Author: Wang Xuan
Should paid subscriptions be prohibited? It is worth discussing.
Not long ago, the news of Mercedes-Benz EQS model’s “annual subscription-based” rear-wheel steering function made it onto the hot search list.
At first, the media’s direction of coverage was still about the matter at hand, but shortly after, a large-scale bombardment of software payment strategies appeared on multiple platforms. The firing range shifted from “Is Mercedes-Benz’s approach right?” to “Is software payment reasonable or not?”
The following response is even more extreme, which calls for legislation to ban software payment strategies and shifts the focus to the infringement of users’ product usage rights and life safety issues.
Putting aside whether the Mercedes-Benz incident is right or wrong, it is worth discussing whether it is right to lump all software payment forms together. In its fine linguistic details, I found that people have biases towards software.
Is software intangible and invaluable?
Everyone is denouncing paid subscriptions, but we must first understand that software payment and software unlocking functions are two different things. To confuse the two is itself wrong.
The core of software payment is that users pay for software products, while software unlocking functions open hardware capabilities through software. Mercedes-Benz’s approach is clearly a software unlocking function.
Software payment is essential as it shows respect for software intellectual property, even though it is intangible.
In an automotive product, software payment strategies are widely used in advanced driving assistance systems. For example, in Tesla, all sensor hardware is standard for users, as well as the basic Auto Pilot. In addition, there is the Navigate on Autopilot (NOA) with a software fee of 32,000 RMB and the Fully Self-Driving (FSD) with a software fee of 64,000 RMB.
The higher the level of autonomous driving software, the higher the price because automakers spend a lot of money forming software teams that spend a lot of time and effort creating software products, continuously iterating algorithms and optimizing the user experience. It has value independent of hardware, so it needs to be priced separately.The original answer mentioned that “once car companies generally adopt this way of ‘making money’, it will form a vested interest group, and it will be almost impossible to legislate against it.” ‘Making money’ means obtaining extra benefits. Since the answer used this term, it is believed that the software payment model will bring additional revenue to companies, which not only cuts into the pockets of consumers, but does not consider software payment as an exchange for the corresponding value, which is completely based on the logic of “intangible and invaluable”.
As stated in the original answer, “As long as it is installed in the car and fully delivered after purchase, the property rights belong to the owner of the car. The car company’s payment for unlocking is an infringement of the owner’s interests”. So, does the physical object have property rights while the software does not?
There is a very obvious example. We buy a mobile phone, but we still have to pay for some apps when we download them. Because the experience we get from buying a phone in one go is completely different from the software experience provided by paid apps.
In “The Inevitable”, Kevin Kelly mentioned that when an industry or thing urgently needs real-time information transmission, the traditional model has to be changed, and some links will be omitted or converted into a free service system.
For example, CDs are carriers of songs, but we don’t pay for them for the few grams of plastic, do we? Even now, we don’t need CDs. Free music software can solve the problem, while some content still requires additional payment. This is not difficult to understand. In this era, the cost of materials is no longer the core cost of a product.
Underestimating intangible property rights is where prejudice lies. We resist this behavior just like we resist watching movies on piracy websites or downloading games on pirate websites. Protecting intangible property rights is something that every software company is doing, and even UGC-style video platforms will encourage users to express their recognition of content creators in the form of “one-click three likes”.
How did unlocking hardware with software offend users?
Why can’t people tolerate unlocking hardware with software? First of all, this approach challenges consumers’ traditional habits. In the traditional era of automobiles, everyone followed the logic of paying for one hand and delivering goods for the other. As long as the hardware was selected during the car purchase, the user would inevitably obtain that function.
Selection is pre-consumption, and subscription is post-consumption. The problem caused by post-consumption is that users cannot know whether the car company has already charged for the hardware in the car price and is using subscription to “make money” again. In other words, the car company blurs the pricing logic by burying hardware, and consumers cannot see it clearly, so they will naturally question it.
The most typical negative example of this is the subscription model for Smart’s seat ventilation, heating, and steering wheel heating.# Smart#1 has three configurations, of which only the mid- to high-end models can subscribe to heated steering wheels, high-end models can subscribe to ventilated seats, and high-end models come with front heated seats as standard, which the mid-range models need to subscribe to. The low-end model does not support any subscription, and it does not even have pre-embedded hardware.
There is a price difference of 15,000 yuan between the low-end and mid-range models, and 30,000 yuan between the mid-range and high-end models. Even though the price difference among the three configurations includes other premium configurations, it is still hard for customers to understand whether their price difference already includes the price of the hardware for the heated steering wheel and ventilated seats.
For example, high-end users may wonder whether the 30,000 yuan they paid for the price difference already includes the price of the hardware for ventilated seats, but they still need to subscribe and pay to enable the feature that has already been pre-embedded in their cars.
The solution is simple: all three configurations of the car should have the three hardware configurations mentioned above as standard, and let users understand that the price difference among car version lies in other functions’ selection, rather than including pre-embedded hardware for software subscription.
Looking back at the paid subscription for Mercedes-Benz’ rear-wheel steering, it is logical in the pricing strategy. The Mercedes EQS model has four configurations, and the lowest configuration only provides a 4.5-degree angle rear-wheel steering function, while the other three models all come with a 10-degree rear-wheel steering function as standard. Except for the angle difference, there is no hardware configuration difference in the rear-wheel steering component, and it seems that low-end users need not worry about being charged for “pre-embedded hardware.”
