How Skylight Balances Growth and Profit for Sustainable Success – Michael Segal & Mark Ungerer, Skylight

David Barnard:

Welcome to the Sub Club Podcast, a show dedicated to the best practices for building and growing app businesses. We sit down with the entrepreneurs, investors, and builders behind the most successful apps in the world, to learn from their successes and failures. Sub Club is brought to you by RevenueCat. Thousands of the world's best apps trust RevenueCat to power in-app purchases, manage customers, and grow revenue across iOS, Android, and the web. You can learn more at revenuecat.com. Let's get into the show.

Hello, I'm your host, David Barnard. My guests today are Michael Segal, CEO, and Mark Ungerer, CPO at Skylight, the family tech company behind the Skylight Frame and Calendar. On the podcast, I talk with Michael and Mark about the boom in hardware-enabled subscriptions, how getting the product right unlocked everything else. And doubling their price to $79, even though the data said they could charge more. Hey, Michael, thanks so much for joining me on the podcast today.

Michael Segal:

Thanks so much for having me, David. It's really exciting to be here.

David Barnard:

And Mark, nice to have you as well.

Mark Ungerer:

It's great to be here. Thanks, David.

David Barnard:

Really excited to have you guys on the podcast. Sometime in January, I was poking around app figures and I started seeing that hardware-enabled subscriptions had a moment in the 2025 holiday season, from Oura Ring, and Backbone, and BirdBuddy, and Skylight. And I just kept going, and searching for more and more of these hardware-enabled subscriptions and saw downloads skyrocketing. And for those that use in-app purchase, revenue skyrocketing. And so, it seems like this category has really taken off over the last few years, so I'm really excited to talk through those things with the two of you. So, first thing I did want to start with was, as a hardware product, what was the decision and when was the decision made to layer on a subscription component?

Michael Segal:

I'm a former VC. I used to work at Bessemer. And Skylight started out as a digital picture frame company. Today it's that, but digital calendars are much more of the business. And as soon as I went full-time and the business was couple million in revenue, there were two of us here. The first thing we looked at each other is, Jake and I, co-founders, were like, it's time for a subscription. Just coming from VC land, a hardware business in consumer without a subscription is basically not building enterprise value with rare exception. And so, we just knew two things. Number one, that we have to from a business model perspective, but also the net promoter score of our product was so high, so off the charts good that we figured there's something we can build for you guys.

Basically, the next thing's on the feature list, we're just going to put those behind a paywall. You guys seem to really like our product. We've built enough goodwill that we think you'll be willing to pay. And by the way, you use our products weekly, if not daily. So, all the signs pointed to our ability to do it and that the customers would be receptive. And we knew we had to from an enterprise value perspective.

David Barnard:

What was the timing of this? When was the company started and when did you introduce a subscription? Because I do feel like when hardware products started introducing subscriptions, it does feel like there was some pushback. And it took a while for consumers to feel comfortable having paid often hundreds of dollars for a hardware product. Then wait, I got to pay more and I got to pay more every single month? So, what was the timing of this?

Michael Segal:

So, first, I'll say they're still uncomfortable and reasonably so. We're not just engaging with that discomfort every day, but we're trying to figure out the right balance, where people think it's fair and they're not barfing all over it after paying three to $600. And it's a delicate balance and it changes. Every year, the market shifts in terms of what for your specific product people are willing to pay for. In our case, the business was launched in 2015. We launched the subscription in 2018, so it was pretty early days.

David Barnard:

Getting back to this holiday season, I'm sure you follow this side of the industry way more than I do. Are there specific things you think made this holiday season so great? I mean is it just continuing acceptance of these kind of products? Or what happened?

Michael Segal:

Yeah. I don't think this season was unique. I think it's just a crescendo of something that's been happening for a few years. If you go in my time hop, I have screenshots from every December 25th of the past few years that shows you and the top 15 apps downloaded on the app store Christmas Day. First of all, it's been us and then a couple of our competitors in both mostly the frame category, which is the more mature category. And then you'll see Toniebox, which is the kids' audio platform. They were number one or number two this year, but they've been up there for years. So, it just seems like more that these categories are reaching mass adoption and maturity. And so, obviously, during the holidays when you're looking for something cool to give, you give a physical product. People love us in a couple of these other categories, so just naturally skyrockets to the top of the charts.

David Barnard:

Has it been just linear growth or has it been an exponential, like every year it just gets bigger and bigger? Because it does feel like there's just more hardware-enabled subscriptions than ever. So, just curious if you've seen a pattern.

Michael Segal:

I tend to think of it as market by market. If I'm speaking to a random entrepreneur and they're like, "I'm going to launch a hardware with a subscription." I'll say, "Don't do that." Because look, I mean each market is its own thing. In the frame market, which is now that the Wi-Fi enabled digital frame market, is 10 plus years old, it's gotten extremely competitive, and commoditized and blah blah, blah blah. But yes, it's reached mass adoption. In the smart calendar category which we invented, it's much less commoditized, and we are far and away the leader, and it's all really exciting. So, I don't think of it as a mega-trend. It's like you have to have a really good idea. And there's very few and far between good ideas of a physical thing that anybody is willing to pay or millions of people are willing to pay.

If I had a list of 10 more, we would be launching those things, but there isn't. I mean there's not 100 things. And even some of the secondary categories, like smart pet cameras and other things, you just don't see them in the top 50 or 100, because there's a very precious few categories that are going to be new electronics that reach mass adoption.

David Barnard:

Maybe I'm just a total outlier as a wealthy dude with four kids and super into tech. But I just in the last couple of years, got a Fi dog collar to track my dog. I got my wife a Birdbuddy camera and she freaking loves it. I mean to be honest, and again, even just being in the industry, when we were going through the onboarding and I think it's like 60 or $90 a year. And it was like, wait a minute. But she freaking loves it and I do too. And we have a little family group chat with me and the kids and my wife. And she's posting pictures of the bird, and the kids are naming them, and it's just been this whole thing in our house.

