Bolt, with Ben Einstein, has done it again. In a recent piece on the two hidden advantages of doing a hardware play, Ben teases out one of the dirty little secrets of SaaS business models: there is often a high customer acquisition cost, and relatively low lifetime customers value in exchange for it.
In other words, it can cost a ton of money in sales and marketing to get any given user buying your new-fangled piece of software. Totally OK, as long as that customer a) doesn’t leave for a newer/better/cheaper version of you in two months, and b) pays you enough every month that you recover your sunk cost very quickly and beginning profiting off of that customer.
Problem is, churn rates in software tend to be high, and people are still not that used to paying (or paying much) for software. People love tangible goods though, which presents an amazing opportunity for internet of things companies. [By the way, I love the dynamic of a user purchasing a piece of connected hardware digitally, using it physically, and interacting with it/upgrading it digitally again. Digital>Physical>Digital]
Driving additional revenue from an existing customer is far easier than acquiring a new one. Traditional hardware companies use diversified product lines and the much-hated EOL (end of life) to do this. Connected hardware turns this model on it’s head and opens up a ton of new possibilities for recurring revenue: feature upgrades, premium service, promotions, automated supply replenishment, data monetization and a hundred other avenues.
This note from the post is very telling: traditional hardware products are static, meaning that if the company finds out the customer wants a new feature, a different color, an additional part, etc., then a whole new SKU of that product would need to be developed. Not only is this slow and expensive, but it renders an existing inventory useless. For a startup, it likely means game over.
The internet of things, in contrast, opens up bug fixes, feature-add, upselling, and variety of other advantages software companies have long enjoyed. I always have this insanely jealous feeling every time Facebook or Twitter pushes an app update to my phone. People didn’t like that new layout? Erased. Users want the search bar to be bigger? Boom. No supply chain development, no fab house lead time, no inventory management issues.
There are a few skeptics pushing back on the potential size and scale of the internet of things, but these factors (likely not being considered in that discussion) are exactly why IoT will more than live up to the hype. Newer products coming faster and cheaper. Upgrades. Customization. True on-demand hardware.
About Bolt: Bolt is a seed-stage fund that invests capital, staff, equipment and expertise in startups at the intersection of hardware and software. Visit them here.
Filed Under: Rapid prototyping