What are some common business models for hardware businesses?

In the olden days, most hardware businesses have a "one and done" business model.  You go to the store, pick up a hair dryer or some such, pay for it once, and you are done.  Lots of products are sold this way. LTV (life time value) often stops at that one product - or the consumer may buy more products from the same brand, but either way, the product is paid for at the point of sales and there is often no further recurring revenue.

For a startup to thrive, a "one and done" business model is phenomenally challenging, because unlike well known brands that market consumer electronics products, a startup has no brand recognition.  They would have to spend significant marketing dollars to acquire each and every new customer, and the COCA would be high and stay high for a very long time while the LTV stays constant.

It is much preferable to have a business model that guarantees a recurring revenue stream.  Having a recurring revenue stream makes the business more predictable, makes it easier to manage cash flow, and more importantly, makes it possible for the startup to maximize life time value for each acquired customer by providing them with "sticky" value-added services that cause them to stay with the startup for a longer period of time.

What are some ways for a hardware startup to capture a recurring revenue stream? Ben Einstein of Bolt has an excellent blog post that outlines 3 common ways that connected hardware products might capture a recurring revenue stream: Hardware as a service, hardware enabled services, and consumables.  These are good examples for business models applicable to consumer-facing businesses.

There are other business models that produce a recurring revenue stream for  enterprise oriented businesses. For instance, in heavy industrial automation, the purchase of a piece of equipment frequently comes with the option of purchasing a service contract.  The service contract would guarantee a quick response time by a field service crew should the equipment go down.  It could also include scheduled preventative maintenance.  Traditional industrial robots are frequently sold with a service contract in which field staff is sent to do preventative maintenance on the robot on a regular 3 month schedule (much like oil changes for a new car under warranty).

Regardless of whether the hardware startup has a consumer facing business or an enterprise B2B play, the financial viability and attractiveness of the business to investors (and founders) will always be more favorable if there could be a recurring revenue stream baked into the way the product or service is sold. 

Businesses that sell only hardware with a "one and done" business model (such as common computer peripherals like keyboard and mice) are typically valued at a significantly lower price to earnings ratio (P/E) than businesses that is able to command a recurring revenue stream and is consequently more investable. So, if you are a founder for a hardware startup, it pays to think about how customers might acquire your product and derive ongoing and increasing value from it over time.  It is much easier to think about it in the beginning and bake it into the product architecture than to try to add this idea after the fact.

 

 

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