Guest article by Janina Garbas, co-author of the 2024 SERVSIG Best Service Article.
Dynamic service platforms have been designed to revolutionize the concept of products and redefine the boundaries of ownership. But how do they work in practice?
Imagine being required to pay an additional fee to unlock essential product features such as additional battery capacity, dual-zone climate controls, or seat heating in your car. How would you react to this business model?
In this guest article, we share our thoughts on the rise and fall of a novel business model labeled internal product upgrades (also known as features on demand) and provide insights into findings from our research studying this marketplace phenomenon.
The shift from static products to dynamic service platforms
In the digital age, the very concept of ownership is undergoing a profound transformation. Traditionally, ownership implied a one-time transaction where the consumer fully possessed a product and its capabilities. However, technological advancements caused a shift in this long-established, irrefutable reality and enable firms across industries (e.g., consumer electronics, automotive) to transform their products into so-called dynamic service platforms that can be customized over time.
For instance, carmakers like Tesla, Audi, and BMW have introduced vehicles equipped with additional hardware and software features that remain locked and inaccessible until they are activated by the consumer for an additional fee. This new business model, called internal product upgrades (or features on demand), allows consumers to unlock functions such as enhanced battery capacity, advanced driver assistance systems, and premium entertainment options at their discretion.
The rise and fall of internal product upgrades: Firms positive anticipation and customers negative reactions
Internal product upgrades started as one of the most promising business models in the last decade in the automotive industry. Major carmakers such as Tesla, Audi, and BMW envisioned internal product upgrades to revolutionize how customers interact with their vehicles and positioned this business model as a way to provide customers with unprecedented flexibility to upgrade their cars over time while creating cost efficiency through standardized production and ongoing aftersales revenue streams for firms (carmakers were expected to earn an additional €155 billion by 2022).
Despite its potential advantages for both consumers and firms, it has become a focal point of controversy and debate as carmakers received major pushback from their customer base. These ongoing waves of criticism in which customers express their outrage have even caused BMW to announce that they plan to abandon this approach all together.
Where do customers’ negative reactions come from and what could firms have done differently?
Our research, which was honored with the SERVSIG Best Service Article Award at the 2024 Frontiers in Service conference hosted by Florida State University, aims to uncover the roots of customers’ negative reactions to this new business model.
Through a series of studies across different product categories, including automotive and consumer electronics, we discovered that consumers experience a sense of psychological ownership for built-in features. Although a consumer may have no legal claim to use a focal feature without paying an extra fee, they have the normative expectation to own all its features outright when they buy a product. The idea of having to pay an additional fee to gain access to a feature that is already built into their product (i.e., their legal and/or perceived property), is considered a norm violation by consumers as they feel that the feature is part of their ownership already, triggering perceptions of betrayal by firms among customers. In turn, consumers have a lower willingness to pay for the additional feature and show decreased loyalty intentions toward the firm.
Investigating strategies that revolve around different elements of the managerial marketing mix, we demonstrate that the negative effects are attenuated when (1) the company (vs. consumer) executes the upgrading, and (2) consumers upgrade an intangible (vs. tangible) feature. Finally, consumers react less negatively when (3) the base product is less relevant to their self-identity.
Where does this leave us?
Taken together, these insights reveal that the concept of ownership and related normative expectations outweigh potential customization benefits of dynamic service platforms. It will be interesting to see whether paying for built-in hardware features will be just as accepted as paying for software in a few years’ time or whether consumers will always hold on to the concept of full ownership for hardware features in their own products. As of now, firms are advised to offer internal product upgrades for software features and/or offer hardware upgrades only for products that are less relevant to consumers’ self-identity.
Although we examined this question in the automotive and consumer electronics context, the insights from this work may also be applicable to other industries, product types, and price points, leaving opportunities to develop further research and potential business growth potential.
Read the article here,
Janina Garbas, Sebastian Schubach, Martin Mende, Maura L. Scott & Jan H. Schumann (2023): “You want to sell this to me twice!? How perceptions of betrayal may undermine internal product upgrades”, Journal of the Academy of Marketing Science, 24(3), 1231-1256.
Janina Garbas
Assistant Professor of Marketing at ESCP Business School.
