Hardware Upgrades Offer New Opportunities

Software upgrades are commonplace. We have them in apps, video games, computer software. Pay an additional amount and the products can seamlessly acquire new capabilities.

Now, there’s an equally seamless hardware upgrade: Tesla will upgrade the battery in an owner’s $71,000 Model S70. The owner pays an additional $3250 for the company to do an over the air upgrade to activate an additional battery that’s built into the car. Once activated, the 240 mile range electric vehicle increases it to 260 miles, turning the car into a Model S75.

No, they don’t teleport the battery over the air. It’s already built into the car. You might think Tesla shouldn’t charge extra for hardware that’s already there. But actually, it’s quite ingenious. A clever way for Tesla to sell their car at a slightly lower price, knowing they’ll recoup a profit from many of the buyers later on.

It also allows Tesla to produce fewer variations of the car, simplify the design, and eliminate the labor and inconvenience of installing an upgraded battery. But its biggest advantage might be customer satisfaction: giving the owner a way to improve his driving distance with a phone call or tap on the display.

Is this the beginning of something new? Just imagine how hardware upgrades, or “in-hardware purchases (IHP)”, might offer designers and marketers all sorts of new possibilities. A company could sell a phone or computer with built-in memory that can be expanded with an online purchase. Cameras could have features turned on for an extra charge, such as increased resolution or a wider zoom range. Tablets and computers could have built-in cellular modems in all of their models. An over-the-air purchase would turn on the cell service.

Yes, these add costs to the bill of materials, but that’s offset by simplifying the supply chain, reducing inventory and shortening the buying decisions. Additionally, the new revenue stream of after-sale purchases provides a competitive advantage and customer convenience.

There’s also a precedent for Tesla’s IHP. GM cars offer OnStar that, when activated, turns on a built-in cellular modem to connect and make calls. There are probably numerous other examples we’ve just not noticed.

Building in extra hardware that can be enabled after the purchase can not only be done for making a new sale but also to improve performance. The Chevy Volt is powered by a battery that typically needs to be recharged 5-7 times per week, depending on the owner’s driving habits. But, just as they do on our phones and computers, Li-Ion batteries deteriorate after successive charges. Chevy solves this issue by only using 10kWh of the Volt’s 16.5kWh battery capacity. This allows the car to maintain the same driving range on the battery, even as it degrades with use. As the battery’s capacity diminishes, more cells are turned on, maintaining the same performance for the life of the car.

Imagine if Apple or Samsung did this with their phones. Instead of a battery needing to be replaced after 2-3 years, just turn on a spare cell to maintain the original performance.

But IHP applies to more than just tech hardware. Several trends are at work that make hardware upgrades more practical. More devices are connected than ever, particularly in the IoT area, and the cost of hardware is falling, with computers-on-a-chip costing under ten dollars and large displays not much more; tablets cost as little as $25.

Companies need new sources of revenues after the initial purchase, beyond just offering an extended warranty. Appliances, such as refrigerators, washers, dryers, and HDTVs could come with a built-in computer, display, speakers, or an Echo-like device activated as an option by the customer. That provides an aftermarket sale direct to the manufacturer plus the option of recurring revenue.

The opportunities are endless and only subject to the imagination of engineers and marketers.

Published by

Phil Baker

Phil Baker is a product development expert, author, and journalist covering consumer technology. He is the co-author with Neil Young of the forthcoming book, “To Feel the Music,” and the author of “From Concept to Consumer.” He’s a former columnist for the San Diego Transcript, and founder of Techsperts, Inc. You can follow him at www.bakerontech.com.

34 thoughts on “Hardware Upgrades Offer New Opportunities”

  1. Yeah, this idea has P. T. Barnum written all over it. “Right this way to the see the Egress!”


  2. “The opportunities for screwing the customers are endless and only subject to the imagination of engineers and marketers.”

    Fixed that for you. What tesla is doing is slimy and disgusting. I very much hope that the practice will be outlawed before it becomes more popular. That you think it’s an exciting new development tells me everything I need to know about your ethics.

