World is changing at a very high pace. Money making is more challenging for those who are following the traditional and conservative methods of doing business. There is a segment of people who thinks that software business needs extensive and specialized qualification and the manufacturing of hardware requires severe and sincere sales efforts in identifying the necessity and then finding a product suitable to meet the necessity. Technology is mandatory to fuel the business in modern times. Not everyone gets success like those who become multi-billion personalities by selling bluetooth earphones, headsets, cosmetics, skin-creams, baby-products, eye-glasses etc. Some have even proven their business excellence by introducing technology based financial transaction applications avoiding cash transactions. Technology has played a very vital role in all these successful ventures.
This Article will provide a review and comparison between the two business models. This article is written based on author’s observation and general terms. The author does not want to establish an advantage of one business model on another one. There are many businesses in both models with excellent margins. The Article provides as:
Primary and Operational Capital Requirement:
The infrastructure cost of a hardware manufacturing unit is very high. It includes production unit, warehouse for raw material, and then inventory unit for post production material, machinery, maintenance, clearance from different departments demonstrating several compliance certificates and declarations. The manufacturer should backup arrangements to maintain liquidity in order to continue in business. On the other hand, a software company can be operated with a lower capital. The clearance from different departments can be comparatively easily obtained. The investment in developing an application or a software gives repeated business with minor edits and corrections in them. The customers of a software company are mostly committed to seek maintenance, support and technical assistance including any customization or upgradation in the software product from the original manufacturer of the software only. So the software company also enjoys the privilege of repeated business from their existing customers for many software products.
Profits and Margin
Software company enjoys additional advantage in their typical gross margin and retains the potential of high net margin. A Software company enjoys the royalty income on its software after investing a primary capital in the development of a software. The Software Company with a negligible cost of additional sales, increase its customer base by selling the same application and adds profits in customizing, modifying, installing and running the same software application. Each such customization, modification helps the Software Company to improve its software application for more friendly user experience, with a more updated and increased price. Evolution, upgradation, improvements in the Software can be done with a minimal costs. With the addition of more features and add-ons, the upgraded versions adds more revenue including increased profits and margins for the Software Company. The phenomenon gives a flight to the software companies to reach early profitability. A software company can cater a larger market and sustain the profitability.
A Hardware Company, on the other hand, has to keep competitive margins in order to survive with its competitors. The production cost of the hardware is contingent upon several conditions including global, geographical, market, environment, season, natural, political or social in nature. Additionally, the revision in wages or mandatory appraisals to meet inflation also adds to the costs. The fuel prices also impacts the costs since the sales of Hardware is impossible without transportation and physical shipping means. Evolution in manufacturing to control the cost may also require huge investments on infrastructure, machinery, skilled labor etc. a Hardware Company does not get repeated business from the same customer unless the customer is in the business of consuming the product for which the hardware is required. A competitor with a modified, more equipped, functional, productive, updated hardware can snatch away the existing business also. An investment in software can not, however, be ignored by a customer. But the Customer will quantify and compare the products before purchasing any new hardware, and would like to quickly discard the previous purchase. All these parameters constantly reduce and impact the margins, and the Hardware Company can be out-competed by a Software Company.
Cost and Pricing of Software vs Hardware
The cost and pricing of products also creates a huge disparity when a software business model is compared with a hardware model. The direct cost of the product (whether software or hardware) in long run redline the effective cost price impacting the effective profit or saving for the customer. The customer evaluates the optimal pricing and cost of the product (whether hardware or software) and compares it with the market segments before a purchase.
In Hardware business model, the Hardware Company manufactures different models and price them based on the cost of each model. A model with lesser use is priced lesser than the product with more usage or features. The samples of the Hardware also cost to the Hardware Company. The Hardware Company may not afford to distribute samples of each model for customer’s trial or free usage. However, a Software Company, can easily offer the customer to use the software for free for limited duration with limited features. The motive behind the practice is to install the software product in customer’s environment and to provide a premium and pleasant experience to the customer for such freeware version. The software company may not change the price of the software even after offering the freeware or sample to the customer. But, it is highly impractical for a hardware company to distribute free samples in order to generate business. The customization in market can also wash the customer’s mind before the customer raise the purchase order for the hardware.
Supply and Delivery of the product: Software vs Hardware
In earlier days, the software were supplied and delivered in different media devices, using different transport means just like with the case of hardware products. With the evolution of internet, the supply and distribution of software is also evolved. Now, the software companies allow you to download the software product or provide a licensed key to use the software applications online, without the hassle of transporting any media or any other physical transportation of the software products. The Hardware companies, on the other hand, are selling hardware products online, but the delivery and supply is still dependent on shipping of the products through different transportation means. Some hardware companies are engaging third party channel partners to establish warehouses or inventory units in different locations to avoid delay in supply and distribution of hardware products, but again the inventory units adds the rental costs to them. Software are also sold through third party resellers to customers, but the software companies deliver the license keys through emails or other electronic means, which are instant and does not cost substantially as in case of maintaining an inventory unit.
Competitive advantage against competitors
In order to obtain a competitive advantage for sustaining in market, patenting the product (whether software or hardware) is compulsive. A software company may restrict a customer not to copy the source code of a software application, but a competitor may find another technology or a software application to provide the same end results. The market has witnessed evolution in software products improvised with competitively more niche, updated, functional features outraging the existing software. A start up software company may compete a giant business tycoon and squeeze them out of the market with a more revolutionary software product for a specific segment, without creating any dispute with the existing software. A hardware company, on the other hand, relies on volume production and consumption to control the cost. Branding and marketing efforts are huge to establish a defensive advantage. A chip manufacturing company is also required to constantly invest huge amount in reminding and advertising to market their product. The branding is also done by maintaining topmost quality and affiliation with other brands selling equipment in their line of business. So, a hardware company has to scale up to establish the competitive advantage, while a software company can easily take a competitive advantage by providing a nice software.
Sales Strategies and process: Software vs Hardware
A software company targets the segment of customers before initiating the sales. They run campaigns to generate leads before soliciting the customer and generating requirements for the software. The solicitation is done through cold calling, attending technology events and seminars, and identifying the target customers either digitally or in such dedicated meetings. The software company will demonstrate the solution, providing high-level insights into the functions, features, work, granular details, capabilities and other information about the software. Customer may, sometimes, request a freeware or a evaluation licensed version of the software to test and run the features. Irrespective of the price, whether low or high, the sales of a software is time consuming until the customer is fully satisfied with the software. Sometimes, the most promising customer inquiring for a quotation of a software product may take months to respond and to determine if they are interested in the procurement of the software. Hardware company also follow a similar process with certain business related changes. Most of the times, the hardware company avoid demonstrating a fresh physical sample. They often use white papers and catalogues to explain the designing and graphics whereas the customer will not always observe a practical user experience with the usage of the hardware. The sales cycle of a hardware is short for low priced products and may have long cycle for a high valued product.
There may be many other ways to prepare a comparative study, but the author concludes this Article here. The contents of the Article are sole and independent observations of the author from various sources. The author disclaims any liability arising out of any person investing in any business model based on their interpretation from this Article.
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