Wesley Chang

June 20, 2017

Building an Effective Business Model for Your Hardware Startup

Setting up business model feature image

The majority of entrepreneurs who are breaking into the hardware scene are often focused primarily on building their product, but that inevitably means they’re spending less time on building a profitable and sustainable business. The problem isn’t just the fact that the business model of a startup is too often neglected, it’s also the fact that it’s designed too late and designed ineffectively.

Before you head down the road to taking your product to market and devising profit-building business models, it’s important to understand what the word sustainable actually means. By definition it means, “able to be maintained at a certain rate or level” but in a more specific business growth definition, it means, “able to maintain a level of profit and profit continuously year after year.”

The terminology itself isn’t enough to help you build an effective business model though. You also have to understand what actually makes a business sustainable. Let’s discuss that now…

3 keys to a sustainable business

Most people understand a business to be made up of 3 prerequisites. The first being your startups actual product, number 2 being the marketing that your company performs to build a customer base, and lastly is capital. Without one of these 3 keys, the other 2 may fail which could mean that you’re left with sunken startup.

Your startup’s product

Martin Zwilling, founder of Startup Professionals and author of “Do You Have What It Takes to Be an Entrepreneur,” who is also an angel investor, explains why there are usually more than one founder in a startup. In his Entrepreneur guest post, “7 Steps for Establishing the Right Business Model,” Martin says,

“Defining the right business model requires the same diligence as designing the right product, but the approach and skills required are different. That’s why investors acknowledge that two co-founders are often better than one — with one focusing on the technical solution, and the other focusing on defining and building the business model. These two jobs need to be done in parallel.”

This means that while one founder is cranking away at product development, making sure it’s up to par with competitors and that it actually solves a problem that people struggle with, the other founder can be focused on customer development which will make sure that you will actually have a market to sell your product to.

Your startup’s marketing

Many startups face the frustrations of not having any paying customers. They might have a killer product which people love but they aren’t buying into any extra features or services that’s provided.

Marketing is the reason why companies are successful. 9 out of 10 times at least. It enables your company to actually sell a product to a market even if that market has high ranking competitors. Not only that but it enables your startup to scale. But the key is to actually track performance of end user growth.

One of the ways to quickly determine whether or not your marketing efforts are actually working would be to implement a “fail fast” strategy. But that isn’t always an appropriate solution for long term success.

Instead, a process called “live planning” could ensure that your startup succeeds in the long run. What makes live planning so successful is the fact that it’s constantly evolving, unlike traditional marketing plans. Sabrina Parsons, the CEO of Palo Alto Software wrote an article called, “Live Planning: The Key to Launching Sustainable Startups,” where she explains how leading startup accelerators are able to crank out highly successful businesses. Here’s how she explains live planning…

“With live planning, an entrepreneur creates an expense budget and a sales forecast, high-level strategic goals, and ties those goals to milestones with implementation dates. The entrepreneur then uses the financial forecast and the milestones and tracks their progress against actual results, which gives a company the ability to quickly understand missed assumptions, and pivot accurately and in the right direction. Live planning not only teaches entrepreneurs to think ahead, but also helps clarify quickly whether they are on the right path towards profitability and positive cash flow.

The key to live planning is in measuring actual performance against the plan, once core “product/market fit” assumptions have been validated. Instead of traditional business planning where the plan is often not revised, live planning constantly evolves the plan based on actual results and real-time performance tracking.”

Your startup’s capital

Businesses need money in order to make money. It’s the life force of any startup which means it’s crucial you understand where your money is coming from and how you can raise the funds needed to be successful–or at least try to be.

Every startup has a option of being self-funded. This means that all the money that goes into your startup will be coming out of your pocket or borrowed money from family and friends. But this isn’t the money you want to rely on to turn your business into a profitable sustainable company. You’ll likely only want to rely on your personal funds for smaller prototypes, maybe even just your MVP.

The next type of capital would be investor funds. Once your startup has started earning revenue and has shown promising growth, you can pitch your business ideas, products, and plans to investors who will help fund your startup.

But arguably the most important source of capital is profit. Your startup should primarily be focused on increasing profit month after month in order to build a sustainable business.

So, by now you have a decent understanding of what a business is made up of at its core which means that you can start understanding how you should plan out an effective business model for your startup. Let’s get into that now.

Building an effective business model

The whole purpose of a business model is to plan out how your startup will be able to grow in the long run but one of the most common problems that new founders fail to achieve with their business models is how to actually create a sustainable company.

Business model steady revenue

Many founders are satisfied with a business model that just allows them to bring in steady revenue, and so they should be, but a hardware startup–or any startup for that matter–isn’t a simple product. It’s not an invention that you can simply sell at trade shows or meetups. A startup is a business, and it should be treated like one.

That means that each high level player within your startup should be thinking about how they can continuously add value to your customers so that they continue to buy your product, services, or add-ons.

Think Kindle.

The Kindle itself is a hardware product but what makes it sustainable is the fact that people can purchase ebooks, games, and apps. That’s a sustainable growth engine. The real question is, how do you create an one?

Discover a critical problem

Most startups don’t succeed by adding random value to random market segments. Instead, a startups sole purpose may be to identify a very specific problem in a very specific audience and then create a product that alleviates the frustrations of that audience.

This can put your startup in a better situation to succeed by ensuring that there is at least some need for your product. Other factors play into this however; market size, who that audience actually is, competitors, and branding are all criteria that affect how your product will be perceived and successful.

Confirm your solution

If you’ve identified a problem that you believe you can solve, it’s time to work out a prototype. More importantly, a MVP. Creating a minimum viable product doesn’t just save you time and effort on validating your idea, but it also saves you money. It prevents the possibility of over-investing in an idea that may not be an appropriate solution for your market.

Deliver your value

Value delivering is the phase where you would ideally start profiting. But it’s not so much as you’re delivering the value, it’s more so that your customers are accepting it. However, that doesn’t mean your startup won’t be successful. If your marketing plan proves to be successful and you’ve already established a decent market size, the chances of your product/value being accepting are likely to increase. Which leads to the next step in this process–adding more value.

Adding more value

Arguably the hardest part about establishing a business is the act of making it sustainable. This doesn’t just mean that your products are constantly being sold, but that your products are constantly adding more value. Consider this talk by Jamie Boyle, the founder and CEO of TickTock, a smart secure parcel reception boxes that allow us to receive deliveries at home even when we’re out. Creating a successful sustainable business is easier sad than done, however it can done even for products that are super targeted–such as the UK garbage bins.

In the case of Rubbish as a Service, it’s actually part of IoT which means that it connects to WiFi, allowing notifications to be sent out whenever the garbage bin is completely filled. But not only that, it can also crush the garbage down in order to accept more trash.

And to add even more value–add services for an extra fee–they can also be integrated with garbage trucks, where the bin itself will send out an optimize route for the truck to come and pick up the bin.

Wrap up

By no means was this meant to be an in-depth guide on designing the perfect business model for your hardware startup. Rather, it serves as a way to understand all the moving pieces that contribute to a well thought-out model.

But after you have created a business model, how do you know that it’ll be the right one? Pay close attention to customer retention and customer growth. Tracking both metrics will help you gauge whether or not you should pivot your plan or recreate it.

Leave a Reply

Your email address will not be published. Required fields are marked *