Generating revenue with a hardware startup: Three effective business models

Many aspiring entrepreneurs believe that hardware startups can only earn money by selling their devices. This is not entirely true: like other industries, electronics rapidly transform under the influence of technology and, as a result, changing consumer preferences. New methods of product development and revenue generation emerge.

B2C (business to customer)

The first and simplest way to make a profit is to sell the products your company manufactures. Buyers can be ordinary people (consumers) as well as professionals who purchase your product for work (prosumers).

Consumers are people who make purchasing decisions based on their needs, tastes, and financial capabilities. If your product is aimed at them, you should find a balance between design, functionality, and price.

Among the companies that target consumers are Canary, Nest, DJI, Sphero BB-8, and many others. Interestingly, many of them pay as much attention to software as they do to electronics—user-friendly applications can be a decisive factor for the buyer.

Some startups not only sell devices but also offer paid services—such as Canary. Camera owners can pay for the storage of their recordings and the ability to upload videos.

Prosumers are people who purchase tools for work. Products for prosumers can be very niche — such goods include, for example, drones for photography, high-quality cameras, and so on. If what you've come up with can be useful for professionals, then you'll find your audience—people will buy the product simply because there are few similar offers on the market. Companies such as Shaper, RED, Ableton, ROLI, and many others can be classified as companies whose main audience is prosumers.

From a business perspective, both of these categories are united by their earnings from retail sales of devices through distributors or directly — via their online stores. I've mentioned a few companies also selling their services, but this has little impact on their business model because the main source of revenue is the sale of electronics.

The B2C model has several drawbacks. Working for consumers, you are constantly dependent on distributors and retailers and, consequently, their terms— typically, you give them up to 60% of the retail price. Additionally, you must spend a significant portion of your time and budget on design, communication, and marketing — standing out in a competitive market is not easy, and you must constantly ensure that your products align with the spirit of the times and meet customer expectations. However, if you are working for professional users, priorities in design shift: you must pay a lot of attention to it, but the most important thing is usability, not aesthetics. For example, RED cameras are designed in such a way that owners can customize them to meet the needs of different people, as these cameras cost thousands of dollars and buyers almost always rent them out.

B2B (business to business)

The second model involves creating products for other businesses. In this case, the decision to purchase is made not by the consumers themselves but by their employers or even a third-party company. For example, you could manufacture Wi-Fi routers specifically for an internet service provider's order. Some businesses cater to both retail consumers and corporate clients: for instance, the smart bracelets can be purchased at any electronics store, but it was also procured for employees.

The B2B model comes with several important limitations. You must have a good understanding of the market—each industry has its own rules that an outsider may not know or understand. If you analyze the histories of B2B electronics companies, you'll find many examples proving that the founders of such startups often come from the industry in which their business operates.

By working in the B2B sector, you acquire not just buyers but clients who are tied to your product. By gathering their feedback, you can continually improve each version of the product.

Another advantage, as noted by Chris Dixon, is the limited number of competitors. Fewer B2B startups are working with electronics than B2C companies because few people excel both in their industry and in business. Additionally, according to Dixon, you are unlikely to encounter foreign competitors: B2B startups usually need to hire teams for sales and service, making it more difficult for foreigners to copy your idea and surpass you in your own country.

B2B/B2C + service

Some B2B companies sell devices and offer complementary services for their products. For instance, Ortho Clinical Diagnostics , a company manufacturing medical equipment for blood analysis, develops numerous digital products that simplify the work of doctors. Another interesting example is the startup Entrupy, which sells devices for authenticating expensive accessories (such as Chanel bags) for $450. It also offers a subscription for its product's software, which can cost between $200 and $500 per month.

Services offered by B2B companies are not a novelty. For many decades, businesses purchased equipment and paid for its maintenance and employee training. However, in recent years, B2C companies have also begun creating their own services.

Another popular model — Hardware As a Service. It implies that you sell the service and, if necessary, devices to consumers. Many startups that have emerged in recent years already operate in this way. For example, Peloton manufactures exercise bikes and also owns an online service that allows users to watch live cycling class broadcasts (held in a special studio in New York). Soma sells not only pitcher filters but also a subscription for replacement cartridges. A pitcher for 6 cups of water costs $29, for 10 cups it's $39, and one cartridge on subscription (sent every two months) costs $12.99, with an annual subscription priced at $60.

Essentially, companies that earn more from consumables than from devices are not new; the coffee machine manufacturer Keurig has operated on this model for many years. Their machines are inexpensive, but users consistently purchase beverage pods, which constitute the main source of revenue. Keurig was among the first, but in recent years, many startups have emerged working on a similar model. Thanks to the development of numerous internet services, smartphones, simplified logistics, and manufacturing, organizing such a process has become easier. The proliferation of connected devices has compelled electronics creators to think not only about the quality of devices but also about software. Like creators of smartphone apps, hardware entrepreneurs have become dependent on operating system creators. To keep up with them, electronics creators are increasingly turning to subscriptions—thus, the products they devise remain in demand and convenient.

Consumer perception has also changed. Due to the rapid development of convenient and well-thought-out online services, people have realized that many household processes are "broken." Consumers now expect electronics manufacturers to approach product development differently, borrowing methods from software startups — offering solutions for entire processes rather than individual components. Today, consumers want more than just a television; they value access to streaming services. They don't want to separately select pitchers and filters; instead, they seek a service that will relieve them of numerous household decisions and take full responsibility for providing them with filtered water.

Some companies, which can be classified under this category, completely abandon the sale of electronics as a source of income. For example, the company Square took this approach — every user of their payment service receives a card reader for free by mail. Square understands that if customers use the service for all their transactions, the company will earn much more than from selling devices. Apart from Square, the payment service ShopKeep has also employed such a model.

The advantage of the Hardware As a Service model is that you obtain guaranteed orders: knowing the number of service subscribers, you can significantly streamline the manufacturing process and plan the future more accurately. Additionally, this approach allows for a different perspective on your product — it should last longer than devices not associated with services.

The main limitation of such a model is the necessity to think about the overall user experience, not just the device itself. For startups falling under the Hardware As a Service category, the electronic devices themselves are not the priority. You must consider not just the individual item, but the entire user experience, in which physical objects are no more important than the service built around them.

Choosing a business model is challenging at the beginning of the journey—gradually, your experience and user feedback will guide you towards the appropriate way to generate revenue. Nevertheless, it's essential to contemplate how you will develop your business from the outset of product creation—this will help you make the right decisions during the development of the initial version. The chosen model will dictate its rules and assist you in assembling a team, setting product prices, selecting development and design methods, and so forth.

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