And funny enough, and part of the reason I knew about Skylight was that my wife... I probably saw Instagram or somewhere Skylight. And asked me, "Hey, should we get this?" And I actually said, "Yeah, go for it." She didn't pull the trigger yet, but we'll probably have a Skylight in her house in the not too distant future. So, maybe I'm a little bit of an outlier, but it does just feel like I've been accumulating the software enabled and subscription enabled hardware.

Michael Segal:

I think both the things can be true. You can count on probably two hands the brands that have broken out Fi, Birdbuddy. These are great companies. We're friendly with most of them, but there's not 500 of them. Whereas, if you go into consumer subscription apps, I think there's much more of a long tail of really interesting niche plays. Here, it's just like an order of magnitude less, but also the number's going up. It's just maybe five years ago there were three of these and now there's 20 of these, but it's not 200. So, it's still a pretty high bar in terms of conquering everything, in terms of supply chain, but also just finding these mass adoption categories.

Nex Playground is the new hot one that's all a buzz. It's the kids movement-based video game system that's a couple hundred bucks plus a subscription. And it's just exploded in the past year. So, I think every year there will be one or two new ones, but I don't think there will be 30 new ones next year.

David Barnard:

One other that I forgot to mention is Backbone. Another fantastic product. I don't know if you guys have ever used this. You connect your iPhone and it becomes like a hand held... turns your iPhone into a Switch, basically, like a handheld gaming machine with controllers and everything. And I've played Minecraft with my kids for years and freaking love having a hardware attached. That's the one though where I don't even know what they're offering in their subscription and have not been... I guess I don't even launch the app, because it just works and I just play Minecraft with my kids on it. But anyways, yeah, there's just so many. And Mark, I think you had something you wanted to chime in on.

Mark Ungerer:

Well, I was going to say, you mentioned that you were looking at app downloads as a proxy. And I would just say that that's generally a proxy for a device sold. So, it's a really good way to proxy the growth of the hardware. But the subscription and the health of the subscription business, I think our experiences can vary a ton based on how critical that device is.

David Barnard:

And probably a good example would be the Backbone, where every other one I mentioned almost required a subscription. And with Backbone, it's a great device and maybe they're not as successful on the subscription side of things. And that's actually something I wanted to get to. And so, we'll just go right there. It's like, how do you make sure that your Skylight device is functional for the $300 they purchase, but then still entice them with a subscription? How do you think about the breakdown of what should be free, and maintaining that good user experience of the free product, and then what you're going to put behind the subscription?

Michael Segal:

Yeah. So, definitely one that both Mark and I should comment on, because he's going to have a different angle on this. I think step one first and foremost is our devices are daily usage in the home. So, they're always on, helping you either by displaying photos of your loved ones or by being this full calendar family management system that literally is the heartbeat of your home. So, once you've got daily valuable usage and attention, it's relatively easier to say, "Hey, we can do more valuable things for you. Here they are and they're behind a subscription paywall," than if you have a device that you put away and maybe you don't use for a week.

And by the way, even Skylight Frame is harder than Skylight Calendar, because it typically sits in Mom or Grandma's house site unseen. And so, you're not thinking about what other valuable things you could do with it. And there's also less depth of what you can do with it versus a thing that runs your whole family. So, Calendar is the perfect storm in terms of a really deeply valuable thing that you can have a subscription to. I'd love to throw it to Mark both to add to that, as well as how we think about where to draw the line.

Mark Ungerer:

If you boil it down, you want the what the customer is buying, like the heart of like why do they want this thing, to be part of what they're getting and they're paying for that $300 or they'll feel tricked and duped. And so, for Frame, I think it was like... when you get down to it's like, I want to easily get photos to Grandma and you should be able to do that without a subscription. And then videos comes up and you're like, oh, it'd be nice to have a video on there. And that goes in the subscription and that feels sort of like it's a natural upsell, but it's not the core of what you came there for. And the same thing for us is true in Calendar. People are coming there and they're saying, well, I want to be able to organize my events, and get my tasks, and to do's and chores done and those are things that we include.

And then you go, well, what about recipes, and meals, and what if we have an AI engine that helps you get all this done faster? And you go, well, great, that's a subscription. And so, I think as long as it passes that gut test of the person came there, and they spent those dollars and they got it, we're good. Where things are getting tricky is naturally our marketing teams are like, but that AI feature's super exciting and people love it. Can we advertise that? And so, you go, okay, well, how do we start to advertise all the good stuff about the product or the completeness of the product without confusing them, so that they buy it and then they feel sort of like that love and that excitement turns into surprise or frustration.

Michael Segal:

And I'd love to just underscore something Mark said. The heart of, I think Mark's comment, which is the heart of how we approach this is it's emotional. We look in the whites of customers' eyes and we try to figure out what feels relatively reasonable. Nobody wants to pay a subscription, but there's a spectrum between I get why you're charging a subscription, and I'm feeling ripped off angry, and disgust. When it's something that they feel on almost a values basis should be free, the emotion that is elicited is disgust and anger. And when you're trying to build a multi-billion dollar brand, that is not an emotion, even if it's actually short term subscription maximizing, not an emotion you want to elicit.

So, we have had times where we put something behind the paywall and it makes the numbers go up, but we learned through reviews and just interviews that it's very begrudging or even anger eliciting. And our point of view is we want to steer clear that we're not a get rich quick scheme here. We're trying to build something for a generational company. So, we keep our pulse on the emotional reaction to where the line is, not just some quant A/B test of what performs.

David Barnard:

That's exactly what I was going to ask next is do you test things in and out of the subscription bundle. So, it sounds like yes, you do. So, then is there any line you draw, you lean toward putting something behind the subscription first, and then you'll pull it out if you hit those roadblocks? Or is it just such a case by case? And do you have any other examples of something maybe that wasn't behind the paywall that you put behind the paywall?

