The metrics that really matter for hardware startups
Previously held hostage by retail, consumer hardware companies used to measure their business by the number of units sold, growth in revenue, points of distribution, and gross margins. Mainly because the hardware experience ended when the product was shipped to retail, hardware companies used the only metric they could track: Sales.
At Contour I got stuck in this same trap, and because of it, I build the company in the wrong order. We often prioritized our retail channels over our customers, and so we focused on channel growth without really understanding our customers, how often they used the product, and how to profitably reach more of them.
The good news for hardware startups is that these metrics are now irrelevant. The new expectation is that hardware ships with amazing software, and that means you can track your customers after they buy the product. This is new for hardware and opens up fantastic opportunities to measure lifetime customer relationships, metrics that were previously impossible.
The bad news is that this will expose hardware’s dirty little secret: Customers buy and then stop using your product.
If you are building or investing in a consumer hardware startup you should be thinking about the following metrics.
Cash Is King
Hardware is a cash-flow business. It takes cash to build your product and when ready, cash to build your brand. It’s why I’m a big believer that your hardware MVP is about the fastest path to cash.
When getting to market all you care about is how much cash it takes to start shipping your MVP. Whether you raise capital or pre-sell your product through Kickstarter, most hardware products should get to market for under $500K. If you have been around the block you can raise additional capital upfront to make a more robust MVP, but otherwise you want to get your MVP selling as soon as possible to start driving positive cash flows.
Once your product is shipping, and for the entire life cycle of your company, you care deeply about the cash float between when you get paid and when you pay your supplier. If your supplier provides 60-90 days of credit and on average you collect payment in less time (known as your average days outstanding), you are in good shape. But if not, this float gets very expensive to fund. Banks will only provide cents on the dollar against existing assets, while equity requires you to give up big chunks of your company just to fund customer demand.
Running out of cash is a very expensive problem to fix.
Reaching Market Fit
This is an incredibly important milestone for hardware startups. Not only is it the point people can’t stop buying your product, but it’s also the point you understand how to replicate a profitable business model.
Not everyone will agree, but growth is not the most important metric in reaching market fit. Although growth is great for getting investors excited, it doesn’t help you fully understand what is and is not working in your business. In trying to reach market fit you should care about deeply understanding your customers, why they buy the product, and what works to grow your customer base.
In addition to cash you will want to track three more metrics:
- Customer Love
I’m a big believer in Net Promoter Score (NPS). It is the single metric you should use to measure your customer even when you only have a few hundred of them.
- Customer Engagement
You want customers who can’t stop using your product because it will help you learn even faster about why they bought the product, how they use it, and which features you should be prioritizing. You can track this metric in a variety of ways, but make sure you pick a single metric that tells you how often they are/aren’t using your product.
- Customer Acquisition Cost
One of the most expensive parts in building a hardware company is reaching new customers. You want to understand what is and isn’t working in reaching new customers, especially early on when you are experimenting with every kind of marketing channel you can think of. Don’t make the mistake in ignoring how much it costs you to reach a customer through retail. Your true customer acquisition cost is what you spend in sales/marketing and the margin you give up in selling through retail.
Growing Your Company
Once you reach market fit you are ready to build a company. It’s a point that most hardware startups never reach and a point most entrepreneurs will find less exciting because once you get here, you spend most of your time repeating the same 18-month cycle: Introduce a new product, advertise it, repeat.
On top of the cash, customer love, customer engagement, and cost to reach a new customer you should care about four more metrics:
- Market Share
You have to be the brand of choice or you risk losing your very existence. Investors don’t fund number two without a clear path to how you become number one in the market.
- Number of Customers
You care about customers, not units. Reaching 100K annual customers with a single product is important, reaching 2M puts you in a small class, and passing tens of millions makes you one of the largest hardware players in the world.
- Lifetime Value
People get it wrong when they ask how much of your revenue is from hardware vs. software. The real question is how much is your customer spending with you over time? Whether it’s from buying another unit, accessories, or paying for your software doesn’t matter. What matters is that you can continue to drive more revenue (and profits) from existing customers. Apple and Amazon both demonstrate how important this metric is. The larger the number, the stronger the business.
In hardware profits ultimately drive everything. Not only are they important for raising working capital, but they allow you to properly re-invest in the business. A handful of investors will fund losses as you build a massive empire, but most will demand you are profitable as you scale your business.
Picking the right metrics for your hardware startup matters. What you track will shape the decisions you make. Getting these metrics wrong, will leave you with a company you can’t fund.
No longer held hostage by retail, hardware startups can begin measuring their business by the only metric that really matters: their customers.