$100 profit on a $150 watch would be crazy. Rest of the post seems made up too. I don't know where these numbers are coming from. I'm genuinely confused.
MSRP of 3x COGS is a pretty common rule of thumb for hardware. Have to leave room for distribution, software, R&D, returns, SG&A, etc. End of the day, it's probably still only 30-40% gross margin -- less than half of a good SaaS company. Hardware is (indeed!) hard.
Having worked in a tiny start-up-turned-company doing hardware for medical training, my biggest takeaway was that it is very slow but that it can also be very stable.
Like, yeah our margins were/are super high, and so were/are the distributors’, but once everything was spun up and running it was also very stable and predictable.
We were located on the outskirts of a 3rd tier Eastern European city and yet we were plugged right into the same global parts supply chain and capable of doing the same global distribution you could elsewhere. If you’re on to something, it’s a good time to be doing hardware. But you’re correct - 2/3 of the entire company was distribution/sales and R&D.
Gross profit = sales or service revenue less the expenses directly related to producing that revenue (this does not include backoffice functions, R&D, rent, etc.)
Net profit, which is the total revenue of the business less all expenses of the business (so, this includes R&D, rent, and the "backoffice" like HR, finance, legal, etc.)
Larger businesses with multiple business segment may account for gross profit separately for each business segment, but the business only ever calculates one net profit item.
There's also unit profit, which is essentially gross profit but at the level of a single unit of goods or services (for services, a unit is usually a customer contract, for recurring services it would be each period of the contract). Unit profit is generally the revenue from that specific unit less the costs directly associated with producing that revenue. Most companies don't calculate unit profit as generally it's not meaningful unless you sell high-value items, like automobiles or planes.
It's absolutely essential to be able to differentiate between gross profit and net profit to establish unit economics, especially as the scale of a newly founded operation may drastically change relative to some amount of fixed capex or SG&A expense.
Of course. But here we're talking about the opportunity cost of the founders and other employees so gross profit isn't as relevant. Context matters and the context here is that the founders and employees would probably have a much higher take home split amongst all of them if they were to work in the wearables division of a large company like Google or Apple.
The difference between gross profit & net profit for companies like this is largely comprised of employee & founder salaries (SG&A and R&D). That delta is literally paying for their opportunity cost. Net profit is most relevant to shareholders.
What they call "gross profit" is not profit, by definition. It's certainly useful to track $revenue-$cost_of_goods, but you can't call that profit. People are free to use words incorrectly, but they shouldn't expect anyone else to go along with them.
Who chooses the "correct" use of words? Is it you? Wikipedia disagrees with you: https://en.wikipedia.org/wiki/Gross_margin. Maybe you should make your own encyclopedia.
Please hire an accountant asap if you ever start a business. Things don't mean what you think they mean in accounting. You are wrong and insist you are right despite multiple people pointing it out to you.
I was using a blended average of the $150 and $225 watches. Also, it sounds like some of the components for the $150 watch were literally left over from Pebble days, which means they could have gotten an amazing deal on them.
