Entrepreneur

Want to improve your odds? Think hardware

When I founded NewDealDesign nine years ago, the axiom in Silicon Valley was that software was the only way to go for new entrepreneurs.

Things haven’t changed much since then.

That traditional thinking ignores some ugly realities, though. Software and Web markets are so filled with dominant players that they are actually relatively difficult to break into. Standard category leaders control 60 percent of the market. Runners-up to those leaders are left with 30 percent. And the crumbs are fought over by others in the category. You don’t need to look much further than social networking sites, browsers or operating systems to understand this breakdown.

No matter how hefty the investment, the odds of success are high.

Hardware products, though, (particularly in the consumer electronics field) have a little more wiggle room. Rather than a market that is run by two or three primary competitors, you can thrive with as many as 12-15 companies with a similar focus. The cell-phone and laptop businesses are perfect examples.

While the consumer hardware market has always been diverse, making it easier for newcomers to get on the shelf and begin building sales, recent trends have made it even more appealing.

One key factor is that the manufacturing industry has grown in China and become more readily accessible to entrepreneurs. If you have a completed design, the manufacturers and component suppliers there are ready to help you begin building.

Also, electronic components are smarter, faster, more powerful and less costly than ever before, making it cheaper and easier to build a smart gadget.

There’s also a lot of room for innovation. Broadband internet connections are pervasive and allow for new market categories and profit opportunities. The recent rise of netbooks is a good example. The small PCs took the market by storm, accounting for 12 percent of sales in December 2008, the month they became readily available.

You don’t have to come up with a market defining idea to be successful, either. You can be the 20th netbook company in the category, and still be making a profit relatively quickly.

The Economics of Consumer Hardware

Many new consumer electronics ventures can flourish in a state of semi-success, selling product for profits and reaching a break-even point faster than software startups. This is because the economics of consumer hardware are not incredibly complicated. The return on investment is a much clearer process.

Roughly one-third of the suggested retail price of an item is direct cost (buying components, shipping, and inventory). Another one-third goes to the retailer. The rest is profit.

Let’s go back to our netbook example. Say your product sells at $300 (meaning a $100 profit on each sale). If you spend $4 million up front — including industrial design and your direct costs — you only need to sell 40,000 units to break even.

Your core technology, something that makes the product unique to your company, will be your biggest expense.

When it comes to product design (or concept development), the general rule of thumb is this should amount to 3 percent of your research and development costs. (This number shifts, though, from company to company.)

The most important money you will spend, though, is on industrial design (establishing the aesthetics of the final product). Good design can dramatically boost your sales, while bad design will end up costing you money (as you’ll inevitably have to go through a redesign down the road).

When approaching an industrial design firm, know your goals, especially if you are a small company.

Because small companies do not have large ad budgets, your product will often convey the attitude and positioning of the firm. You also need to be careful to ensure your management and board of directors are unified on the vision for your product. (Unofficial arbiters between the two sometimes galvanize different views of a product.)

Another place where the value of your product design investment can help “sell” the product is in the fundraising process. Objects have power – they capture attention.

The right object can stop people on their tracks – and an investment winner when you’re talking with VCs. When selling an idea (whether to backers or manufacturers), tangible prototypes are infinitely more effective than flat sketches.

While Silicon Valley’s mentality hasn’t changed much in the last nine years, the opportunity in consumer electronics may be even greater. The ‘long tail’ theory is true here more than any other industry. A “magic product,” such as the iPhone, may be at the front of the curve, but it’s followed by everything else that people want and need. Take a walk down the aisles of Target, Wal-Mart or any big box store, and you’ll see how many products that are out there that are not revolutionary, but evolutionary.

Gadi Amit is the founder and principal designer of NewDealDesign. He has been in product design for over 20 years and is responsible for the design of such devices as the Sling Box, Fitbit, Glide TV and Dell Studio Hybrid.


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