Mark Ungerer:

Well, I could jump in. I think the philosophy as you build things out, we really want anything that goes into the bundle to make sense quickly to a user. They need to grok it without thinking too hard. And we don't want it to be something that they stumble into and it's like, this configuration setting. They're like, ah, crap, if I want this view, I've got to pay for it. They wouldn't get that when they're actually buying the product or signing up for it. So, as we build out new things that are like, hey. A good example was we launched a meal planning module. And it was like, for people who are meal planners, it's really clear what that's going to do. Think I'm going to be able to plan the family's meals. And we said that wasn't part of the product before, so you're still getting the same thing that you got for $300, for that same $300 and this new thing that they can grok is going to go behind the paywall.

And a lot of those things we don't even test. Sometimes we just say, hey, that makes sense. It's obviously easier to start behind the paywall when you're adding something new that passes that, yeah, I grok it, I want it test and then move it out, then the other way around. It's very painful. So, that's how we've felt our way into it. Also, counterintuitive point number one here is we have tried changing the merchandising of how do we show what is in the bundle to users. And those changes often don't change the attach rate, what we call the attach rate, what percent are subscribing, very much.

So, a lot of times we get the sense that as long as there's value in the bundle and the customer is excited about Skylight, they're like, give me the whole thing. I want this subscription, and they're going to start with it and turn it on. And this optimizing of how exactly do we frame it. We haven't yet seen a ton of change in the attach rates based on how we rebundle things.

Michael Segal:

I'll just add a couple of thoughts. One is I want to put a healthy layer of humility down. We have never had a subscription growth product manager. We are hiring our first one right now and haven't found them yet. So, all of this, when we say we've done this, we've lightly done it. We've done our best. But actually, I think I learned this when I went to your conference, like, okay, there are some people that are 10X more rigorous at testing the paywalls at every step than we are. Cool, let's do that. But as I said, we have yet to have or find that perfect growth PM who's going to drive that for us. So, these are all early instincts. But I do think they've proven out time and again this emotion first cautious philosophy. I'll give you one very ripped from the headlines example.

When we launched in 2018 or maybe it was early 19 for Calendar, we're like, you know what? We know how to do photos on a device. We're just going to put that behind the paywall. No rigor at all. Just like, if you're buying it for a calendar, cool. If you also want it to be a photo frame, 39 bucks a year, which by the way is a magic number where people don't really care that much. And it worked. It just worked out of the box, but it's now been eight years and the market has evolved. And now our customers are telling us that... not overwhelmingly, but some customers are starting to say much more than two years ago, hey, guys, this photo screensaver really should be free. And so, we're having active discussion about do we make it totally free. Do we make it partly free, moving it outside of the paywall based on changing tastes? Which it's going to happen over a decade as the competition and the market evolves.

Mark Ungerer:

On that example with the screensaver, there's also this second order effect. The first one is like, hey, we got more subscribers and ARR goes up, great. But the second order effect is people didn't come to buy Calendar for the frame, but we often listen to customers and they say, boy, I bought it for the Calendar. It's great that we're organized, but my kids love the photos. And so, people who have it just light up about the product and the experience. And again, unrigorously we're like, that is surely good and that's going to lead to more top of funnel, that's going to lead to them telling their neighbor and their friend. And we're starting to see that happen more and more. And so, we go, well, maybe that's another reason that we're being short-sighted, if we're both frustrating customers. And so, as Michael said, we're trying to figure out how can we move beyond fully pay-walling that feature.

David Barnard:

Yeah. I think most subscription apps who are paying attention anyway struggle with this, is figuring out what to be behind the paywall and what not to be behind the paywall. How do you execute on a freemium strategy? And it's essentially what you're doing. It's like you have a $300 one-time purchase to get into it, but then you're still then running a freemium product, just like a freemium subscription that doesn't have hardware. So, a lot of this thinking I think applies to any app of not confusing the users, not frustrating the users, thinking in the longterm. I think it's all super applicable.

And then what you were saying about the attach rate too, I just did an interview with an employee at Tinder. It'll come out after this podcast. And he was talking about how they've seen over and over again, there's just a certain person who just wants the best and will just buy... For them, it's whatever, the platinum subscription. And they don't even necessarily use the features. They don't necessarily care. It's like, I'm in on Tinder and I just want the best of Tinder. And so, I imagine that maybe comes into play in that attach rate, is that there's a lot of people who's just like, this thing is awesome, I want the best of it.

Michael Segal:

It sure does. However, and by the way, it does even more so than for an app, because they are going through the very obvious gate of buying a really expensive piece of hardware, so they're quite motivated to have the best already. But again, on a 10 to 15 year business lifespan, you get through the... I guess I'll use the geologic analogy, you get through the sand and the bedrock, the easy drilling of people who just really want your thing. And then you start to hit dense, deep stone, which is people who are like, they really should have your thing, but they're more skeptical, they're more price conscious. They're just thinking about it a lot more. It's the classic crossing the chasm journey of technology adoption. And those people are going to process everything from your product to your subscription, completely differently. So, you have to continue to appeal to the first group, but start to widen your positioning, including your pricing and subscription for the next group. It's hard.

David Barnard:

And speaking of which, in the prep for the podcast you shared, people don't assess what they're paying for as logically as you think. You're alluding to that, but I wanted you to maybe dig a little deeper what you meant by that.

Mark Ungerer:

Yeah. I'm happy to take that one. So, I think when we speak with a number of growth PMs and folks that come from the freemium world, where it's download the app and they have this giant user base from which to pick. And in that relationship with the customer it's like, well, they got something for free. The user shows up and then they try to basically sell them on the value, give them a taste of all the features. But because of the dynamics we've been talking about here, which is like, Mom has been thinking for six months about this purchase. They've been on our website, and Reddit, and they're doing the YouTube reviews, they've made that decision to go all in.

And so, that instinct to say, well, you've got to convince them that it's worth 399 a month, and they're doing some calculation in their brain of what's the alternative to that is like yes, there are some customers who do that for sure, got a diverse customer base. The point there is most are actually not doing that once they've made that decision to buy. They just want to know that this is really valuable, they're going to be using it every day, it's meaningful for their family. And then I'll add a little trick. We don't actually in our product call out what is a premium plus feature if you are subscribed, which I think makes a pretty big difference as the person is thinking about when it's renewal time. And they're going, okay, well, I'm paid $79 a year right now for that.

