At What Cost?

I met with a company yesterday that is trying to launch a new consumer product. The product was pretty cool and the software made some sense but most of our conversation revolved around the simple question "does it make sense for a startup to launch a consumer device?"

The number one reason given by the company for pursuing the market themselves, rather than seeking design wins and simply being the underlying technology for a new class of consumer devices, was their ability to extract higher margins by selling the product themselves. But can they really? If you dig into the true costs of selling a product yourself, it turns out that your high margins are often illusory.

Look at the instance of a consumer device -- there's the cost of the retail channel, there's inventory cost, there's marketing, there's breakage, there's returns, there's support, there's obsolete inventory, and the list goes on. When push comes to shove, a whole host of costs eat away at the otherwise appealingly large margins of consumer direct sales. It's just another example of how powerful it is to already have a channel and why startups are often best served by leveraging other people's channels rather than building their own. And it is a good reminder that costs come in all shapes and sizes and it is incredibly important when you're building a business to know precisely what all of those costs are and what knobs can be turned to impact the bottom line.