Hardware Cost Reduction Curves for Deeptech Investors: The “stair-step” Model Explained

The Stair-Step Model: A Founder's Guide to Hardware Cost Reduction

For many deeptech founders, the journey from a working prototype to a scalable product is filled with financial uncertainty. You have proven the technology works, but investors are asking different questions now. They want to see a clear and credible path to profitability, which hinges on understanding how your manufacturing costs will decrease as you scale. Simply stating that costs will go down with volume is not enough. This guide provides a practical framework for building a hardware cost-down story that will resonate with investors, addressing how to show hardware cost savings in your pitch deck effectively.

Foundational Understanding: The "Stair-Step" Path to Profitability

Investors focus on your Gross Margin, the difference between your revenue and your Cost of Goods Sold (COGS), because it represents the fundamental profitability of your product. A healthy gross margin means you have the resources to invest in R&D, sales, and marketing. For hardware startups, the path to a strong gross margin is not a smooth, continuous curve. The reality for most pre-seed to Series B startups is more pragmatic: cost reduction happens in distinct stages.

This is the “stair-step” model. It differs from the classic experience curve, where costs decline smoothly with accumulated volume. In contrast, your costs remain relatively flat for a certain production run, then drop significantly only after you make a specific, targeted investment in tooling or automation. For instance, moving from 3D printing to injection molding requires a large upfront payment, but it dramatically lowers the per-unit cost. A credible financial model must reflect this lumpy, stair-step reality, showing you understand the operational and capital requirements of scaling hardware production.

Step 1: Building Investor-Ready Financial Models for Your Unit Costs

The first step in creating your cost-down story is to build a detailed manufacturing cost breakdown on a per-unit basis. This involves separating your COGS into three core buckets: the Bill of Materials (BOM), assembly labor, and landed costs. Your goal is to project these costs at key volume milestones, such as 1,000, 10,000, and 100,000 units.

Bill of Materials (BOM)

The BOM includes the costs of all your physical components. Price breaks for these parts are not uniform, so you must model them individually. You can typically group them into two main categories.

• Electronics: Component distributors offer significant price reductions at higher volumes. A 15-25% reduction in electronics component costs is typical when moving from 1,000 to 10,000 units.
• Mechanical Parts: Savings on custom mechanical parts are often less dramatic without new tooling. These parts might only see a 10% cost drop until you invest in high-volume tooling. To make these projections defensible, you must get budgetary quotes from potential suppliers for your target volumes.

Assembly Labor

This is the cost of human labor required to build your product. Early on, you can expect efficiency gains as workers become more familiar with the process. It is reasonable to assume a 10-15% labor cost reduction for the first 1,000 to 5,000 units from this learning curve. However, more substantial savings must be tied to a specific investment. A labor cost reduction of 30% or more must be justified by a specific investment in automation or process improvement, such as creating assembly jigs or automated test fixtures.

Landed Costs

Landed costs are the often-overlooked expenses required to get a finished product from the factory to your warehouse. These costs, including shipping, tariffs, and duties, can add 5-15% to your BOM cost. The figures can vary significantly based on your supply chain. For startups in the UK and USA, sourcing from overseas may offer lower BOM and labor costs but could incur higher shipping and tariff expenses.

Step 2: Planning for the Lumpy Costs of Scaling Hardware Production

While unit costs capture variable expenses, scaling hardware is defined by large, infrequent investments known as Capital Expenditure (Capex). These are the major purchases for things like molds, fixtures, and automated equipment that enable lower per-unit costs. This is where your cost-down model gets its stair-steps. Founders must distinguish between the accounting treatment and the cash flow reality. Your accountant, using software like Xero or QuickBooks, may amortize a tool's cost over its useful life on your profit and loss statement. But from a cash flow perspective, you must pay for that tool upfront. Investors need to know you have planned for these large cash outlays.

A scenario we repeatedly see is founders mapping capex directly to volume triggers:

• 1,000 Units: At this scale, you are likely using processes that avoid high upfront costs, such as 3D printing and soft tooling, with an example capex of around $5,000.
• 10,000 Units: To reach this volume efficiently, you need to invest in more durable tooling. A typical P20 steel injection mold tool for 10,000 to 50,000 units can cost between $15,000 and $40,000, with an example capex of $25,000.
• 100,000+ Units: High-volume production demands robust, multi-part tooling and automation. The example capex for 100,000 units, covering multi-cavity hardened steel tools and automated fixtures, is $150,000. An even more durable H13 steel tool for over one million units can cost two to three times more.

