This seems to be a model that makes great sense and fills a need for early stage companies. I am very interested to see how this pans out.
There has been lots of chatter on the airwaves that hardware is hot again – the Nest acquisition at the beginning of 2014 by Google reenergized the hardware discussion and this year crowdsourced funding sites are seeing great interest in hardware projects as many of these projects are hitting their fund raising goals (Did anyone see Neil Young’s Kickstarter project?) . But take a closer look – hardware is just the ” shiny object” that these projects are leveraging, it is a deeper level of intelligent engineering that makes these hardware projects stand out.
This resurgence in hardware is more specifically driven by companies that are using software to create competitive differentiation through smartphone client applications or “Apps” and scalable cloud platforms. The “appcessories” category is growing very fast, encompassing everything from smart toys to wearables and may just be one of the fastest going categories at Apple retail today.
But how does an appcessory approach really help a hardware company lock in competitive advantage? Let’s look at a relevant example in the hardware home automation market space. Our client, Rachio has developed an irrigation controller that is user operated through an intuitive iPhone application simplifying the management of the typical valve controller box in the garage that no one but the gardener can figure out. In addition, Rachio has added cloud based smarts to this system so that it knows not to water your yard when it is raining, saving the user on the water bill and making the system more environmentally friendly. What a needed upgrade to an otherwise archaic solution! This was all done by updating a hardware platform and smartly adding software app and cloud capabilities using an engineering approach that cannot be readily copied by a team without real motivation and software skills. This complexity of adding software and cloud services adds a higher level barrier to entry for any would be competitors.
This is a true example of the internet of things becoming a reality and I encourage all hardware companies to broaden their vision and build the right software engineering teams to architect better hardware systems through software and cloud services. Running a sustainable, profit margin rich hardware company demands it.
Channel Pacific has had the good fortune of working with Sena Cases through the major growth phase of their company in helping them with business development, channel marketing and sales. Recently, as reported through media outlets like all things digital, Sena Cases was acquired by Targus Inc., a $500M accessories company. This begs a question: why would an accessories company with over $500M in revenue need to acquire a small case company with $20M in revenue? What could have Sena Cases have created that was so valuable to an industry behemoth? Lets take a closer look.
What lead to Sena Cases success?
1. They took care to always position their brand as premium and built premium products. No compromises.
2. They built high quality leather products that considered the use case needs and style of a mobile accessories consumer. Function and fashion.
3. They focused on developing only premium channels like Apple retail. Leveraged the “Apple halo effect”.
4. They cut strategic licensing agreements with premium fashion labels like Michael Kors to drive revenue and add premium product lines to their portfolio, making them a more valuable vendor to retail partners.
5. They built a flexible infrastructure to be fast to market in everything they did. Focused on customer service.
A Lesson Learned
Sena had the ability to craft wonderful cases and bring them to market fast to support premium channels but really had very little intellectual property. This a lesson for early stage companies – competitive differentiation is important (Intellectual Property is optimal) but this is not the only motive in acquiring a company, expansion into hard to access channels or targeting new market segments can also be significant reasons for acquisition.
Nice to see all the hard work has paid off – congratulations Sena!
I have a great friend that has incredible experience in getting small companies funded with a track record of raising somewhere near $1B (Craigster, you know who you are). I have had the pleasure of being through a significant number of VC meetings on Sand Hill with him living the process in getting multiple companies funded.
Here is his checklist on what makes an early stage company fundable.
2. Customer traction.
3. Sustainable differentiation
4. Serviceable market size
Keep this in mind as you develop your company and you will be much more interesting to any investor and better position your company for long term success.
I believe that human beings are drawn to beautiful design. I also believe that every early stage company should be sure to use design as a critical differentiator.
One of my favorite books on design is The Design of Everyday Things by Donald Norman. Design is a process but great design is an absolute art. Great design is the bridge that allows new technologies to be useful to the consumer.
Because of companies like Apple, more than ever consumers expect better designed products – they are no longer happy with a subpar products that are not integrated well from a hardware, software and user interface perspective. (Apple took this a step further than most companies – they actually thought through the entire ecosystem solution as well!)
Early stage companies often have to make many compromises but one thing I always stress is not to lose focus on the industrial design of a product, if your company does not have a strong designer then hire one. The benefits of great design transcend the device itself, making it easier to get PR coverage, placement into retail and overall consumer awareness through social media and other mechanisms.
Bringing consumer products to market is difficult as can be seen by the high failure rates of start-ups in this market space, leveraging great design is a major factor in making any early stage company a success.
Over the last few years, there has been a variety of key industry trends that have dramatically impacted how young companies should bring their consumer electronics products to market – the dramatic growth of ecommerce, the influence of social media and what I call the Apple retail effect. Now more than ever, defining a channel strategy is of the utmost importance to a young company or it may find itself is a situation of significant channel conflict where their product value is diminished early its lifecycle impacting revenue, profit and the overall valuation of the company. Let’s explore the impact of these trends and how they effect overall channel strategy by using a typical Apple accessories company as an example .
1. The dramatic growth of ecommerce. Ecommerce has profoundly impacted the behavior of consumers and the emergence of power-houses like Amazon.com and Ebay have created online market places including 3rd party retailers that have changed the retail landscape forever. Amazon.com alone has over 100 million consumers leveraging its site to search, evaluate and buy consumer products and has successfully integrated 3rd party retailers allowing them to compete in selling the same or similar products offered on Amazon in a highly integrated way. It is this unlimited access of any retailer to large number of consumers online that has enormous implications on channel strategy. For example, if you have listed your product at a broad line distributor, many small retailers and etailers have access to your product at wholesale price. Many of these small retailers offer no differentiation in retail service so their value is simply selling on price (let’s call them “bottom dwellers”). Access to wholesale pricing and the Amazon website allows these bottom dwellers to undermine MSRP (manufacturers suggested retail price) at will, resetting what may have been a hight value product to a retail price point at some small margin above wholesale price. I believe that this is what may have happened to Otterbox, a once glorious case company that has seemed to stagnate in depths of retail conflict. (Just google shop or look at Amazon 3rd party sellers and see their channel price variability).
