about Eye-fi moving to a subscription model, after all. Competition in this market has increased to the point where traditional business models aren’t viable — excepting efforts by highly motivated folks who will eventually wish they’d known better.
You can still be successful in investor-backed hardware ventures, but the models seem to have become more complicated:
- You can achieve a level of sophistication and vertical integration that makes profitable competition against you impossible. This grows more difficult by the year, though. Companies like Apple can design their own silicon or purchase market-shifting quantities of aluminum-milling robots, but this is not a viable strategy for most.
- You can “dominate the retail channel” which I take to mean some combination of anticompetitive practices and managing consumer perception — here’s the Bolt blog approvingly discussing the success of Beats headphones:
I estimate that the COGS without labor or shipping is $16.89 – yet Beats is able to successfully retail these headphones for $199+. This is the power of brand; Dr. Dre and Jimmy Iovine have leveraged their personal backgrounds and a sleek design to launch a remarkable brand that’s become fundamental to music pop culture.
There’s nothing wrong with selling people a brand experience, except insofar as the creation of those experiences can be done more or less cheaply, freeing resources for stuff that has to cost money.
- Or you can create a business with recurring revenue by ensuring your product’s usefulness is tied to ongoing payments, like the Keurig.
I think most of us amateur observers are used to thinking about globalization in terms of its impact on labor and consumer prices — not its affect on how we relate to products or the business models that shape those relationships. As we collectively revisit the antiprotectionist consensus of the last few decades, it’s interesting to consider the other impacts that increased international economic friction could have. I am no expert, and I wouldn’t dare guess whether such measures could boost manufacturing employment. But it’s fascinating to consider how a moderate level of protectionism could — paradoxically — reinvigorate business models with a simpler, more transactional and less predatory relationship to customers.