However, after Mercedes introduced the paid subscription solution, it exposed a core problem: the difference between angles does not lie in hardware differences but in software support. Rear-wheel steering is a mechanical configuration, so its hardware value is far greater than its original software.
This is why netizens and real EQS owners have collectively confronted Mercedes-Benz. Low-end car owners believe that they have paid for the entire hardware set, but their experience is limited by software restrictions, while high-end car owners feel that they have paid for a software that is not very valuable, making them feel they are being exploited.
Not pleasing anyone, Mercedes-Benz became a hot topic.
Is Paid Subscription Pointless?
So, is hardware subscription really not a good idea? I believe there are still benefits. We need to look at it from the perspective of both the OEMs and users.
Currently, many new energy vehicle manufacturers are exploring new models of configuration logic in addition to adopting the new retail model, among which there are two major types: customized configurations and hardware subscriptions.A typical case of adopting a custom configuration is NIO. NIO only provides users with basic models and signature models that contain all premium configurations. The basic model is a blank canvas where only battery capacity will affect its price, and users can freely choose all premium configurations.
However, custom strategies also have drawbacks. It’s like a permutation and combination problem. The more configurations that users can freely choose, the greater the differences in configurations between cars. As long as the supply of parts is not a problem, it does not affect production capacity itself. However, it greatly increases the burden of production, including production line length, station beat, line-side part arrangement, on-site logistics turnover, logistics site, assembly sequence, error-proofing, and so on, which increases a lot of costs.
Therefore, the traditional configuration logic is for car manufacturers to match configurations for users, sell them in three levels of high, medium, and low configurations. Of course, ultra-luxury car brands are exceptions because the high-priced configuration premiums can offset the increase in production costs. However, user feedback shows that users prefer customized options, as bundled packages always have the possibility of spending more money on configurations that are not used for years.
Hardware subscription is a strategy evolved from custom configurations. From the user’s perspective, the experience brought by both options is the same, and users have the right to choose independently. The difference is that hardware subscription can release pressure from the factory end, achieve cost reduction and efficiency improvement, and the pressure to recover costs is shifted to the user end.
For users, hardware subscription is not a one-time purchase, so they can fully adopt a “pay-as-you-go” approach to use a customized model. NIO’s BaaS battery leasing is a good example. We once calculated that for ET5, the 70 kWh battery model, if the user chooses to lease, the total rent paid after 7 years is equivalent to the price of buying the battery directly. That is to say, if the user sells the car within 7 years, there will be money left on the battery.
“The ventilation and heating set” is also the same. After all, these configurations are seasonal configurations, and users can save part of the vehicle-use costs as long as they calculate the cost in their own minds.
Another benefit for users is when buying or selling used cars. When we buy a new car, the price of each configuration is clearly marked, but not for used cars. The important factors that determine the value of a used car are mileage, maintenance level, and mechanical quality. The valuation of premium configurations for used cars is relatively vague.
The benefit of adopting a subscription-based model for certain hardware is that users change from buying hardware to buying services. Therefore, services only exist during the period in which they are used, and do not have any value-related relationship with the next car owner. The best way to deal with vague pricing is to not set a price.
Which configurations should adopt a subscription model?
Mercedes’ incident also exposes another question, which configurations should adopt a paid model?
Critiques online questioned the reason for paying to unlock the rear-wheel steering function, which is worth considering. Among them, it was mentioned that Mercedes’ approach changed the vehicle’s driving system, directly affecting the driver’s driving experience and driving logic. It is difficult to change driving logic in a short period, and it is easy to be dangerous if the subscribed turning function expires at such time when the logic has not yet changed.
Although many of those who questioned this issue mentioned that the probability of such an incident is very low, Mercedes’ approach is indeed challenging consumers. After all, we used to buy all mechanical configurations related to vehicle performance in a one-off purchase when we bought a vehicle.
As mentioned earlier, it is inevitable to increase the cost for the manufacturer by customizing the policy. Otherwise, Tesla, which is extremely cost-conscious, would not have been the first to adopt a subscription-based model to unlock the winter heating kit. The ideal car’s products that do not offer a certain degree of optional accessories are also similarly affected.
It is uncertain whether the subscribed configuration can be retrieved later, so it is a skill to select all rescheduled configurations among all premium configurations that can be subscribed to. After all, car manufacturers need to better control costs and cannot bury hardware that no one is paying for.
We believe that there are two directions for subscription-based hardware: seasonal configurations and scenario-based configurations.
There’s no need to say much about seasonal configurations, the most typical example being the air-ventilated and heated three-piece suit. Scenario-based configurations, such as advanced assisted driving, were introduced by NIO during a certain spring festival holiday as a policy of on-demand subscription to the advanced assisted driving function to handle the long-distance travel scenarios of everyone returning home.
Regardless of whether it is seasonal or scenario-based, it shows the essence of subscription: timely and demand-based.
Finally
In a time when product competitiveness is becoming seriously homogenized, I am willing to believe that every challenging sales model is based on good starting points, whether it is software payments or hardware subscriptions, but the premise is that car manufacturers need to be sincere with customers.
Obviously, the bending and winding logic can no longer hold Chinese consumers.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.