How rising physical costs are pushing product leaders toward digital innovation

A subtle but profound divergence is emerging in the economics of product development: physical assets are getting more expensive, while digital capabilities are becoming cheaper. This split is reshaping how companies build, scale, and monetize products—especially those that straddle both worlds. What was once a straightforward equation of hardware plus software equals product is now a more lopsided math problem, one where digital increasingly carries the weight of innovation.

The reasons for this divergence are not mysterious. The cost of physical components—from copper to steel to lithium—is climbing, driven in part by the global push toward electrification and the geopolitics of trade. For example, the International Energy Agency reports that the average price of lithium more than doubled between 2021 and 2022, driven by EV demand and supply constraints. Meanwhile, U.S. tariffs are reshaping the market for key inputs like steel and aluminum, with new 25% duties on imports affecting everything from construction materials to auto parts. With imports making up 23% of U.S. steel and 44% of aluminum supply, the downstream effects span housing, transportation, and consumer goods. These are not short-term spikes. Many of these inflationary pressures—resource constraints, national industrial policy, energy transition—have staying power.

If hardware is becoming a long-term cost burden, digital capabilities are moving in the opposite direction. And not just because of cloud infrastructure or open-source tooling. The real accelerant is AI. Generative models and intelligent code assistants are collapsing development cycles and democratizing software creation. According to McKinsey, developers using generative AI tools to perform complex tasks were 25 to 30 percent more likely to complete those tasks on time compared to those without the tools. The result: software is not only cheaper to build, but also faster to iterate and deploy. For product teams, that changes the calculus. Extending functionality via digital services—rather than upgrading or replacing physical assets—suddenly looks like the smarter bet.

Product leaders are already adapting. One approach is to invent new digital use cases that layer on top of existing physical infrastructure. In the UK, for instance, utilities are deploying flexible grid interconnections—software-based systems that let distributed assets like batteries and solar arrays dynamically plug into the grid. These systems increase capacity without requiring new substations or transmission lines. Better orchestration, not more equipment, is the unlock.

In mobility, digital ingenuity is even more striking. One automaker used steering wheel vibration data from its vehicle fleet to map every unpaved road in the U.S.—a previously unavailable dataset now packaged and sold to logistics companies. Other examples abound: cars that identify potholes, interpret weather conditions, or optimize routes based on real-time driving behavior. The physical hardware (sensors, GPS, accelerometers) hasn’t changed. But the digital layer—and what it makes visible—has.

Hybrid businesses that combine physical products with digital services have the most to gain from this shift—if they’re willing to adjust their mental model. Too often, these companies treat software as an add-on or feature set. But in this new cost dynamic, digital is not the accessory; it’s the engine of value. Those who embrace this will find they can do more with what they already have—more growth, more insight, more leverage—without waiting for the price of hardware to cooperate.