Stop Comparing Yourself to SaaS
I sit in board meetings with hardware founders and watch the same scene play out every time. Someone pulls up a SaaS benchmark showing 80% gross margins, and the room goes quiet. Here's what most people in that room get wrong: SaaS margins are high because the marginal cost of serving one more customer is near zero. You send bits over the internet. Hardware has real, physical cost per unit. You manufacture, ship, and support physical goods. Comparing yourself to Slack is a mistake.
The right benchmark for hardware is actual hardware companies — and the range is enormous. Cisco runs about 65% gross margin on its networking products. Garmin hits around 58% on GPS devices and wearables. Sonos lands in the mid-40s on speakers. Apple's hardware products — iPhones, MacBooks, iPads — sit around 37% (their headline 47% gross margin is boosted by services). Dell is down in the low 20s on PCs. GoPro is in the mid-30s on cameras. And Amazon's Ring and Echo devices? Sold at cost or at a loss — Amazon lost over $25 billion on its devices business in five years because the strategy was ecosystem lock-in, not hardware profit.
The point is that hardware gross margins depend entirely on the type of product, the competitive dynamics, and the business model. Enterprise networking equipment with high switching costs commands 60%+ margins. Commodity consumer electronics might struggle to break 30%. Most hardware startups building differentiated products should be targeting somewhere in the 40–60% range at maturity — but at seed stage, you're almost certainly not there yet. And that's OK.
At Seed Stage, Margins Are Not the Point
Here's what I tell every hardware founder: if you're pre-seed, seed, or even Series A, gross margin and contribution margin are not the metrics that matter most. They become very important later. But right now, obsessing over margin percentages is premature.
What matters at the earliest stages is proving three things. First, prove that the product works — take the technology risk off the table. Second, prove that customers will buy it at the price you want to offer it — take the product risk off the table. Third, establish credible evidence that customers will buy a lot of it — take the market risk off the table. Technology risk, product risk, market risk. In that order.
At this stage, every single cost is higher than it will be in the future. You're producing in small batches. Your customers are buying small quantities to try out your solution. Every customer win is a huge celebration — and it should be. Your margins are going to look terrible compared to Cisco or Garmin, because Cisco and Garmin are manufacturing at scale with decades of supply chain optimization behind them. You're not. And nobody expects you to be.
What Your Financial Model Needs to Show
What does matter is having a financial model that is comprehensive and realistic. If your model shows both of those things — a thorough accounting of all costs and a credible path to decent gross and contribution margins in the future — that's good enough through Series A. Investors at the seed stage are not asking you to prove you have great unit economics today. They're asking you to prove you understand the path to getting there.
The financial model should show what happens as production volumes increase. Where do component costs drop? When do you hit minimum order quantities that unlock better pricing? What does the margin structure look like at 1,000 units versus 10,000 versus 100,000? A credible improvement plan shows operational maturity — and that's what separates fundable hardware startups from the ones that get passed over.
When Margins Become Essential
The moment this changes is Series B and beyond. When you're raising much larger sums of money, your investors need to see evidence that you're not burning a hundred-dollar bill every time you ship a widget. At that point, gross margin and contribution margin move from "we have a plan" to "show me the data."
Contribution margin — revenue minus COGS minus delivery cost minus customer acquisition cost — is the number that really tells you whether the business works at scale. A $500 product with $200 COGS, $50 delivery, and $50 CAC shows 60% gross margin and $200 contribution margin per unit. That's a business. A different product with $100 COGS but $150 delivery and $300 CAC shows 80% gross margin but negative contribution margin. Gross margin alone can be misleading. By Series B, you need to know the full picture and present it with confidence.
The Real Benchmarks That Matter
When you do need to benchmark yourself, use companies in your actual category. If you're building a connected consumer device, Sonos at 44% and Garmin at 58% are more relevant than Apple at 37% or Dell at 22%. If you're building enterprise hardware, Cisco at 65% product gross margin is the target — and the reason Cisco commands those margins is high switching costs and deep integration into customer infrastructure. If you're building a camera or sensor product, GoPro at 34% shows you how tough that market is.
Apple's hardware gross margin of 37% might surprise people. They sell the most desirable consumer electronics on the planet, and their hardware margins are in the 30s. The reason Apple's overall gross margin is nearly 47% is that services — the App Store, iCloud, Apple Music, Apple TV+ — run at 70%+ margins and now represent over a quarter of Apple's revenue. Amazon took this even further: sell the hardware at a loss to lock customers into the ecosystem. That strategy cost Amazon $25 billion before they admitted it wasn't working as planned. The lesson for startups: be very clear about whether your margin story is hardware or hardware-plus-services, and don't confuse the two.
Know What's Actually in Your COGS
Even at seed stage, when margins aren't the primary focus, you need to account for your costs correctly. Above 75% gross margin on a hardware product usually means something is miscounted — and in my experience, it's almost always that shipping, returns, warranty reserves, or customer support costs got left out of COGS. I check this immediately when I start working with a hardware startup. Getting it wrong doesn't just produce a bad number — it produces bad decisions, because you're optimizing against a margin that doesn't exist.
On the other end, if you're below 30% at seed with no credible path to 40%+, that's a structural problem worth addressing now. Not because investors demand it today, but because it might mean the business model itself needs rethinking — pricing, packaging, channel strategy, or bill of materials.
Your Fractional COO Builds the Margin Roadmap
Getting unit economics right isn't a finance exercise. It's an operations exercise. It requires someone who understands the full cost structure from materials through delivery, who knows which benchmarks actually apply to your category, and who can build the roadmap to improve margins as you scale. At seed stage, that means building the financial model that tells a credible story. At Series B, it means having the data to back it up. That's the kind of operational work that pays for itself many times over — and it's exactly what a fractional COO does.