Google CEO’s Crazy Toothbrush Test

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A couple weeks ago, a headline from Inc. caught my attention: Why Google’s CEO Only Buys Companies That Pass His Crazy Toothbrush Test. Larry Page talking about toothbrushes? Count me in.

The post starts by noting that Larry does not subscribe to many of the classic finance driven metrics when looking at buying a company; they then reveal the ‘toothbrush test’:

So what is it that Larry Page is really looking for, if not sales or proven performance, in a company when Google is considering an acquisition? Page will ask, “Is this something you will use once or twice per day, and does it make your life better?”

Of course, Larry Page uses the metaphor of a toothbrush, which falls into both categories, to underscore a broader point about Google’s acquisition strategy. However, Beam is inclined to look at this dynamic in the more literal sense.  In short, very few consumer products are as ubiquitous as toothbrushes, and fewer still require a daily use, or ‘touch point’.  The most rabidly popular consumer internet products of the past 20 years, sites like Facebook and Twitter, have 100s of millions of users globally, and these users log in multiple times daily to use the product.  These companies, and others that have scaled to enjoy this level of success, are considered to be among the most valuable companies in the world.

By contrast, toothbrushes have had multiple billions of users for decades, and these users tend to their teeth on a daily basis as well.  This provides the basic framework for the value that can be created with a potential base of engaged users of that magnitude. The users already exist; they are a captive audience.  The exercise from there is using this fact as an advantage. Namely, can the experience of caring for your teeth be enhanced to become entertaining, rewarding, even productive? And, what services can be stacked on top of this experience to help make your life easier, more efficient, and cost effective?

Working backward from behaviors that are already built into most people’s daily routine provides a more convenient pathway to not only changing this behavior, but more importantly harnessing it for creating impact. This simple fact serves as the fundamental building block of Beam’s foray into connected dental.

The Case for the Mass Market Hardware Device

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I recently overhead a phone conversation between two venture capitalists who were comparing Google and Samsung, specifically their newest hardware sales numbers.  The key difference between Google’s rising market share in this category versus Samsung’s stagnation was, as one VC put it, ‘because Samsung wants to sell you hardware. Google wants you to help deepen their user base and ecosystem.’ This technique gives Google the flexibility to craft an experience and a suite of products not concerned with maximizing the off the shelf margin, but instead on thinking in terms of the lifetime value of a customer.

This perfectly underscores the distinction between a hardware company (like Samsung) and a software company (like Google).  I also believe this is a key feature for the growing internet of things marketplace. Today, most IoT creators are focusing deeply on their hardware, painstakingly creating beautifully designed, engineered, and packaged devices.  Crowdfunding hits like the Misfit Shine, the Pebble Watch, and the Skully AR-1 motorcycle helmet are gorgeous and functional hardware products.  As such, hardware startups like these are able to charge a premium for these products, partially due to their differentiating features, but also because of their own costs in lower volumes.

This is the natural cadence of introducing a new device to the market: high prices and low volumes at the beginning, and over time the product matures (and competitors come in) to result in a high volume, low price good.  USB flash drives are a great example; I remember buying a 1GB flash drive in 2006 for $50. By 2009, 2GB flash drives were giveaways at job fairs and tossed in the nearest trash can.

However, the internet of things presents a unique opportunity, and challenge, for innovators.  To compete with the incumbent device in any given category (like traditional thermostats), a connected hardware device can grow volumes more quickly by introducing their product at a truly competitive price point. Nest’s thermostat was a runaway hit by all accounts, building a superior product and a superior experience.  In spite of this, I often consider the lost revenues in the huge portion of the market that Nest still today cannot effectively court. For most consumers, the chasm between a $25 regular thermostat and Nest’s $200+ connected thermostat is massive, a leap that just does not make sense for Joe Consumer, even one interested in the product.  What if a Nest thermostat was just $40 or $50? By surrendering margin upfront, Nest could plausibly have grown their customer base exponentially faster. [I know I would be a customer!]

What really keeps customers around, and therefore creating value, is the software built on a particular platform. The power of Nest isn’t industrial design, great packaging, or even their incredible UX…it’s data. Connectivity. The opportunity present for IoT makers is to grow their products at the rate that viral software platforms grow (think Facebook, Instagram, Snapchat, etc.). In this model, the digital ecosystem is built by distributing the hardware aggressively, removing the cost barrier for consumers who will default to the established and trusted brands selling cheaper and still totally functional products.  By crafting purposeful business models that take advantage of the connectivity, monetization in terms of lifetime customer value should still resemble or exceed that of selling really expensive devices to a small group of wealthy customers.

Hardware commoditization is inevitable. To me, at this stage of IoT, growth rate should be as critical as gross margin in that equation, as there are still a disappointingly thin amount of reasonably-priced connected hardware products.  Brand name wearables are $99, most connected health products are at $150 and above, Philips Hue lights are a $200+ endeavor. A concerted push for viral user growth rates, akin to what software startups call success when launching a new digital platform, should be replicated in hardware as a strategy to cement connected devices as a part of (all people’s) everyday life. Only then will IoT go from the much-hyped near future to full fruition.