People love to talk about Tesla’s self-driving cars as the fulfillment of a decades-long automotive dream. But the cars’ defining feature is actually an extra.

While the basic “Autopilot” feature—essentially a safety system—comes standard on all models, Tesla sells its “Full Self-Driving Capability” as a pricey subscription add-on of $99 to $199 per month.

So, why aren’t customers balking? Why has Tesla’s approach been so successful?

Here’s the secret: The subscription applies to a feature that delivers value through software rather than hardware. Other companies should pay attention to this strategy if they wish to succeed in the Hardware-as-a-Service model.

In this article, we'll take a deeper look into the difference between hardware and software value, then examine three real-world examples of how companies price their products and explore why influencing the buyer’s perception is essential to a successful model.

The Perception of Value—and How to Avoid Micro-Transaction Hell

As electronics become smarter, consumers have been trained to separate hardware value from software value. Today's customers look at a product's features and mentally categorize them into hardware or software buckets.

In general, buyers expect to purchase and own hardware but pay monthly or annually for software.

Understanding these expectations is everything when it comes to creating a successful pricing model that avoids alienating your customers. Cost is not about where you spend your engineering time and dollars; it’s about how the customer perceives the value of your product.

Things start going downhill when companies try to charge subscriptions for features that customers perceive as hardware-enabled—and they go from bad to worse when companies create a laundry list of subscription-only features. This nickel-and-diming strategy creates “a micro-transaction hell” that often causes customers to look elsewhere.

Just because you can lock something behind a subscription, doesn't mean you should. The key is understanding customers’ perceptions of software and hardware value, then creating pricing plans accordingly.

Software vs. Hardware Value: Real-World Examples

Is it possible to sell hardware to customers using a subscription model? Absolutely. When this is done thoughtfully, customers will understand and accept the model without negatively impacting your brand—but when it’s done incorrectly, damage happens.

Let’s look at three examples of how brands charge customers, along with how their pricing aligns with the way customers perceive value.

BMW's Heated Seats

When BMW launched its heated seats as a service, the public (at least, the part of the public that buys BMWs) went into an uproar. Articles like this one popped up, shaming the brand for having the audacity to charge $18 per month for a feature that was previously available at no extra charge.

The reason for the backlash had everything to do with lack of perceived value. Customers saw heated seats as hardware, so when BMW demanded they pay a monthly fee to use something they’d already bought, this led to feelings of being nickeled and dimed.

Moreover, BMW individually charges for digital services such as high beam assistance, safety camera information, and steering wheel heating rather than offering a bundle. This makes the brand feel greedy and untrustworthy, which can be a deterrent for customers—not great for BMW's reputation and future vehicle sales.

Apple iPhone Cameras

Apple's iPhone cameras boast quality on par with professional-grade photography equipment, with HDR technology that captures perfect exposures in differently lit settings and an action mode that stabilizes videos. While the hardware is certainly impressive, much of what the iPhone camera can achieve is made possible using software and algorithms.

Although Apple has devoted considerable resources to designing and producing its cameras, the company doesn't lock camera features behind a paywall of subscriptions, nor does it create two different iPhones and charge a higher amount for the one with the better camera features.

Why? Because it knows its millions of customers wouldn't be happy.

For many decades, cameras were viewed as pure hardware, and it wasn't until recently that their capabilities were enhanced with software.

Ultimately, people still don't consider cameras to be software or believe camera features are worth paying extra for.

IoT-Based Asset Trackers

What's the perceived value of software that's hardware-driven?

For example, manufacturing equipment uses software for fault detection and diagnostics. The end user rarely interacts with the hardware piece, and a maintenance tech/ops manager almost entirely uses the software portion.

However, Internet of Things hardware only sometimes connects to the user interface—for instance, GPS asset trackers provide information through a web interface.

Chances are, B2B customers will be OK with paying a subscription. Not only do they understand Software-as-a-Service models, they actually prefer them because they’re cheaper than acquiring hardware or building tools from scratch.

Suppose a GPS asset tracking company offers two plans: one that can pinpoint assets within 10 meters and another that does the same thing within 1 meter. There are two reasons why one might be more accurate:

1. The chip it uses is of higher quality.
2. The software it uses is higher-performing.

Customers will often agree to pay more for a higher-quality chip because they perceive the product as hardware. However, if the chip is the same and the software's algorithm is optimized, customers may balk.

In reality, the chip and the algorithm both likely contribute to the improved accuracy. In this case, customers will find value in paying more for advanced hardware, along with getting a subscription to benefit from the software.

Ultimately, if a customer regards a feature as requiring low effort or investment from the company (e.g., using the same chip), being charged more for the feature can feel like a rip-off.

Value Is In The Eye Of The Beholder

Determining software and hardware value comes down to how customers perceive the company's investment in the product. Did the company invest a lot of money to improve the product's capabilities? Did it hire teams of programmers to build an algorithm that delivers better results?

In these instances, the perceived value increases, thereby improving the odds of customers accepting higher prices or ongoing subscription costs.

Understanding how your customers view hardware and software value is key to future success. Looking through the lens of how your IoT product will be perceived (hardware vs. software), you are better equipped to evaluate whether a price tag and pricing model will be worth it.