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Comment by paulcole | Hacker News Reader

"seller of over two million smartwatches"..."Pebble was losing money, with no profit in sight"

I honestly don't understand this line of thinking. Why not, you know, sell something for more than it costs?

That's the idea. But the "cost" of an item will depend on the number sold.

Let's assume that a company's yearly costs are $1 million. They will sell one widget a year. That widget will now "cost" more than $1 million if they want to be in the black. But if they will sell 1 million widgets, now one widget will "cost" more than $1. (There's a lot of slop here, as the marginal costs will have gone up since you greatly increased production.)

Basically, you have fixed costs, and when you sell many of a thing, you build in the fixed costs, along with the marginal unit cost, into the final price the consumer pays. The problem comes when the size of your market is such that the cost you would need to stay in the black is well more than any reasonable consumer would pay. In Pebble's situation, there surely would be a one-watch cost that would keep them in the black, but that number could be in the thousands or tens-of-thousands. That's when you, as the CEO, start to think about shutting down the business, because that unit cost would be absurd.

I think you may be thinking of the "cost" of the watch as the marginal cost it takes to pump out one more from a production line. But you also have to take into account all of the fixed costs (software developers, administrators, server infrastructure, getting the production line ready, etc).

This is why some startups report being "contribution margin positive". That is to say: the unit economics of selling a widget are profitable when you consider the direct cost of sales (usually some combination of: marketing, components and materials, projected lifetime cost to serve if there's any subscription component), but excluding the significant central office costs.

E.g. Tesla. To be fair, a lot of their "central office cost" is R&D, but that was also probably true for Pebble.

I'm sure their unit costs were lower than their unit revenues, but it was the R & D costs that did them in.

They couldn't just charge more to cover R & D, because you need to hit a price point that your target audience will pay.

They could have gone for a higher price point, but then they're competing more directly with Apple and other premium brands like Gamin.

Investing in R & D to fuel future growth is a normal and reasonable thing to do. It just didn't work out for them, as it turned out the overall market for this product category isn't growing as fast as early indications suggested it would.

Economy of scale. As a comparison, Fitbit has sold more than 38 million devices worldwide since 2010[1].

[1] https://www.statista.com/topics/2595/fitbit/

Do you have any insight on what their return rate is? Judging by the Amazon reviews it must be somewhere (far!) north of 50%.

Also note that Fitbit can cover some of its costs (or enhance its profits, however you look at it) by wholesale spying upon its users.

Pebble was profitable for a time but if you have fixed costs and not the sales to make it up then you have a problem. It's pretty naive to think that "sell something for more than it costs" is reasonable advice here.

"Pebble was profitable for a time"

must've been a fun couple of hours

The article explained they dropped into the red in 2015 so I'm assuming that means they were profitable in 2014. Curious if they were profitable in 2013 as well.

They originally launched in 2012 so I don't think your "couple of hours" are likely fair.

"Perceived value is the worth that a product or service has in the mind of the consumer. For the most part, consumers are unaware of the true cost of production for the products they buy; instead, they simply have an internal feeling for how much certain products are worth to them." [1]

Some times you just can't sell an item for more than it costs. This is particularly true for technology companies who are pushing the envelop on the technology front. For example, the EO-444 tablet sold for $2000 in 1993.

[1] www.investopedia.com/terms/p/perceived-value.asp [2] http://www.oldcomputers.net/eo-440.html

You lose money on every unit but make it up in volume!

You still lose money that way. The volume gain is often not enough to offset lackluster sales.

(Chinese can outcompete you on price, always.)

They were profitable for a lot of their lifetime and then they weren't.

But you need to grow as rapidly as possible and own the market because everything in the world works exactly like a social networking web startup.

like uber does?

I can understand uber, where there are network effects at play as well as ongoing lifetime value from a customer. But this doesn't seem to apply to a watch where you'll maybe buy 1 every 2 years?

Dang, I guess they just never thought of that.

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