What did our family get from these, and what was in the bundle and did I use this? If that's your intuition as a product person is like that's not I think what's normally happening. And we see renewal rates are pretty high, even across folks that heavily use the bundle and those that don't. But that's because what's common across all of those customers, the device is on, they're regularly using it and it's bringing a lot of value to their families overall. They want the full thing. And so, that's what we mean by not being too overly fixated, at least in a hardware business. I can imagine a non-hardware business, the relationship might be different and more tenuous to those free users than what it is to our free users, who actually paid $300 and have a physical thing on their kitchen counter they see every day.

David Barnard:

One thing I was curious about, and I should've just done more research, but I think it might be an interesting topic if you have thought about it. Is there a software only experience, as you're building out all of these tools? And we'll get to the whole family OS concept later. But is there a software only experience where people can use some of these scheduling tools and other stuff, whether it's on a home...? We have an iMac that sits in the... old 10-year-old iMac that sits in the living room. And could we just run that on our iMac or is it for now just a hardware only experience?

Michael Segal:

So, your intuition about software only is astute, although I think that particular implementation may not be the right one. High level, again, if you want to be a generational company, if you want to be the operating system for families, not everyone is going to buy a piece of hardware. Not everyone is visual. Not everyone thinks they need it. But the problem is the physical presence is a lot of the value. It's like that's what gets everybody in the family in sync and having conversation, so you get rid of that and you just have another family calendar. Well, we are not convinced that that is a super valuable, juicy, wonderful experience to put into the world, at least not until AI showed up.

And that's where we're getting really interested. To what extent can a smart AI family assistant substitute for that physical presence, with its relationship that it builds, and the way that it communicates with all your family members all at once, and gets everybody aligned and on track? Interesting question. So, that's where we're trying to figure out a software only solution. The people who tend to bring it up are often very tech forward, very male. And so, we've never really decided to pursue it. It didn't feel mass market.

Mark Ungerer:

Yeah. David, my favorite one-star reviews that we receive take the form of this is dumb, it should be an iPad app, but my wife loves it. I go, okay, I guess that's a one-star review. So, the point is that form factor really matters. And this bring your own device is like, I'm not sure that's a huge unlock for us beyond trying to figure out how do we solve through an app and an assistant that really helps the family.

David Barnard:

Yeah. It's funny, the deeper we get into this conversation, the more sold I am on the product, partly just the vision you have. And I think my wife and my family would really love it. I did want to dig in. And I don't know exactly how much you want to share, but I'm always curious about this sort of thing. With a hardware attached subscription, how much of the business is hardware? Or is a hardware a breakeven or a loss-leader? I would imagine different companies approach this differently, but I'm curious how you think about that.

Michael Segal:

So, the right way to run the business by the textbook would be to run the hardware at contribution zero, and just build this juicy, giant ARR business. That said ,Skylight is bootstrapped and profitable. The customer acquisition curve has this fall off a cliff effect, where you could tell your marketers spend $130 to acquire customers. And then you say, no, we're going to spend to contribution zero. Spend 180, 200 and you get zero more customers. You just light $50 million on fire. So, we've tended to make money off of both. We make a bit of money off the hardware, make a good amount of money off the software, such that the profit, the question I'm going to answer first, is about half-and-half. Now, that's going to change this year, because you may know that the entire computing industry is in a massive crisis in terms of memory supply.

So, memory prices are out of control. Everyone's laptops are going to be really expensive. Skylight, because we have the luxury, is going to keep our prices the same, and just not make money on the hardware essentially, and make all of our money on the software. And then maybe in a future year it'll be both again. But I will just add the caveat. When you have a hardware business, you're in this unique position where the revenue is this big. And so, people are always like, what percentage is subscription of your total revenue? Well, the thing is we sell millions, and millions of units, and we're growing really fast, so the subscription never has a chance to catch up. You pay 300 to $700 for a device and then you pay 80 bucks a year. Some fraction of people pay that, so you can do the math.

It's never going to be 50% of the business until the day when the calendar hardware business plateaus and then over time, software will catch up. So, it's a good problem to have, that software might be, I don't know, 10 to 20% of our revenue, but it is half of the profit. So, you're right about that.

Mark Ungerer:

Keeping the price to a level where we can generate the demand profitably feels like a little bit of dry powder for us in the positive sense, both for who would've seen the memory shock coming. Maybe we should've seen around that corner a year ago, but we're in a good spot because of that. Same with tariffs last year. When there was a moment where Vietnam was going to get crushed, we were not sweating bullets. And then there's also like if we want to generate demand, we can go down. And we've talked earlier in this about how it's hard to go the other way. And so, it feels like this strategy served us really well as we've been growing into a new market that we've created. And certainly, if we'd raise funding, I can imagine the $100 million check hits the bank, and it's like drop the prices and get to three times as many households. And that is a strategy for sure, and it's not the path we've taken.

Michael Segal:

Can I just riff on that for one second? One of my favorite topics is how do you bootstrap a business like this. And it's super simple, but really hard to do, which is there's three reasons you're not going to bootstrap. One is to build the software you need engineers. That's becoming less of a thing in an AI world. You need working capital to buy all of your units before Christmas. That's really hard. Maybe for a different podcast, but I'm happy to go into it. And then there's the marketing cost and this is what every subscription marketer probably knows. And if not, you should know. Just pay back on the first order. Do whatever you humanly can to pay back on day zero, because then you have no marketing payback time.

With Skylight, with a hardware business, you have the added benefit that we're selling a thing, so like a physical thing. So, we pay back every single order in the company's history, has paid back on day zero. There's no marketing acquisition cost, which means you don't have to go convince a bunch of VCs to give you $20 million just to grow, which is awesome. So, if you're doing a new subscription and it's like five bucks a month, just figure out how to make it that 60 to $70 a year upfront payment, and you're golden on your CPA and your payback time.

David Barnard:

The one thing I did see in researching, and anybody who listened to this episode and wants to enter this or is just more curious, we'll see, that you did I believe some form of venture debt or inventory debt. This won't be super applicable to most of our audience. But I'm curious, just a brief overview of in a hardware business, that facility is really important, but it's not actually raising money. So, how did that work? Give me the two minute overview.

