What’s the Difference Between a Hardware and Software Business?
There are so many different types of companies. Pawn shops, landscaping companies, food trucks – you have everything. There are companies that make things you can touch and companies that make things you use on a computer. Both can become huge.
Apple is a hardware business, and Microsoft is a software business. But what are the main differences, and how do you decide which type of company to start? In this article, we’ll break down the main differences between software and hardware businesses, which will give you an idea of the pros and cons of each type of business.
What Is a Hardware Business?
A hardware business is a type of company that manufactures and sells physical or electronic products. An example of a hardware business everyone knows is Apple. Examples of hardware products built by Apple are the iPhone, MacBook, and AirPods.
What Is a Software Business?
A software business is a company that specializes in creating and selling computer programs – software. Microsoft is a good example, with their software products like Windows and Microsoft Office. A software business is defined by its focus on intangible, code-based products.
The Main Differences
From the earlier descriptions, you can probably already see hardware businesses and software businesses are very different. But what are the main differences you should know about? Let’s dive in.
Starting Capital
Software businesses typically have a significant advantage over hardware businesses when it comes to the amount of capital needed to get it off the ground. They require lower initial investments as they don't need to deal with the substantial costs associated with manufacturing plants, equipment, and inventory.
Hardware businesses face higher capital requirements due to the need for expensive equipment and facilities. The lower capital needs make it easier for software startups to secure funding and establish their businesses – the entry point for a software business is substantially lower.
This has become even more true with the rise of AI. Tools like ChatGPT help you write code and develop tools, which makes building a piece of software even easier and cheaper, while the cost of building a hardware business remains the same.
Pricing
The way software and hardware companies set prices is quite different. Hardware businesses usually determine price based on the costs of making the physical product, while still ensuring they make a profit. Software companies often have lower costs to make their products, so they can be more aggressive with pricing. They are often able to offer a free version, to lure people in.
Some software companies even set their prices so low that they don’t turn a profit. They do it to win market share. Uber did this for a long time, for instance. This route is rarely available for hardware-based businesses.
Margins
Margins are very different between software and hardware businesses. Software companies often have higher gross and net margins compared to hardware businesses. This difference is thanks to the minimal cost of goods sold in the software industry. With negligible production costs, software companies can achieve profitability much more easily.
Dealing with tangible products and the manufacturing expenses associated with them, hardware companies face more significant challenges in maintaining comparable margins.
Distribution
The Internet has changed how companies get their products to people for both software and hardware businesses, though there are some differences. Downloads and other online services allow software companies to directly share their products.
Hardware businesses still have to get their customers a physical product..
The internet has made it easier and cheaper for both software and hardware companies to reach customers, but each still has some unique challenges based on what they sell.
Market Dominance
Becoming the big player in the market is different for software and hardware companies. For software, even smaller companies can find a special place by being creative and focusing on specific groups of customers. But for hardware, the big companies like Intel, Cisco, IBM, HP, and Dell usually stay on top for a longer time.
This is because they can save money by making a lot of products at once, and people already know and trust their brands.
In hardware, being big helps you stay in charge for a longer time, making it an advantage that many successful companies use. In software, being quick and clever can help you win, but it’s easier for others to do that too.
Key Takeaways
Let’s recap:
Software businesses have a significant advantage with lower initial investments due to fewer manufacturing-related costs.
Hardware businesses set prices based on production costs, aiming for profit, while software companies, with lower production costs, can be more aggressive with pricing.
Software companies generally enjoy higher gross and net margins due to minimal cost of goods sold.
Despite internet advantages, both software and hardware companies have unique distribution challenges based on their product types.
Obtaining dominance is possible for both software and hardware businesses, but keeping it is way easier for hardware businesses.
With this information in mind, you not only know the differences between software and hardware businesses, but you also have a better idea of which one might suit you best.
