SaaS plus a box is THE model for technology hardware companies. Simply put, it’s when a company attaches a subscription to its hardware for the consumer to maximize the hardware’s features. And, the more expensive the hardware, the more likely the consumer is to stick with a monthly subscription.
No Subscription, No Value
Without a software subscription attached, as a consumer hardware tech company, your business may as well be dying. If your business strictly sells hardware, you’ll be considered a dinosaur and shunned by much of the VC world. Simply identifying as a hardware company has negative connotations nowadays.
When raising capital, a SaaS business can receive 4-5X the valuation a strictly tech hardware company will get, even if their growth rates, top, and bottom lines are identical. The reason is simple: recurring subscription revenue is more valuable than a one-time transaction because it’s a much easier sale to make! Additionally, it gives more predictive cash flow without the cost of fulfillment a sale of hardware requires.
This valuation component, and the ease with which SaaS startups raise capital compared to hardware companies, has altered the mindset of tech entrepreneurs and changed the landscape of the consumer tech space over the last 7-10 years.
Peloton is the poster child of the ‘SaaS plus a box’ business model, having integrated high-end hardware with a robust (and amazingly retentive) subscription model. GoPro’s original model, which was purely a hardware play, is the opposite (they have better-incorporated software to their offering today).
So, with subscription models now incorporated into virtually every hardware tech company in the world, I wanted to share something I’ve seen over the last year or so, which shows how some entrepreneurs are missing the mark on this model…
They’ve taken things too far.
Never Brick Your Hardware… Never
Bricking hardware if the consumer opts not to stay on the subscription is insane, and it sets the company up for failure. What I mean by bricking hardware is, if no subscription is purchased, the hardware can only do a small fraction (approx. 25% or less) of what it is capable of.
At least one of the top features of the hardware has to be a ‘for-life’ feature…a good feature, one that is enjoyed by the user time and again, and one that entices the consumer not yet on subscription to further explore your other offerings (subscription-based). The goal is to convert, after all. And with every conversion, the value of your company increases.
Consumers grow curious about what else you offer when they already like your offering. In other words, the product/hardware should be really good without a subscription and fantastic with one.
It’s About Conversion Rates
Bricking your product makes the consumer forget you forever (at best) and resent you (at worst) because they begin to wonder if they’ve wasted their money (buyer’s remorse). Bricking a product if the consumer hesitates to pay the subscription can even lead a customer to feel deceived. It’s similar to a ransom — pay me more, or you’ll get nothing.
Furthermore, if the consumer has buyer’s remorse, do you think there’s much of a chance they’ll ever want to become a subscriber in the future?
Essentially making the hardware a useless piece of plastic unless the buyer subscribes opens up Pandora’s box of terrible reviews and a deteriorating brand value.
If the consumer buys your hardware but not the subscription, that means they want to love your product, but they’re just not quite there yet. Their experience with your hardware will determine if they become a subscriber for life — so make it a good one, with or without a subscription.
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