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Hardware Unit Economics: COGS, Margin, and the Landed-Cost Trap
Hardware unit economics worked through: BOM to landed cost, gross margin by channel, the costs that hide between factory and customer, and subscriptions.
by the HardwareMap editors4 min read
Contents
Hardware unit economics is the arithmetic from the bill of materials to profit per unit: parts, assembly, yield, packaging, freight and duty make landed cost, then channel fees, warranty and returns come off the price. Founders who price from the BOM alone miss every cost between the factory and the customer. This note sits under how to start a hardware company.
The companion note, hardware startup costs, covers the one-off spend to reach production. This one covers what happens every time a unit ships. If the second does not pay back the first at a believable volume, the business does not work.
Hardware unit economics, worked from BOM to profit
An illustrative connected device, sold direct online at $199. The numbers are invented for the example but the shape is typical. Replace each line with your own quotes.
The landed cost is 1.4 times the BOM. Gross margin on landed cost alone is 70%, which looks healthy. Contribution after the variable costs of selling is 59%. Customer acquisition cost comes out of that: if each sale costs $60 in ads, the unit earns $58. The BOM line starts with a clean bill of materials; the bill of materials example shows the columns, and the manufacturing bill of materials adds the assembly steps that set the second line.
The landed-cost trap
Landed cost is where margins disappear, because none of its lines appear on the factory quote.
- Duty and tariffs. Rates come from the product's classification in the Harmonized Tariff Schedule and its country of origin. US Section 301 and later tariff actions stack on top of base duty for many Chinese-origin goods and have changed repeatedly. CBP explains how duty rates are determined. Get a customs broker's classification before you set a price.
- Freight mode. Air freight on a launch shipment can cost several times ocean freight per unit. Founders who miss a ship date pay for air.
- Yield. Units that fail end-of-line test are either reworked (labor) or scrapped (full BOM). A 95% first-pass yield on a $42 BOM is not a rounding error.
- Component price breaks. Quotes at 1,000 units assume 1,000-unit pricing on every part. A first run of 300 pays more.
- Currency and payment terms. A factory quoting in another currency moves the BOM with the exchange rate.
Carry a buffer of 10 to 15% on landed cost in every pricing model until the first production invoice is paid and the real number replaces the estimate.
Channel math: direct, Amazon, retail
The same $199 product earns very different amounts per unit by channel.
Amazon's consumer electronics referral fee of 8% comes from its published fee schedule; fulfillment fees depend on size and weight. Card processing is typically about 3% plus a fixed fee per order on processors such as Stripe.
Retail is the trap inside the trap. At a $100 wholesale price, a $58.90 landed cost leaves 41% gross margin before markdowns, co-op marketing and returns. That is why founders planning retail distribution aim for a landed cost of roughly a quarter to a third of shelf price.
Margin targets and recurring revenue
Gross margin pays for everything the unit table leaves out: engineering for the next version, support, the warehouse, the team. A product at 25% gross margin needs enormous volume to cover a modest team. A product at 50% can fund its own next generation.
When the device margin cannot get there, the business model has to change.
- Subscription. Oura sells its ring with an optional membership priced at $5.99 a month or $69.99 a yearest (Oura membership). Recurring revenue changes the metric from margin per unit to lifetime value per customer.
- Robots as a service. Formic sells robot automation to factories pay-as-you-go. The vendor carries the hardware cost and earns it back over the contract, so the key number becomes utilization, not unit margin.
- Consumables. Printer makers such as Prusa Research also sell filament, so each printer sold can be followed by years of material sales.
Each model trades a simple unit margin for a payback period and a churn risk. Model both before choosing.
How the numbers move with volume
Unit economics at 500 units and at 50,000 units are different businesses. BOM falls with component price breaks and with negotiated pricing once volume is real. Assembly cost falls as the line learns and fixtures improve. Tooling amortized per unit falls toward zero. Freight per unit falls when shipments fill containers. What does not fall on its own: duty rates, channel fees and warranty cost per failure. Model three volumes, first run, year one and year two, and price for the first. Raising a price after launch is harder than lowering it.
Frequently asked questions
What is a good gross margin for a hardware startup?
There is no single number, but 40% or more on direct sales is a common working target, and the target rises when the product must also carry retail markups. Margin under 30% leaves little room for warranty, returns, marketing and price cuts. The right target depends on channel: a product sold through retail needs a much lower landed cost relative to its shelf price than one sold direct.
What is the difference between BOM cost and COGS?
Bill of materials cost is the price of the parts. Cost of goods sold adds everything needed to turn those parts into a unit in the customer's hands: assembly, test, yield loss, packaging, freight, duty and often warranty reserve and fulfillment. For a first product, COGS commonly lands well above BOM cost, which is why pricing from BOM alone underprices the product.
What is landed cost?
Landed cost is the total cost of a unit once it arrives at your warehouse, ready to sell. It includes the factory price, packaging, inbound freight, insurance, customs duty, brokerage and any tariffs. Duty is calculated from the product's tariff classification and country of origin, so two similar products can land at very different costs. Check the classification before pricing.
How do subscriptions change hardware unit economics?
A subscription lets the device sell at a lower margin, or even a loss, because recurring revenue pays back the gap over the customer's lifetime. It shifts the key metric from gross margin per unit to lifetime value per customer. The risk is churn: if customers cancel early, the device was sold below cost with nothing to recover it.
HardwareMap records hardware companies from first prototype to scale, and how they make money on each unit. Building one? Submit it and get a part number.
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