Planning for these lumpy investments is a critical part of your cost of goods sold analysis and shows investors you have a realistic grasp of the capital required to scale.

Step 3: How to Show Hardware Cost Savings in a Pitch Deck

With your unit cost projections and capex plan, you can build a compelling slide for your pitch deck. The goal is to distill this complexity into a simple, two-part visual that tells a powerful story of scaling and improving profitability. This is how you demonstrate hardware gross margin improvement without overwhelming your audience.

Part 1: The Stair-Step Chart

Visually represent your cost-down journey with a simple bar chart. The Y-axis should be your per-unit COGS, and the X-axis should show your production volumes (e.g., 1k, 10k, 100k units). Each bar will be lower than the last, creating the “stair-step” effect. Add annotations above each step-down to indicate the capex investment that unlocked the new, lower cost structure, such as “$25k Tooling Investment.” This chart instantly communicates your strategy.

Part 2: The Summary Data

Beneath the chart, provide the supporting data that demonstrates the direct impact on your unit economics. Show the manufacturing cost breakdown transparently at each stage. For example, you can present the data as a summary list:

• At 1,000 units: A BOM of $120, Assembly of $30, and Landed Cost of $15 result in a Total COGS of $165. This delivers a 34% Gross Margin and requires a capex of $5,000.
• At 10,000 units: Costs decrease to a $90 BOM, $20 Assembly, and $12 Landed Cost, for a Total COGS of $122. Your Gross Margin improves to 51% after a required capex of $25,000.
• At 100,000 units: Costs fall further to a $65 BOM, $10 Assembly, and $10 Landed Cost, yielding a Total COGS of $85. This achieves a target Gross Margin of 66%, unlocked by a $150,000 capex investment.

This two-part slide delivers a clear, defensible story. It shows you have done the work, understand the levers of startup manufacturing efficiency, and have a credible plan to build a profitable hardware business.

Practical Takeaways for Your Investor Narrative

Translating your operational plan into a financial story can feel daunting, but focusing on a few key principles will ensure your message lands effectively with investors.

First, prioritize credibility over precision. Investors know that early-stage projections are never perfect. They are looking for a well-reasoned model based on real-world data points and supplier conversations. A plan built on budgetary quotes is far more compelling than a guess, even if the final numbers shift.

Second, always anchor your model in cash flow reality. While your accountant manages the P&L, your primary concern as a founder is runway. Your model must clearly identify when you need cash for capex. This directly informs your fundraising ask and demonstrates responsible financial stewardship.

What founders find actually works is structuring their fundraising around these manufacturing milestones. Frame your ask clearly: “This Pre-Seed round funds production of our first 1,000 units with soft tooling. Our subsequent Series A will finance the $150,000 investment in hardened steel tools and automation needed to achieve a 66% gross margin at the 100,000-unit scale.” This approach connects your capital needs directly to tangible business outcomes, creating a powerful narrative for investors.

Continue exploring this topic at the Pitch Deck Financials hub.

Frequently Asked Questions

Q: Why is the "stair-step" model more credible for hardware startups?

A: The stair-step model is more credible because it reflects the reality of scaling hardware production. Significant cost reductions are not gradual; they are unlocked by large, specific capital expenditures like tooling and automation. This demonstrates to investors that you understand the cash flow requirements and operational planning needed to scale.

Q: How can I get accurate cost data for my financial projections?

A: The key is to engage with potential suppliers and contract manufacturers early. Request budgetary quotes for your Bill of Materials and assembly at different volume tiers (e.g., 1,000, 10,000, and 100,000 units). While these are estimates, they provide a defensible basis for your investor-ready financial models and show you have done your homework.

Q: What is the most common mistake founders make when presenting their cost-down plan?

A: The most common mistake is presenting a smooth, declining cost curve without linking it to specific capital investments. This signals a lack of understanding of hardware manufacturing. Another frequent error is ignoring landed costs, which can significantly impact your true Cost of Goods Sold and overall hardware gross margin.