    1. I wouldn’t be that harsh: customers know what they buy, they’re not screwed since the product conforms to advertised specs, even the fact that extra batteries are onboard but cost extra to activate isn’t hidden.
      Screwing the customer is selling DSL speeds that are never reached in practice. Or even telling home-buyers that their area is covered by DSL, only to retract that statement once they bought the house. Or advertsing a $99 price that turns into $140 once fees are taken into account. Or raising prices/fees once locked-in. I find even “sales” that temporarily lower costs (1 year @$9.99, $24.99 after that is popular for Mobile in France) are worse than what Tesla’s doing, even though it’s not deceptive per se.

      Granted, having the hardware but being unable to use it feels worse than not quite getting the service promised at the price advertised. I don’t think it’s slimier though, objectively. The alternative is to offer an in-shop battery upgrade, more of an inconvenience at a higher cost ?

      1. I’m selling you wine by the tankful, but it comes with two dispensing valves. One higher, one lower. At purchase you can only dispense from the top valve, the bottom costs extra. Ask any prostitute, the bottom always costs extra!

  3. My iBrother used to work for a leading investment bank. They were hooked on IBM’s ability to decuple their processing power at a moment’s notice (for a very hefty fee), which they used when involved in large IPOs that generated a huge amount of transactions for a few days even hours.

    The idea feels a bit fishy though. Software-as-a-service is mostly fine, and people are sued to paying different prices forthe same services (late/early booking…); but hardware-as-a-service… I already bought the actual hardware, and I got to pay extra to access it ?

      1. It’s a perception issue. If Apple offered to up iDevices’ storage to 64/128GB post-sale, they’d probably sell a lot of those upgrades, and customers would appreciate the capability.

        My best guess is that Apple isn’t doing it for 4 reasons:
        – perception issues, such as the ones on display here ^^
        – needs a high upsell rate to make up the the cost of the actual Flash.48 GB cost $13.5, Apple sells it in new devices for $100 ie around x7 / 83% margin; getting even to 66% margin from preinstalled but locked Flash would require about 7 out of 10 customers to upgrade, 50% margin is around 6 out of 10.
        – would cost sales of new devices, since some customers would unlock the extra Flash instead of buying a new device
        – would weaken the downstream conversion to iDevices and the iOS ecosystem, since fewer used iDevices would flow downmarket, to kids or the second-hand market.

        1. Is there a 48gb chip? Does Apple install 128gb in every device instead of 16 gb which is at least 8x the cost? Not that I’m satisfied with with being charged A$200-300 more for a sensible capacity, but there are, incomprehensibly, people that won’t even use the 16gb in the base model, not including the ones supplied as work devices.

          1. I simplified, 16GB is valued at $4.50 in the teardowns, that makes the extra 48GB to reach 64GB worth $13.5, assuming things are linear.

            You’re right, some people certainly never need more than 16GB, or know to buy more right away.

  4. One way to open up a flock of advanced upgrades would entail something like Amazon Prime service. INHP adds a secure ecosystem for penetrating new market opportunities. Pre-purchased, it removes a hassle shelling out additional expenses along the path.

    1. INHP feels close to hardware as a service.

      Posting without deeply considering all the angles…

      Perhaps if Apple sold a device with 128GB hardware inside, charged (nearly) the same purchase price as (say) the 16GB model, but offered access to the additional storage capacity by charging some ‘small’ fee per GB used per month/week/day, in excess of the 16GB?

      Something in the order of (guessing) 10 cents per GB per month (really rough number there). You would still own the base GB capacity but ‘rent’ the extra, paid via your iTunes account credit card.

      Filling up an extra 100GB of ‘rented’ capacity would cost (say) $10 for the month. And every month you managed to not delete all your extra ‘stuff’.

      Something akin to paying monthly interest on accumulated credit card debt, but it is data accumulation.

  5. Phil Baker, you are taking an entirely marketer’s view on this. The customer’s perspective might be something more like “I’m being asked to pay extra for something that is already in the car, and I don’t like it at all.”