2. The impact of social media. The emergence of Facebook, Twitter, Groupon and other social media platforms have the effect of making any significant channel promotional event go viral in no time. Clearly, if people in your social network find a product deal worth repeating, Facebook and Twitter friends will know about it. In addition, Groupon and other flash bargain sites have also readjusted consumer behavior and the impact of over-promoting a brand’s products may in-fact lead consumers to wait for the next branded bargain price promotion. Last time I checked, no one that really cares about brand perception wanted to be known as a “promotional brand”. Care must be taken more than ever to limit this kind of promotional behavior to boost short term sales. Brands need to reasonable about market size (and their potential share) and focus on marketing awareness campaigns that drive consumers to buy branded products without relying on sustained, discounted channel promotions.
3. The Apple retail effect. CE retailers have not innovated nearly enough but Apple retail has emerged by selling incredible Apple products and creating an extremely differentiated retail experience shifting the retail environment forever. One in five consumer electronics dollars in the US market are spent on an Apple product. Apple retail owns a large market share of its own products and the third party accessories ecosystem. Apple also offers its products at a minimum margin to only a few competing retailers therefore squeezing competing retailer profitability. These competing retailers (like Best Buy and AT&T) attempt to keep up profits by selling the Apple core products and attaching the more profitable third party accessories. Of course, there are many other undifferentiated retailers that have very limited success in focusing on accessories sales. It is this broad, undifferentiated retailer base and their demand for accessories products that tempts accessory companies to over supply products to the wrong retailers causing channel inventory issues as retailer supply exceeds consumer demand. This also creates an environment for retailer “bottom dwellers” to focus on low price to differentiate.
The industry trends above suggest that a thought out channel strategy is very important to make sure that a brand maximizes its revenue and overall profitability for every new product through out the lifecycle. In formulating a channel strategy, ask yourself the following questions:
1. What is the true market size for the products?
2. Which channels will bring the most value?
3.Where can conflicts occur and how can these be controlled?
4. How does distribution fit into channel plans?
5. How do I balance sales channels to meet company goals?
It is not about, nor has it ever been about having your brand products assorted at every retailer – it is about having them at the right retailers. Starting with a channel strategy that promotes a clean, well defined channel will help pave the way to retail success.
Consumer Electronics and Fashion Worlds Collide
As the consumer electronics industry has evolved, we have seen the worlds of fashion and consumer electronics collide in way that has created many licensing business relationships between established lifestyle brands looking to expand their brand awareness into new categories and consumer technology companies looking to build their business by leveraging existing brands. Almost everyone is aware of the Beats by Dr. Dre and Monster license agreement that changed the landscape of the headphone market space but there are countless other fashion or lifestyle brands with licensing programs including Michael Kors, Paul Frank, and Disney. This begs the question: When does it make sense for a consumer electronics company to license a brand? Let’s take a closer look.
Licensing deals need to fit in well with your overall company goals and strategy for the term of the license agreement and hopefully provide a springboard to continued company success after the license term. The licensee should be able to utilize existing company resources and infrastructure so that with reasonably small incremental effort during the license term, the licensee can significantly increase its current business and prepare to enhance its future business by building off the licensed brand engagement. It is very important for a consumer electronics company to recognize that once the license term is up, a majority of the effort that was put into building the awareness, products and the channel for the licensed brand is ultimately lost. So then why would anyone license a brand? Here are some of the possible benefits:
1. Increased revenue and profit – By licensing a strong relevant brand, a company can accelerate growth by developing a range of products under that license that drive increased sales and profit for the company. Any increase in the bottom line can help the licensee fund other core company goals. We were able to help one of our clients close a fashion license that increased sales by over $5M is less than 12 months, not an insignificant percentage of the overall company’s revenue. This allowed out client to finance other key parts of their business.
2. Product and Market Knowledge – Every licensee is ultimately responsible for creating products under the licensed brand name but many licensors have experts supporting their licensing team that they will leverage to oversee the quality of the licensee’s products. This expert knowledge base often has critical information in developing products for a specific market segment that the licensee may not have developed in house. There are almost always things that a licensee can learn during a license relationship that can accelerate its understanding of market requirements, product development or even supply chain process. I once was involved in a Disney license where our company learned all the critical requirements in how to bring kids products to market, knowledge our small company was able to use to drive our own kids product lines after the license contract was complete. This example is a case where the licensor makes the licensee better, faster.
3. Breadth of Channel – An additional portfolio of license brand products can help a company penetrate channels that may not have been previously accessible. This can help a company broaden its reach in the channel and leverage the relationships made in these new channels to roll out future products under its own brand. During the term of an IBM license agreement, I was once able to increase my company’s revenue and profit, penetrate key retail channels like Walmart and Best Buy leveraging the licensed brand products and use this acquired channel knowledge to assort my company’s next generation products on the same retail shelves.
There may be many additional benefits resulting from a positive relationship with a licensor so be sure to spend time strategically analyzing what you want out of the deal before engaging. Every relationship has its strengths and weaknesses so it is important to make sure that a licensor meets the key criteria of a good partner that aligns with your company’s goals. If one chooses the licensor wisely, negotiates a reasonable license term and works hard to maximize the license deal for the licensor (and therefore the licensee), the overall experience can certainly help accelerate a company forward.