There’s been some buzz about BMW’s recent offering of heated seats in your car for an $18-a-month subscription. There was even more commotion when Tesla
The emotional response from the customer to this has been strong and there are many fascinating issues to unravel when it comes to the issue of software-enabled features in hardware – and even in software. Businesses are naturally greedy and want to get as much revenue from customers as possible. Of course, customers also want to pay as little as possible. The idea of paying extra to use something you already have seems inherently wrong. But it may not be so.
- There are aspects to software features that make manufacturing the vehicle (both with and without the feature) cheaper, which can benefit both parties.
- In many cases, this is yet another example of differential pricing, where companies charge different customers different prices for the same product, usually driven by the ability to pay or the desire to pay.
- We are faced with the difficult question of whether we own what we buy and can modify it to allow for new features (even against the will of the seller) or whether we no longer own or control what we own.
For the seat heating, BMW places the heating elements in all cars and the automated switch that can turn them on. However, for some buyers, they don’t get the option to activate that switch. Buyers who subscribe (or pay a one-time fee) can enable the switch and have heated seats.
Part of this is just the business wanting every opportunity to get more money. All companies will, of course, and competition is the main factor holding them back, changing their thinking to “provide the most value to the customer so that they prefer our product over the others”.
At the same time, there are economies of scale in car production. Making two models of the car, one with heated seats and one without, would actually be quite expensive. Making all the different variations of options would greatly complicate the supply chain. Installing heater wires in seats at the dealer would be much more expensive than adding them at the factory. There’s no doubt that if a lot of customers want heated seats, and it’s cheap to add the wires, just do it in any model. From there, the company can declare that seat heating is standard in all vehicles (as most companies do) or they can enable them in software – either when the car is bought, or later, or with a subscription.
When you buy a car these days, you usually choose between 2-3 trim levels and there may be an option pack as well. The option pack, when you buy it, can contain one thing you really want, and a lot of things you hardly want or don’t want at all. However, there is no way to just pay for what you want. For the car manufacturer, especially those who sell cars a continent further, it is difficult to unbundle every car and customize it to their liking. Doing this would add long delivery days – you would never find a car configured exactly the way you want on the lot, but it also adds complexity and cost. The car OEMs don’t mind you paying a lot extra either.
Differential pricing is the act of charging different customers different prices for the same commodity. In some cases it is the exact same product. In others there may be a slight variation. The classic example of this is the airplane seat. Dave Barry joked that “Federal law requires that no two passengers pay the same price for their seat.” Airlines are constantly changing prices based on their predictions about cargo, competition and what they think customers might be able to afford. While there are already big differences between first/business and economy class, there are also big differences between the prices of economy seats, even seats with identical rules about things like changes.
There is no doubt that we tend to hate these changing prices. Well, we hate them when we get a high price, and love them when we get a low price, although we may not love the hoops it takes to get the lower prices. The airline wants as much revenue as possible, but also has a base amount needed to keep the planes flying and competing.
This means that the only reason you can get a seat for $200 on some flights is that someone else — usually someone wealthier — paid $600 for their seat. If all seats were the same price, the business travelers and the wealthier passengers would be happy for a bargain, while the lower-income people wouldn’t fly at all — meaning the plane might not fly, which isn’t good for anyone. The business class passengers in the front with beds and 4 times the room pay 8 times the price as some bus passengers, thus letting the plane fly. They try to make it a bit like taxes, charging as much as each passenger can afford.
The differences are smaller, but that also applies to a car. It may only cost a few bucks to add heating wires as a standard feature, and adding them as a custom feature isn’t practical. The people who really want them are paying enough to justify those costs. I have had heated seats in my cars for 25 years and have used them 3 times. I could be really happy with a way to only pay them when I’m driving somewhere cold, and let others who use them every day pay the lifetime fee.
Tesla battery story
Tesla’s battery story is a bit of an outlier. Tesla sold the car with a 60 kWh battery and the buyer paid for it. Later the battery had to be replaced under warranty. They stopped making a 60kwh pack, so they stopped making a 90kwh pack and forgot to limit it software to 60kwh, which they would do because the customer was only paying for 60kwh. Maybe they should have just openly given the customer the full package, but they didn’t – but the customer assumed they did. The car was sold twice as a 90 kWh car. It sure looked like it. If anyone was wrong here, it was the first seller, who accidentally got a 90 kW pack and didn’t tell the buyer that it really should only be 60 kWh. He/she probably didn’t know. Tesla later updated the controller and reset the car to 60 kWh it should have always had. They told the new owner that if they wanted a 90 kWh pack, they would have to pay the standard $4500 upgrade price. The owner thought he had bought a 90 kWh car, and the middleman thought he had sold such a car.
This is a fairly unusual situation that Tesla might have had to resolve sensibly by remembering that their mistake of not limiting the pack in the beginning set off a chain of confusion that understandably upset the new owner and created bad press. People wrote that Tesla was holding the extra 30 kWh for “ransom”, which is a bit of an exaggeration, but within a few days Tesla switched the capacity back on.
We have a psychological problem with this kind of software limitation of a hardware function. After all, there was a 90 kWh package in the car. We’re used to the idea of owning our car, and to bring something as important as an extra 30 kWh and own it, but not being allowed to use it because a previous owner didn’t pay for it seems very odd. (I’d love the chance to upgrade my battery with a software switch. It’s completely impractical otherwise.)
Tesla had decided it just wasn’t worth making 60 kWh packs anymore. It’s a little surprising, but they still thought it was worth selling that as a product, but did it by offering a software-limited 90 kW package, which cost them the same as a non-restricted package. Customers had to pay $4500 to flip the bits. This is differential pricing – Tesla is finding that they can get more money from wealthier customers and less from those willing to pay less. In a competitive market that can help both customers and buyers, by allowing people who cannot afford the market rate of 90 kWh to get in the car.
(The software package is a great deal, as you get a longer battery life and you don’t strain your battery by charging it to 100 or taking it to zero. You do pay to carry extra weight. You can also use it later. change your mind for much less than it would cost to take your car apart and replace the package. But this is for people who choose to buy it, not those who get it in a warranty repair.)
Own what we own
There is no doubt that we like to feel that we have complete control over what we buy. In the BMW, it’s possible to hack into the car to turn on those heated seats without paying for them, and there doesn’t seem to be much wrong with that. It is possible and popular to hack many cars’ ignition systems to get better performance – but by making the car break emissions standards. A few years ago, Tesla discovered a way to get more performance out of their engines with new engine control software. Despite a history of giving updates for free, they charged $2,000 for this one, and people paid it — it was actually pretty cool to get a faster car just by putting new software in it. People weren’t bothered by that because you paid for some new software they wrote. They are more bothered by cars where you can pay to flip a little to get performance they always knew the engine had.
Much of the software we buy for our computers comes as the same download, regardless of the version of software you buy. The code is all there, it’s only used when we pay, and we’re pretty used to that. Our minds change a bit for services and more for hardware.
Tesla offers a subscription called ‘premium connectivity’. For $10 a month, you can do several things through the car’s mobile data account, such as web browsing and streaming. Nobody has a problem with that, and they can also create a hotspot on their phone and the car will do these things. A little more unusual is downloading traffic data. The car always downloads traffic data, even if you don’t pay, and uses it to choose routes in navigation. However, when you pay, you get to see the traffic data on the screen – a purely software function.
The discussion on this will not end soon. Businesses will continue to look for ways to charge different amounts and additional fees, as well as ways to streamline and simplify the supply chain, and customers won’t like it when it looks like they’re paying for what they already have.