I write a lot about how connected hardware ends up looking a lot more like software. For example, companies that manufacture smart devices can disable them with a software update. Or they can use those same over-the-air updates to add new features. And unlike traditional hardware, adding connectivity means adding a cloud back-end and continuous software updates.
This leads to ongoing costs for connected products and forces companies selling smart gadgets to find new business models. For many, add-on subscriptions were the way to go. But we’re seeing a maturation of the subscription business model that doesn’t see the connected hardware as the product. Rather, it presents the hardware as a delivery mechanism for a subscription service.
It’s a fairly subtle distinction, but it’s important. For example, in an interview with The New York Times, Peloton’s new CEO Barry McCarthy has spoken about plans to change Peloton’s pricing models.
Currently, people buy the Peloton bike, which ranges from $1,495 to $2,495, and pay a monthly membership fee of $39 that provides access to classes. This is a classic connected hardware subscription model, where the price of the hardware is closer to or higher than competing “dumb” products and the company requests a subscription to fund the ongoing costs, which either for content or cloud storage.
But McCarthy, who was previously an executive at Netflix and Spotify, said he plans to play “with the relationship between monthly recurring revenue and initial cost to find a sweet spot in the consumer value proposition that drives people to buy user”. experience and offers you a very good margin. And when asked if he was considering selling the entire Peloton bike and service as a subscription, McCarthy said yes, and it might cost $70 or $80 a month, with the initial cost being “significantly lower”.
Oops, the wearable fitness that recently raised $200 million, has a similar subscription plan. Whoop includes the initial cost of its activity tracker in its $39 monthly subscription. When customers sign up, they sign up for a $30 per month subscription for a minimum of six months or $288 for an annual subscription. Both subscriptions include the actual group price. The language on Whoop’s site champions the membership model as a way to provide a steady stream of new features and updates with a less expensive way to try out advanced health tracking technology.
And as technology moves beyond hardware and expands into software and experiences provided by artificial intelligence, this shift in selling a technology service consisting of sensor-laden hardware and software for a fee monthly makes more sense.
The language of the Whoop site enforces this concept, asking customers to register now, instead of buy now. The fitness world is a good place to test this idea, as many people can compare the cost to a monthly gym membership. But it’s not the only vertical to push this concept. The Fi Dog Collar is a connected dog collar with built-in GPS tracking. While the $149 collar can track a dog’s footsteps and provide access to a dog social network, the real value comes from the $99 annual subscription that provides GPS tracking.
Fi CEO Jonathan Bensamoun says that 93% of customers who buy the collar buy the subscription, and after a few years if the collar breaks, they are happy to send them a free or very discounted collar because the value to the company is in the annual subscriptions. The hardware is simply a way to integrate dog owners into the Fi family.
We even see software vendors trying to provide physical hardware as a mechanism to satisfy subscribers and facilitate access to their services. For example, Spotify now sells a $90 device, called Car Thing, which easily mounts in a vehicle and can access a customer’s Spotify account. And it looks like the future of connected devices and the subscription economy.
A combination of a device-tight subscription and a flat-rate price is the likely future of high-end smart devices, especially those that promise to add regular feature updates. It will also affect the smart home. Right now, for example, people buy cameras and then choose whether or not to add a subscription to store video in the cloud. My hunch is that we’ll start to see a bundle of devices offered under the umbrella of home security or energy efficiency that combines multiple gadgets with a plan offered by a company such as Google, ADT, or Comcast.
There are many options for companies that could bundle devices and services together, which is why we are seeing many mergers and acquisitions and many partnerships around security, energy conservation and resilience. , and aging in place. And for those of us who aren’t thrilled with paying a monthly subscription for hardware, we might end up missing out on the benefits of smarter products and services.