Michael Segal:

In the early days, I had personally a weekly cash flow model, because you could be at zero cash in the bank and then millions the next day, if the next day is Black Friday. By the way, you have to buy all your inventory weeks in advance for it to be produced, shipped over. So, you have to play this incredibly delicate cash planning game in a way that most businesses... And by the way, even most hardware businesses or physical goods. If you're in cosmetics, you don't care, because your cost of goods is 10%. Our cost of goods is like 50%, so we're spending insane amounts of money to just buy the stuff. Now your point is you don't have to raise venture. Well, yes and no. It depends how fast you're growing.

If we're like, we want to grow four X and we need this much money, well the problem is the bank is going to say, I'm not on board with that. That's scary. What if you don't grow it all or you shrink, then we've lost all of our money and we're sitting on a bunch of inventory that, by the way, we can't even sell because it's connected device. You need to be around to run it. So, we've been incredibly prudent about growing fast, but not too fast. And then finding lenders who are more risk friendly than a bank, but less expensive than debt. It's that happy middle of... There were times when we paid 15 to 20% annualized, but it made sense when you do our profit numbers to do that, instead of raising equity. We could afford it.

I would trade off gross margins all day long instead of selling a piece of the company. So, that's what we did. We found those creative lenders and we still work with fantastic... I don't know if people say fantastic and we love them about their lenders, but they're fantastic and we love them. And we're very lucky to have found them and I think they're happy with us. So, it's finding that really good relationship with somebody who gets what you're doing and is willing to charge more for a little bit more risky debt, basically.

David Barnard:

And we do see this starting to happen in the software only side of things as well, Ladder raised $100 million facility with General Catalyst for user acquisition and very similar things. It's like they could've gone out and raised more venture capital, but why take the dilution when General Catalyst has a fantastic product to get access to tens or hundreds of millions of dollars, if you're the right product and the math works. So, it is fascinating how... There are similarities in how people look at raising venture versus finding another facility to fund that cash flow, whether it is to buy hardware or to fund user acquisition.

The next thing I wanted to ask about is how you see this hardware device as a software moat. You've alluded to it already, is that once somebody puts this up in their home, probably not coming off the wall unless they just stop using it or move and forget to put it up or whatever. But hopefully, you're creating enough value. So, how do you think about that balance of the hardware is a moat, but you still really got to do your job to keep them retained, both on the subscription, but then also retain as a user?

Mark Ungerer:

So, I mean, first of all, it's totally true. Once they've been invested in the hardware and they have it in their household, that's protective of that customer. But I mean, if we step all the way back, we're in maybe 2 million households today. There's 100 million households in the US, 30 million with kids. So, we're in the 10 to 20 million maybe market size. So, we're in the early stages here. So, we don't sleep super well feeling like, well, just because we're in some households today, that's not a future mode and the market is still yet to be won. We hope we're a 10th of the way there. So, yes, it's true for the existing customer, which is great for our retention. We have very high retention rates and that cuts across the different types of features as I mentioned that they use. There's actually not a super high correlation there, because people are in it. So, it is protective for that customer you acquire, but not for future customers.

Michael Segal:

It's interesting, though. I know hardware is all the rage right now, but hardware is the most cutthroat, competitive world sometimes compared to software. I feel like it's 100X crazier. We had competitors who fully cloned and ripped off our UI/UX, and just sold it to hundreds of Chinese OEMs who now populate Amazon with what we consider pretty mediocre products. But people looking for a cheap deal are buying them at times. That's wild. So, to your point about moats, let's be real, hardware is not actually a moat. It's a moat against people who don't know how to do hardware, but it's not a long-term 20-year moat in a market. In fact, I would say neither hardware nor software are moats anymore. It's got to be something that your competitors cannot do or are not willing to do. And no amount of software is that, especially in a world where software development is getting progressively easier.

So, it's got to be either classic moats, like network effects or ecosystem moats, like partnerships or a developer platform around your thing. Something where people look at two identical pieces of hardware and software and still pick us. What would make them still pick us that other people can't have? Well, let's start with retailers. We are in Costco, and Best Buy, and a bunch of others, and they're only going to take one player generally. So, that's a good moat. Other partnerships that we're exploring that are really exciting, also potential moat, but it's darn hard to switch...

You're essentially asking us or we're asking ourselves to switch from a software, slash, hardware utility, which ultimately someone can clone, to a utility plus ecosystem consumer or business partner, or whatever, some ecosystem that others cannot clone. That's not trivial. Everyone always, when I'm chatting with them, you should think of some network effects. Cool, thank you. Yeah, we're thinking, but you can't just tack it on. It has to be incredibly authentic to what the product does. But if you have that, you've got the best business in the world.

Mark Ungerer:

I'm reminded of my profit is somebody else's opportunity here. And so, somebody in the audience is thinking, wait, so you've kept your prices high and you've got a juicy subscription. Somebody's paying attention and yeah, go on Amazon and you'll see that. And so, that's why we're trying to basically move faster. So, I think the short-term moat is certainly not long-term, but the short-term moat is have the best product move quickly and always be ahead. So, whenever our customers' doing research, they come back to if I want the best product, the category defining product, the Kleenex of this product, it has to be us.

And if we maintain that position, then good things happen. Costco and others will want to work with us, because we are the product that the customer demands most even at a premium. And so, we think of if we can have the Apple model here, where maybe in the long run we're not the vast majority of all devices sold, but we are the vast majority of the profit, that's the position that we would want to take.

David Barnard:

So, how do you think about getting that message across? I wanted to talk about growth next. And I think that was the perfect segue is from influencers to paid marketing, to how you show up in retail, how do you position yourself as that best product? And what are the levers you're currently pulling on growth?

