The road to recurring revenue for hardware startups
If you look at the most successful startups today, you’ll find plenty of proof that the hardware-enabled service (Haas) model works: Peloton, Particle, Latch and Igloohome all rely on subscriptions along with product sales. Even tech giants like Apple are rapidly reinventing themselves as service companies.
Yet, if you currently rely on device sales, the prospect of changing your entire business model might seem daunting.
At Minut, we are building smart home monitors (privacy-safe noise, motion and temperature monitoring) and recently made the transition despite the lack of resources on the process. Here are the seven lessons we learned:
- It is a question of when — not if.
- The transition will have company-wide impact.
- Your current and future target audience may differ.
- Price should reflect the value for the customer. Your revenue should grow with theirs.
- Avoid your free offer competing with your premium ones.
- Be transparent (internally and externally) about the changes. Over-communicate.
- Start the process early, check regularly with your team and set measurable targets.
Why subscriptions are the future of industry (and your startup)
Hardware has one advantage over software: customers understand there is a cost to your product. Now, this allows hardware startups to generate revenue with their first iteration, but it’s unsustainable as the company grows and needs to innovate: the software and user experience need continuous improvement and excellent support, just like in a software-only startup.
That’s why we see most hardware startups eventually launching a subscription model and limit what’s available for free. Even established companies — think Strava or Wink — often end up having to radically limit free features after years of operations.
Experienced founders and financial markets favor subscription models and recurring revenue. Market valuation multiples are typically much higher for companies that benefit from service revenue in addition to sales.