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Consumer IoT Start-Up Advice

a series of posts by Charles Huang

· IoT,startup,advice

#1 What margins does your hardware product need to achieve?

I’m a fan of comedy. Jeff Foxworthy, a comedian from the south, has a series of jokes that start with “if you’re blah blah blah ... then you might be a redneck”. Here’s a short version of that for IoT startups:

  • If your BOM (bill of materials) is between $45 - $55 and you’re losing money selling for $99 retail, then you might be an IoT startup.

  • If you have software services for your device that no one wants to pay for, then you might be an IoT startup.

Why does this happen?

Most likely, you started out to build a consumer IoT device that gathers valuable data. So you have an SOC (system on a chip), plus sensor(s) to gather data, plus wifi / bluetooth to upload your data. Your BOM is probably $45 - $55, depending on the price of your sensor(s). You should be selling at a minimum of $150 - $200 SRP (suggested retail price) to have sustainable margins. But you are selling at $99 in order to get faster user growth. You hope to make up for lost margins by converting users to a paid software service. But the data you’re gathering may not be useful enough for users to pay monthly / annual recurring fees. If I had a dollar for every IoT I have met that went down this path, I could probably fund their seed round.

So what margins do you need to build a healthy, scalable, consumer IoT product?

For retail, a good rule of thumb is the SRP should be at least 3X COGS (cost of goods sold). That gives the retailers enough margin to carry your product which means you have good SELL-IN. And it gives you enough margin to do good marketing programs, which means you have good SELL-THROUGH. You’ll need both sell-in and sell-through to be successful.

Some of the most successful consumer hardware products have a 4X or 5X SRP to COGS ratio. Beats, GoPro, Fitbit are examples of products that probably hit these ratios.

If you offer software services, don’t count on subscription revenues to provide a meaningful contribution to your margins from the start. Getting a meaningful percentage of consumers to pay a subscription is like finding a black swan. Even if you are certain that your product is a black swan, be conservative and plan as if you needed to survive on hardware margins alone.

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