Michael Segal:

So, I'm going to cheat and say that before any of that, you actually have to be the best product. We learned this the hard way. Back when we were developing... Calendar was born, it was a glint in my eye and Jake, my CTO's eye ,in July, 2018. We're like easy, let's launch it. We launched it in November. I think that's when we shipped, November, 2018, our first units. It took until fall '22 to take off. And the macro mistake that we made is we starved it from a... It turned out it was really hard to build. It was not digital picture frames. It was really hard to figure out what people wanted and build a deep software experience that could run people's lives. And we gunned marketing in '21 and '22, revved the engine and it just sucked. It didn't work. And we thought about killing the product.

We're like, this is depressing, this business isn't working and we're ignoring the other business that is working. But the root of it was our product sucked. So, to any entrepreneurs out there debating whether to allocate resources to product and marketing, if your product isn't like a solid 40 NPS, I think marketing effort and dollars are a waste of time, because you're going to get a false negative. People aren't going to want it. You're not going to know if it's because your marketing sucks or your product sucks. Now, flash forward, our product rocks. We're very proud and it's getting so much better every single month. It's amazing, but you're still building a new technology.

Technology adoption curves are rough, especially after you get past the early adopters. So, sure, paid growth is great. And in a business like digital picture frames, that's all you needed, because it was like everybody understood your idea. Come Christmas or Mother's Day, all it took was two ads and people just bought it. This calendar, people have to commit almost spiritually to change the way they're running their family. They're like, I need a better way. That is a multi-month emotional journey that they're going on. So, how do we help them on that journey? A, I have no idea. If you know, tell me, because we're just trying to figure it out.

David Barnard:

Say that growth PM, you need to hire. Somebody in this audience, go apply for that job.

Michael Segal:

Yes, please, and thank you. But influencers are huge and very authentic. People can smell an inauthentic influencer. We have thousands of people out there using this, loving it, talking about it, that, plus paid growth. Retail is the biggest influencer of all in our world. The fact that we are in Costco and other great retailers, it's a stamp of quality that can't be underestimated. So, it's kind of that. And the fourth part of the square is just word of mouth. We often poll our customers and we ask, how impactful is this thing to you? Is it life-changing, pretty high bar? Is it very awesome, but not life-changing or is it worse than that? Today, about 20% of people who reply say that it's life-changing.

And our hypothesis is those are the people who are getting us dozens and dozens of new customers just by virtue of they can't stop talking about it. But not life-changing is probably an order of magnitude, in terms of the chatter and how good our business is. So, probably, the best thing we could do for growth long-term is just build, build, build features that take us into 50% life-changing territory. Mark as our chief product officer, that is pretty much explicitly his goal.

Mark Ungerer:

The other thing that we've done is we've decided to be multi-channel, and so this is something that those who are not in hardware are not thinking about. But we have our own website where we sell the product and we directly control the relationship with the customer. We sell through Amazon, and we sell through retailers, and we do the same thing internationally. And so, I think the strategy to be everywhere, that has been very successful for us. But it comes with real complexities and trade-offs, and we could probably do a whole podcast just on how to be multi-channel.

The point I would make here for subscription focused audiences, in our owned channel on myskylight.com, we have a much higher attach rate to the subscription because we can turn the subscription on automatically. And we actually, pro-tip here, we give a discount on the hardware if you sign up with the subscription, and that is a super successful way to get subscribers, because it seems like a great deal. Wait, I get a free month, and I pay less today, and I'm getting the full access and I can choose to opt out? Most people don't. We can't do that on Amazon. We can't do that in a retailer. And so, those channels behave differently for the subscription.

Michael Segal:

And bringing it back to the other point, as retail becomes heavier and heavier in our mix, that puts enormous pressure on us to be able to prove to our customers downstream of purchase. That there's all this, hey, you're not just here for a calendar, that part's free. You're here for the full family operating experience. The problem is when people are setting this thing up, there's laser focused on getting it up on the wall as a calendar. It's really freaking hard to tell them, oh, by the way, we do meals, and recipes, and to do's and you should set all those things up. And by the way, chores for your kids is really cool. Take 10 minutes and really think about your chores system.

And I would say within weeks, if not days, after they've established their natural daily flows and cadence in the app, our ability to convince them to try new things drops to zero. Again, maybe growth PM can help us, but it's really freaking hard once they have an established pattern of behavior, so that there's this iceberg underneath of an incredibly useful software. And they know it's probably useful, but they're like, I'm a busy mom, at some point I really should check all that out. And then they never do. So, this is the nut that Mark is trying to crack this year, because that's also where all the subscription stuff is.

Mark Ungerer:

Right. We love and hate how common customers tell us I love my Skylight and I know it can do so much more. And I actually have friends when I talk to who just bump into happen to have a Skylight and they here I work at Skylight, they almost feel they need to apologize. It's like, oh, no, I like it, but I know it can do so much more. Don't quiz me on all of it. And then you're going, yeah, there's just a lot of stuff being left on the table there. And to Michael's point, the data shows us after 30 days, it's pretty hard to change their behaviors. So, our newer customers that set up the device with more features tend to use those things more. The older customers, their habits are set, the family set and what that device means to them. So, maybe somebody can help us change that, but it's been hard.

Michael Segal:

And just one other fun idea, which I think is relevant to your audience. In a world of Web 2.0 onboarding, where you just have screens, and you fill them out and it's cumbersome, your ability to educate people about a bunch of different features is quite limited. But what about in a future world of AI driven, maybe even conversational onboarding? You could probably accomplish a great deal more in terms of in the same 10 minutes you have with them. You could get them set up on a full chore chart. If my kids are eight and three, boom, boom, boom, here's some sample chores. Do any of these ring a bell for you? So, this is the sort of stuff we're thinking about. How do you squeeze more and more aha moments early on in their experience, because squeezing them in after 30 days, pretty hard.

Mark Ungerer:

And something we're thinking about there is, well, today, an amazing fact is Skylight's gotten to where it is from a subscription perspective without a free trial. And that is so table stakes presumably for the other folks that you talk with. And the reason for that is because we have that own channel and because in our downstream flows we see most people decide to subscribe up top, back to that, I want the full bundle, give me it all. That there is only an incremental number that will subscribe after that. So, if we tell everybody there's a free trial, I think it'll actually be counterproductive. And so, I'm sure there's a way for us to crack this nut, but we haven't done that yet, which means this idea of get them in, give them access to all these things, and then they'll like it, and they'll use it and they'll stick as something that's been tricky because of that nature of people signing up upfront. A bit of a puzzle there.

