The Blog

5 better business model options for product companies

See how hardware and product makers are combining business models from software, coffee makers, and the razorblade industry to redefine how we want, use, and love things.
Necessity breeds invention. If you are looking to be inspired by business model innovators, keep your eye on the makers. Wearables, smart home devices, and the graduates of successful Kickstarter and Indiegogo campaigns are experimenting not just with product innovation, but business model innovation.
It used to be that a thing was a thing. You would go to a store, and buy a product. Along the way the manufacturer of the product had already spent a portion of the cost on the component parts and casing, the packaging, the shipping, and even their own marketing. But the price to get that product in the store was (and is still) quite steep – often more than 50% of that product’s price winds up in the hands of the retailer.
No wonder product makers are experimenting with new business models.
Now product makers are focused on developing a direct relationship with the people who buy their things. They wand us to get hooked early, and sometimes for life. As customers, we can pre-order and direct order and even continuously connect with our things.
We’ll take a look at five potential business models for connected devices and how they are shaping stronger paths to the customer.

1. The Pre-Funded Model

Kickstarter initiated a completely new starter business model for makers with strong networks and clever marketing skills. Launch on Kickstarter, raise money ahead of time, and your customers may even be willing to wait six months to a year to get their product.
The Pebble Watch is the most well known, having even just raised over $20 MM on Kickstarter despite the threat of the Apple Watch launching in the same time frame. The Coolest Cooler that is actually cooler with USB ports and LED lights and the Exploding Kittens card game come in second – demonstrating that there is pent up unmet needs in our culture that we are only starting to explore.
To be sure, critics of crowdfunding complain that it’s a massive and time-consuming effort that asks you to call for help from every person you have ever known, and ask them for money. Hardware companies have it harder, trying to figure out manufacturing cost and volumes in advance of product orders. It’s not a sustainable model for long term success. Often in parallel with initial crowdfunding, the product company must work just as hard to get their next business model started.
A number of early stage product makers like Tile and Plastc now tend to forgo crowdfunding for their own Pre Order campaign. But we have Kickstarter to thank for finding and cultivating the early adopters who are willing to pre-fund products and then be patient enough to wait for the latest thing.

2. Product + Subscription

We are slowly being driven mad by the smoke and carbon monoxide detectors in our house. Chirp. Beep. Eeek. So we’ve been shopping for a Nest detector. And there it is – the best value proposition promise ever. “No chirps.” Such a specific promise to a pain point that literally keeps us up at night. Done.
As a business model geek, what amazed me is that they don’t charge for the ongoing service – the software to check in on the machine. I’m certain that the Nest folks have A/B tested the pricing scenario thoroughly, and please don’t let them know that I would pay to keep that chirp silent.
But Nest is experimenting with this model for the new Nest Cam: a video camcorder that aims to become a home security device. $199 for the Nest Cam, and then options for a fairly hefty subscription fee. $100 per year for 10 day history, $300 for 30 day history. The value proposition: you pay extra to know what happened, to have Nest store your data.We’ll see if Nest Cam succeeds with combining product sales with the annuity-like benefits of a subscription model.

3. Razor Blade Business Model + Experience

Originated by King Gillette, Razor Blade Business Models work when the core product is sold at a discount or lower margin, but the follow on consumable product is sold at a higher margin to the maker. The real money is not in the razor, but the razor blade.
Keurig and Nespresso, XBox and Playstation, Pur and Brita all follow this method for creating value in the disposable use phase.
Ben Einstein at Bolt Ventures argues that the economics of Keurig defy the basic logic of the Razor Blade business model by creating a consumable product that people love (vs. tolerate). Bolt points to a number of emerging companies that are aiming for this type of experience offering, utilizing software and other experiences to foster relationship and connection and strengthen loyalty beyond the mere habit of purchase.
“The best new ideas live at the boundary between the real world and software,” says First Round Capital in an interview with Adam Macbeth, who has shaped products like iPod, Jawbone’s wristbands and FiftyThree’s Pencil. Macbeth encourages a “software-first” approach to making new things, Beautiful industrial design is just table stakes at this point.
“You need differentiated software combined with the right branding, the right look and feel, the right messaging. If you can deliver all of this, then I think you have the ingredients to be the next Apple or Tesla. For the first time ever, talented startups can outmatch the giants by leveraging software talent.” – Adam Macbeth 

4. Razor Blade + Subscription

In fact the benefit of this business model is so compelling new disruptors in actual razors have combined this model and turned it on its side, taking a once dreary product that no one loved and creating a cheeky experience. Dollar Shave Club is famous for its standout YouTube Videos, and Harry’s has become known as that ideal gift shaving experience for that discerning man. Both companies combine the high margin economics of the razor blade model with the even better ongoing annuity streams of the subscription model.

5. Ecosystem Products

Finally, we can’t talk about hardware or business model innovation without mentioning Apple. While the jury is still out on the success of the Apple Watch, the company is by far the strongest product manufacturer in the history of making things, and much of the company’s success is described as a combination of design, and controlled ecosystems like the App Store and iTunes.
The mistake innovation aspirers make, however, is to point to Apple and say, “we should be more like Apple.” Of course, you should pay more attention to design, to ecosystems, to App stores and your open vs. closed strategy for connecting with partners.
Apple ingeniously is a business model innovator who has garnered the strongest audience of customers who value the attention to experience. These customers, therefore, are willing to actually pay for hardware, software, and media that enables that experience. Apple is the default choice for App and iTunes partners who actually want to vet if there is a paying audience for their service. In the end, Apple and the company’s partners are masters of business model combinations to test and grow new markets, and new ways of connecting people to products.
We wonder what all of these business model innovations will change our relationship to things. Will we become more attached? Will we be more likely to upgrade to the latest release? How has your own view of new products and gadgets changed with these business model shifts?