    I’m also put off by what seems to be an increasing stream of posts on Tech.pinions that are not informational, but are obvious sales pitches intended to benefit the seller and not the customer. Today’s little writeup smells like horse manure to me.

    Be careful, Ben Bajarin and Tim Bajarin, we are YOUR customer and we’re not so dumb that we can’t see when someone is trying to sell to us instead of giving us tech facts. I don’t think that’s what your audience wants, but maybe what YOU want is to to drive us from the free version of your site to the paid one. Instead, we could simply stop reading Tech.pinions at all.

    1. I’m a product designer by background and looking at ways of being more creative in that process. Look at this for what it is, just thinking out of the box.

      1. Okay, sure. But this is the kind of behaviour that drives people crazy about cable companies, banks, and cell phone carriers. This is not a customer facing strategy.


    2. Not a criticism at the site, but we are not the main customers. The main customers are companies that pay for consulting jobs, which explains most of both the choice of topics and the narrative around those topics.
      Obviously authors and commenters share an interest in Mobile and new tech, but we commenters mostly have a user’s point of view, authors have a supplier’s

    3. I was going to say something similar, but I’m happier that someone else said it. This was purely through seller’s point of view.

    4. Actually, the premium articles are mostly briefer and less in depth than the free articles, judging by the ones you can buy individually for fifty cents – it’s quite seldom that I think I got my money’s worth when I pay to unlock a particular article.

  6. Give me $3250 and I will remove a software block that’s been preventing you from utilizing your hardware optimally. In my book, that’s called “extortion”.

    1. Software unlocking of existing hardware capabilities seems right up the alley of current smartphone (and car ECU) hacking and jail breaking.

      There is already an ongoing arms race between the ‘secure things’ providers (smartphone, PC, car engine controller) and the folks that profit from cracking said things and selling the access.

      Adding even greater potential hardware capabilities but placing them behind an encoded and encrypted ‘barrier’ is just begging for increased attention and focus from the hacking communities.

  7. 2 things beyond the gut reaction do seem problematic :

    1- As I tried to work out in a post further down, the economics are iffy unless you get a very high conversion rate (unlikely, if people didn’t deem it worth it at purchase time ?) and/or the hardware itself is very cheap (in which case competitors might be out-feature-ing you by just making it part of the starter bundle, which further complicates the PR issue)

    2- If you go with qualitative stuff (say, a TouchID sensor, the ability to take LivePics instead of only stills…) you end up with fragmentation, which can be an issue if you need app support, or if it creates a sub-par experience for some. “My car died on my way to Mother’s day” isn’t good PR. nor “How come I can’t do what you’re doing, we’ve got the same phones ???”.

  8. The whole problem with the approach to business being so eagerly advocated by this author is that it’s primarily selfish. But instead of acknowledging it, he peddles specious reasons for his campaign like “being more creative” and “thinking out of the box.”

    Phil Baker is hard-focussed on what’s good for the seller, with little attention given to what’s good for the customer. Examples are “The new revenue stream of after-sale purchases provides a competitive advantage” and “Companies need new sources of revenues after the initial purchase.” And what, Mr. Baker, do customers need? You show little concern for that, so your approach isn’t very smart.

    Baker should emphasize that a business that considers only what maximizes its profits and doesn’t ask how to benefit its customer, is a business that probably won’t survive.

    1. The benefits to the customer are clearly noted: A simpler buying decision with one model (Tesla battery and the cell modem examples), the convenience of upgrading over obsolescence (memory), and better performance (phone battery).

      At some point the cost of building in extra hardware such as a cell modem in a tablet may be not much different than the cost of building and stocking multiple models. When that occurs the customer need only buy a single model and have the option of enabling the cellular capabilities. That’s already happened with the iPhone now containing a chipset so that one model works with AT&T, Verizon and T-Mobile. The intent is simply to look beyond current practices and visualize what could be, might be, and the implications in the development of new hardware.

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