David Barnard:

And that was something I was going to ask about too is that I know a lot of hardware enabled subscriptions don't charge via in-app purchase because there aren't required to. So, I have an Oura Ring and some of these others I've talked about are apps. The Fi Collar is an app that you can't subscribe within the app. Was that a conscious choice? Did Apple ask you to do that or why do you have it in-app purchase?

Mark Ungerer:

I believe, Michael, you can correct me if I'm wrong because this predates me, but I believe Apple asked us to do that even though we had the hardware. And obviously, things have changed with what Apple's requires now, so we could move outside of Apple. But in the tests that we've run and we've only done really one good one, it pays for itself. So, I've been a little bit dragging my feet, if I'm honest, over that being this big juicy pot of... Because it's like a fraction of our customers are subscribing on Apple, because we have the direct channel, and then of that it's 30%, and in year two it's 15% and some percent will not subscribe. And so, it seems like this juicy pot of money that for me at least in the test we've done, has paid itself off in an increased conversion through reduced friction.

Michael Segal:

Yeah. I think that's the money quote. It's reduced friction. In a world where they were equally easy, then, of course, there's no incentive. But I don't think they're yet equally easy. There's still some extra clicks and some extra UI weirdness if you're going to take them to your website. So, it's the same reason we're in retail. It would be much easier to just be direct to consumer. Retailers are hard, demanding, but if you want to be... And by the way, if you want to be $100 million business or 50 million or even 200, you might not need to do any of that. But if the scope of ambition is to take over the world level, you have to be everything everywhere, all at once, including I suspect that you can't get away from Apple subscriptions.

David Barnard:

Yeah, that makes a lot of sense. And it's funny because a lot of folks who have to use in-app purchase are very excited about the web. And with the epic ruling and other things, there's opportunity. But there's almost an over-focus on it at times, where pick up the low-hanging fruit. It's not all just free cash flow. You're not going to automatically make 30%, it's more like 20. And then is it easy? Do your customers like it? I mean, I was just dealing with... We have a subscription to New York Times that we cannot figure out where it's coming from.

I've gone through all my New York Times, my wife has gone through all her accounts. And we're having to email back and forth with their support to figure out what account our credit card is attached to just so that we can cancel it. And so, there is that aspect of the consumer friendly and consumers being really liking in-app purchase, that I think moving everything to the web isn't the best solution for your customers, because a lot of them do prefer to pay through Apple.

Michael Segal:

Yep. And I'll just put a crisp little framework in front of you. It's as simple as growth versus profit. And a lot of trade-offs we deal with come back to growth versus profit. It's really hard to do both at the same time. So, in this case, you could either grow, grow, grow by making it really easy to subscribe. Or you could juice your profit by making sure you're not paying a 30% tax. Which one is important to you? The answer is going to be different based on the ambitions of the business and the current profit profile of the business.

If we needed to scrape together some extra points of EBITDA for whatever reason, because we're trying to sell or because we're private equity owned, neither of which are true, then we'd be thinking about it very differently. But we're just trying to grow and provide value to the maximum number of people, which leads to a different decision.

David Barnard:

Fascinating. On the subject of the subscription, I know a while back you increased your price. And you had mentioned it earlier in the podcast about the $39 being this magical price where people don't think about it, but you increased your price from that magical price to $79 a year. What was a thought process behind that and how did things go?

Mark Ungerer:

Yeah. Well, I mean the big picture thought process was how do we increase average revenue per user. And there's two ways to do that. You get more percent of the people who buy the hardware to subscribe or you increase the price. And we actually have more than half of the families that buy a calendar subscribing already, and so there was a sense of you can only get that. We could do more things to try to get more people to subscribe, but price is really the biggest lever. And also, we're likely leaving value on the table because of how important and critical this device is versus our historical reference of frame. And this is a very Skylight specific thing, but to move fast, the initial Calendar subscription and Frame subscription was literally the same subscription, same skew, same price point, turned it on for both devices. The customer didn't know that, but if they bought another one, it would've worked.

And so, it was just sort of like, hey, we're at 39. And then we started thinking, well, if we were going to do this as a new company and we were just going to make Calendar, what would we price the subscription at? We actually just run a bunch of tests. And this is classic, I'm sure folks in the audience have all done this. But we ran a bunch of different variants and we variated both the price of the subscription, as well as the discount on the hardware. So, that's another pro-tip for the hardware folks out there is the relationship between those two changes, the conversion in hardware and the attached to software. And so, you're having margin changes on how many units you sell, what's margin per unit and how many subscriptions you sell. And so, we did a bunch of tests on that and we landed at 79.

It was actually not the ARPU maximizing amount. So, I like to share this one that our test showed us that 99 would've made us more when you calculate all the numbers in the spreadsheet. It was a little bit better. It wasn't massively better and so it was like, why don't we do that? And it was like, I don't know, it just felt like overreaching. We were doubling our price. We want good vibes to continue. We can always go up. And so, we landed at 79 as sort of a middle ground, where we felt pretty confident going to that change that it was going to work, because of that testing and it's been phenomenally successful.

Michael Segal:

There's so much qualitative surveying and conversations happening throughout all of this. So, if there are any folks listening who are not constantly talking to customers, either in surveys or ideally also face-to-face, one-on-one, focus groups, you will see it. You'll see it very quickly when you meet with people. And we knew 99 on paper penciled a little bit better, but that was getting into closer to that disgust or it's not worth it yet territory. We will revisit that as we stuff more and more valuable stuff in there. I don't think it's there yet. But my point is commercial for doing lots and lots of research and talking to customers yourselves, you'll just very clearly see what the market wants.

And then of course, you do some quant testing and variance, because sometimes people say things and they do completely different things, so you have to do both. But smart people by doing both, can I tend to think triangulate to the right answer. The biggest mistake I would say people make out there is not doing the qual and just saying the numbers are going to be what the numbers are.

