In the early days, the Cloud/SaaS combo took off because it made life obviously easier: no messy installs, lower upfront costs, and the flexibility to scale as you grow. But that model is starting to hit its ceiling. Customers today expect more than just software. Having grown accustomed to the flexibility of as-a-Service, they’re now looking for complete solutions: experiences that blend software with physical products, infrastructure, or devices that work together seamlessly.
Bringing physical products into a SaaS business is a big shift. It changes how you operate, sell, ship, and support customers. But it also transforms your offering: from being just a tool to becoming a full solution.
We’ll look at why adding products matters, how leading companies are making the leap, and what challenges (and opportunities) come with it.
Why combining software and products makes sense now
Let’s look at some realities of today’s software economy that help make the case:
- The SaaS market is projected to reach $1.25 billion by 2034, growing at a compound annual rate of ~13%.
- In most successful SaaS businesses, customer retention is strong. Companies often retain 90–95 % of customers annually, implying churn of 5–10 %. Considering natural erosion, this performance reflects close to 100% customer satisfaction.
- Yet many SaaS firms struggle with sales efficiency: only about 11 % of private SaaS companies met the so-called Rule of 40 (growth rate plus profit margin ≥ 40) in 2024.
- Among private B2B SaaS companies, the median spending on R&D is ~22 % of ARR, with marketing, sales, and support each claiming significant shares.
What these numbers suggest is that growth is still possible, but margins are under pressure. Adding product components can help offset margin compression in pure software. Physical products (if managed well) can offer higher gross margins, additional revenue lines, and give you an edge through tighter hardware–software integration.
Also, as software platforms proliferate, differentiation becomes harder. Embedding a product component, especially when it is unique, tangible, or hard to replicate, can significantly increase defensibility. It makes the offer more complete and builds switching costs that protect your business as competition intensifies.
However, there is a broader opportunity here. You don’t need to manufacture or own hardware to take advantage of it. SaaS platforms can bundle physical components provided by partners and include them in their subscriptions. This creates a more comprehensive experience for the customer without changing the company’s core business model.
How some companies are already doing it
Philips Healthcare (Patient Monitoring-As-A-Service
Rather than simply selling medical monitoring equipment and separately selling software, Philips now bundles monitoring devices, connectivity, analytics, and support in a subscription package. Hospitals do not just get devices, they get “monitoring uptime” as a service.
Volvo’s car subscription
Volvo moved from vehicle sales toward subscription-based mobility. Customers pay one monthly amount that includes the car, insurance, maintenance, and support. The software platform tracks usage, schedules maintenance, and gives data to predict issues and control costs.
Industrial “as-a-service” in compressed air and cooling
Some industrial providers such as Kaer or Energy Partners have shifted from selling compressors or chillers to selling compressed air or cooling by the usage. The customer doesn’t care how many machines you own, just that you deliver X cubic meters of air or Y kilowatts of cooling reliably. The supplier retains ownership of hardware and is responsible for upkeep, upgrades, and reuse.
Shopify’s SaaS + hardware model
Shopify started as a software platform enabling entrepreneurs to create and manage online stores. To support customers who also run physical shops, it developed Shopify POS (Point of Sale), an app that syncs online and offline sales, inventory, and customer data in real time. For payments, Shopify offers its own card readers while partnering with trusted brands like Epson, Star Micronics, and Zebra for peripherals such as receipt printers and barcode scanners. This partnership model allows Shopify to stay focused on its software while delivering a complete, plug-and-play retail experience that strengthens loyalty.
In each of these, the software is the orchestration layer. The hardware delivers the physical experience or performance.
What changes when you add products
Billing and monetization complexity
Your monetization models must evolve. Fixed subscriptions won’t always work. You may need usage-based billing, tiered fees, hybrid models, or outcome-based contracts. Your SaaS billing systems may not support that out of the box. As a positive side effect, this would naturally bring pricing best practices to the overall catalog, e.g. monetize an AI with the newly enabled outcome-based pricing capability in minutes.
Inventory, logistics, and servicing
You now have to deal with physical goods: procurement, quality control, maintenance, repairs, returns, and refurbishing. And you must design for reuse or recovery if you want to reuse hardware. Of course, solutions exist to outsource this part of the business process, but you have to keep the customer-facing responsibility of the complete offer.
Customer lifecycle redefined
The customer journey no longer ends at renewal. It includes hardware support, upgrades, replacements, and potentially end-of-life decommissioning. Product support becomes part of customer success. On the other hand, having a product creates more regular touchpoints with the end customer, which is a great opportunity to build a long term relationship and open the door to future upsells.
Design and durability
To make a XaaS (Everything-As-A-Service) model viable, your devices must last, be modular, and support refurbishment. If hardware is thrown away, the economy of the deal will collapse. But a higher quality ‘by design’ offers also the possibility of a second, maybe a third life for the product. This brings 2 main advantages: obvious ROI with longer product lifetime, and a bigger addressable market, as a refurbished quality product is often a segway to down-market with a leader position.
Partner ecosystem
You won’t build everything yourself. Logistics, financing, insurance, refurbishing partners, distribution… all may come from the outside. You must command the customer interface and orchestrate the network. The key to success here is customer ownership. The risk of diluted responsibility is high, often leading to customer dissatisfaction and a lack of valuable insights; both of which are essential for building a sustainable business.
Risk and capital demands
Physical products require working capital (inventory, parts), supply chain risk, warranty liability, and a stronger focus on operations. SaaS cash flow is “lighter” by contrast.
How to get started (a phased approach)
You don’t have to flip everything overnight. Here’s one way to go about it:
- Pilot with a minimal “product module.”
Start small, perhaps with a sensor, accessory, or smart module that complements your core SaaS. Use that to test fulfillment, pricing, returns, and support workflows. The device can come from an existing partner catalog, at least as a start, the value for the customers will be in the packaged offer. - Finance the approach.
A good way to include hardware in an existing subscription model is to externalize the “swallow-the-fish” effect to a financing partner. You can then have a pure OPEX approach with no negative impact on your balance sheet. - Integrate billing and operations early.
Before scaling, embed your billing engine with product usage data. Build workflows for returns, spare parts, and logistics, or outsource the logistics part to a third party. - Choose a vertical or use case where the product adds clear value.
Don’t try to productize everything. Focus on one area where a physical component unlocks a better customer experience or performance, or defines a new competitive advantage - Measure and iterate.
Track margin per unit, failure rates, refurb yields, and repair costs. Use data to refine design or shift to better materials or modularity. - Bake reuse and circularity into your operations.
From day one, plan for how hardware returns will be handled, how parts will be reused, and how value can be reclaimed. Over time, this becomes an additional revenue stream. Start exploring a down-market strategy for refurbished goods, delivering the same quality of service and leveraging your brand strength. This could mean targeting a new market (e.g., SMBs), entering a new geography (e.g., a country with lower cost of living), or partnering with new distribution channels.
The payoff (if done right)
- You create revenue diversification. When software pricing pressures rise, your hardware revenue can cushion the blow.
- You deepen customer relationships. The customer is less likely to replace you if your software and hardware are entwined.
- You can capture second-life value. Refurbishing used hardware can improve margins over time.
- You raise barriers to entry. Hardware, logistics, and service capabilities are harder to replicate than code.
Ready to explore the next step?
At Black Winch, we help SaaS businesses integrate products into their models, from strategy to finance to operations. We know where the pitfalls are and how to build a path that works in practice.
👉 Book a call with us and let’s talk about how your SaaS can grow into a hybrid model.