David Barnard:

One tactical question. Did you announce the price raise before you raised a price? And was that a nice bump in subscription attach?

Mark Ungerer:

We did not announce it and we did not apply it to our existing customer base. They were grandfathered in through what we now call Legacy Plus, that has access to the frame and calendar. So, it really just showed up as the new price for new customers. And we had a policy that said if you were on the fence, because remember we talked about people are thinking about it for a while. We didn't want anyone to feel miffed. I thought it was 39. I've been thinking about it for five months and I just missed the boat. If they reached out to us, we honored the old price effectively and definitely.

If anybody's listening today and just bought the Skylight and is like, I want that January last year price, email us and we'll honor it. I mean that's one of the benefits of us being in an early growth stage and the lesson here is be really nice to the existing customers. Build for the next 10 million customers and don't try to squeeze every penny out. We certainly could've figured out a way to do that. And we had the math on, yeah, it's worth a couple million dollars, but we just said let's focus on bigger and better things.

Michael Segal:

And by the way, if there's anyone out there imagining or not sure what life under private equity ownership would feel and look like. Private equity people are not mean or bad or generally. I have friends and I love talking to them, but a decision like that would go very differently if you're a PE firm that needs to sell in four or five years and double EBITDA in the process. And it can lead to some strange short-sighted decision making.

David Barnard:

Well, I asked in part because I haven't had anybody on the podcast yet. I haven't talked to anybody yet who's done a price increase and announced it ahead of time, but it seems like that could be a nice little hack. If you have a huge freemium base, which I guess maybe you didn't have quite as many people to advertise this to. But if you're going to raise the price... Last year I was working on fitting out my home gym and there was this one company, French Sport that would announce ahead of time, hey, on this date we're going to raise the prices because of tariffs. But we wanted to let everybody know and a lot of other home gym companies, they would just overnight raise the price.

And so, one day to the next. And honestly, there were a few pieces that I bought specifically, because I was like, man, I'm never going to get this price again. So, somebody out there is going to run this test and I'll get them on the podcast. And we'll figure out how well it works or doesn't work. All right. I did want to wrap up with the three questions I now ask every guest. And one or both of you can chime in on these bonus. Start with what's the biggest win of the last year and experiments you did, change you implemented? What was the biggest win of the last year?

Michael Segal:

It has to be the plus subscription, going from 39 to 79, with minimal loss of retention or attach. I mean the ARR curve, you can see it. It just was transformative to the business. Mark led the entirety of that start to finish. To me, I mean there's many, many wins, but even it's coincidental that we're on a subscription podcast. I would've said it even if we weren't on a subscription podcast, that was huge, huge win.

Mark Ungerer:

I'll throw in dollars much less, but in percents a big win, was changing our checkout flow back to the Apple thing. We used to have on our device, if somebody was not subscribing and they scanned a QR code, it would lead to a web-based checkout. We flipped that to Apple and we saw over 100% increase in conversion. Now, the number of people that were doing that was smaller. So, again, it wasn't like the two X factor of the price that affected everybody. But just reducing that friction of Mom pulls out her phone, scans a QR code, bang, she's subscribed, over 100% lift from a change in a QR code.

David Barnard:

Wow. Yeah. That's great. So, what was the biggest fail of the year? The experiment that went off the rails, the product change that pissed a lot of people off. What was the biggest fail of the last year and what'd you learn from it?

Mark Ungerer:

I'd go with the free trial test. We tried to do a free trial where we would take a customer's credit card. And we did one with not taking the customer's credit card. So we did both variants and that was not successful in getting us any additional lift. It was more or less the people who opted into the free trial was roughly the same as the people who just would've subscribed. And so, this goes back to our need for a real growth PM to tell us how this should actually work. I'm sure there's an unlock there, but that was unsuccessful.

Michael Segal:

That to me is actually a resourcing fail. You can't moonlight growth PMing when you have 5% of your roadmap available to do it, because the first test is going to fail and you need to run eight more. And we didn't have the time to run eight more. So, basically, it was a little bit of a Hail Mary, which is not how you want to be running your efforts.

David Barnard:

I had the chief product officer of Duolingo on the podcast recently. And it was surprising to me that for them a free trial was super successful, because I mean, your product, it's a freemium product. You're getting to experience so much of the value already. And so, once you've made the decision you purchase, but for them the free trial was super successful. So, maybe there is some way to revisit that experiment and make it work. But it's like every product's different, so who knows. But fascinating that it didn't work for you. All right. The last question is growth would be easier if.

Mark Ungerer:

Well, my cheap answer here, and I think I had this ahead of time, was if we had a team for it, if we were able to experiment and test more. But absent being able to do a lot of the experimentation, we're forced to pick very carefully what we're going to do. So, right now, last year it was like we're going to do one or two things. And I think in talking to other folks in growth, there's a sense of like, well, we can test a lot, and we're going to run a lot of experiments and I don't know what's going to work. And the last two years has instilled in me some sense of I really want to know what's going to work, because I only get a few shots. And so, growth would be easier if we didn't have that sense of let's really pick carefully.

Michael Segal:

I'll give you another cheap answer, which is growth would be easier if we drop the price of the hardware. There is meaningful price elasticity, but we can't, at least not yet for complex reasons. But over time, I think if we want to get to 20 million households, that is what's going to have to happen.

David Barnard:

Wow, great answer. All right. Well, as we wrap up, you've already shouted out. You very desperately want a growth PM and this is a perfect audience to make that pitch to. But any other open roles or anything else you wanted to shout out as we wrap up?

Michael Segal:

That's the big one, so thanks for letting us mention it.

David Barnard:

Awesome. Well, thank you so much for joining me. This is a super fun conversation. I think, folks, even though it's hardware and not a lot of folks listening will be working on hardware, I think there's so many lessons for anybody in the subscription app space to learn from. So, thanks for sharing.

Michael Segal:

Thank you. We really appreciate you having us.

Mark Ungerer:

Thanks for letting us share the story.

David Barnard:

Thanks so much for listening. If you have a minute, please leave a review in your favorite podcast player. You can also stop by chat.subclub.com to join our private community.