Compilation / Ma Xiaolei
Edited / Meng for
Design / Leather
Source/ Boston Consulting Group Author: Daniel Schellong, Philipp Sadek, Nikolaus Lang, Miles Mattson
For years, automakers have been looking for business models beyond selling cars, hoping to diversify their profits.
Pay-per-use mobility models such as car sharing and ride-hailing services have become more common, but alternatives to outright ownership of cars are still limited to traditional rental or lease (a popular long-term lease method in North America, which is not available in China), usually with long-term agreements and restrictive clauses.
From the advent of SaaS (Software as a Service), to Audio and Video Subscriptions on Spotify and Netflix, to mobility, with the rise of various sharing economies and subscription services, it's only a matter of time before car subscriptions rise.
How does a car subscription work?
Subscriptions and rentals have some common features, more similar to long-term rentals. Consumers pay a monthly fare that includes most or all of the costs (except fuel) such as maintenance, repairs, road assistance, registration fees, insurance and taxes. Subscription periods range from 1 month to several months, or in annual increments, from 1 year to 2 years or more. In general, the longer the subscription period, the lower the monthly fee.
It has been years since the original equipment manufacturer (OEM) launched the car subscription service. But as business models continue to evolve and more and more vendors continue to hone themselves in the competition, this market has only recently begun to gain favor with consumers and investors.
Within 10 years, car subscriptions are likely to become a $30 billion to $40 billion market.
For many OEMs, results are lackluster, but some startups, particularly in Europe, have performed well.
Does this mean that car subscriptions are not suitable for the traditional automotive industry? Or is it just a problem in the business model that remains to be solved? In terms of resources, capabilities and strategies, what resources, capabilities and strategies are needed to turn car subscriptions into new profit points in the auto retail industry? How are different vendors ready to gain an edge?
In Europe and the United States, OEMs and other players, including dealers, traditional car rental companies, have ventured into the subscription business, and a number of startups have also joined. So far, Europe remains the largest market in terms of revenue, with venture capital pouring in.
Amsterdam-based micro-mobility service provider Swapfiets illustrates the advantages of subscription models in mobility. The travel subscription pioneer offers subscriptions to bicycles, e-bikes, scooters and mopeds throughout Europe, and many companies are following suit.
Subscription VS traditional rental VS long term rental
The difference between subscriptions and traditional rentals is relatively clear. The services of both are all-inclusive in most cases. However, traditional leases are usually shorter, calculated on a daily or weekly basis.
Long-term rentals are another matter. Most long-term leases require a minimum of two to four years of contracting and charge high liquidated damages for early withdrawals. Many people will not buy additional services, such as insurance or repairs.
However, "full-service leasing", which is common in some European markets, covers everything but fuel. They are essentially subscriptions, but have a longer minimum term. While customers can often configure the vehicle they want, choice and flexibility are limited to that.
Another way to compare is the way products are marketed and sold. Subscriptions make car buying a modern digital experience, from buying and comparing to trading.
Consumers, on the other hand, deal directly with suppliers. In this regard, subscriptions represent an opportunity for OEMs to establish a digital channel for sales to end users. They are a natural entry point into digitalization and direct marketing.
Interestingly, since the introduction of subscription services, long-term rental companies have begun to blur the lines further. Some long-term rental companies have moved closer to the terms of subscription services, especially shortening the minimum contract period.
At the same time, in order to retain customers and avoid the risks and costs of customer unsubscription, subscription companies are offering monthly fee discounts to encourage customers to accept longer-term (e.g., at least one-year) agreements.
From a consumer's point of view, it's better to subscribe than to buy a car. Subscriptions are more convenient and flexible, with long or short lease periods, and significant upfront costs associated with buying a car, as well as other hidden costs.
This is an important selling point because people often underestimate the total cost of owning a car. A survey of 7,000 households in Germany showed that people underestimated the total cost of buying a car by more than 50%.
Subscriptions also eliminate the cumbersome formalities and documentation of the car purchase process. Customers also don't need to worry about maintenance, inspections or tyre purchases, or finding a reliable repairman.
Compared with traditional long-term rentals in North America, subscription services avoid the risk of trying new brands or new types (such as electric vehicles) and, more importantly, avoid the risk of vehicle depreciation and depreciation.
Car subscriptions are not cookie-cutter. Some vendors offer multiple vehicle brands, models, and types, while others offer only a single brand. Some focus on a certain automotive segment, such as high-end market, mass market, fuel vehicles or pure electric vehicles. Some, such as Porsche's subscription program Porsche Drive, allow customers to change different types of vehicles at no extra cost, for example, customers can swap their SUV for a convertible when spring arrives.
Importantly, subscription models have evolved throughout their short history. Expensive, single-brand subscription models that claim to be interchangeable (mostly provided by OEMs) have not gained traction. At least in Europe, what is more prevalent is a different model, a model similar to the all-inclusive long-term rental.
Why is the timing now?
Changing customer preferences, including a waning takeover of an item, have been accelerating the shift to subscription-based offerings beyond software and digital services. In addition, the pandemic has forced many city dwellers and commuters to stay away from public transport and shared mobility and seek the safety of private vehicles.
Buying a car in the traditional way is a bit tedious. Many consumers believe that in the traditional car buying experience, from the moment the test session is over, there is only endless "harassment".
Consumers don't like the feeling of being marketed. The purchase process is lengthy and cumbersome, involving a large number of documents, especially auto finance.
Prices often lack transparency. At this point, support for new cars to buy online is limited, mainly because industry structure and various regulations limit the online sale of new cars, especially in the United States. (As of 2020, only 1% of new cars are purchased online).
Full ownership of a car is less flexible and can be risky. Whether it is a full-fledged car purchase, a loan to buy a car or a long lease, the term of ownership is very long. The liquidated damages for long-term rentals are very high, and the car buyer will be reluctant to change to a new car because of the fear that the vehicle will depreciate too quickly. The risk of residual value is borne by the owner of the car personally, and this risk is painful for anyone who buys a car and then suffers unemployment or other forms of income instability, as many have experienced during the pandemic.
There are other reasons why car subscriptions are becoming more and more attractive to consumers.
In some Western countries, the possessiveness of vehicles is fading. For young people, owning a car is no longer a status symbol, and they are not as desperate as the previous generation.
A study of baby boomers (born between 1946-1964) and Gen Z (born 1997-2012) showed that while about 75 percent of baby boomers believe that owning a car is a necessity, only 45 percent of Gen Z respondents do.
In the United States, the percentage of people aged 20 to 24 who hold a driver's license fell from 92 percent in 1983 to less than 80 percent in 2018, a drop of more than 10 percentage points in a generation. Attitudes toward driving are more pragmatic, and research shows that more and more people (especially city dwellers) believe they don't need to own their own car to get around.
To try out new brands and electric vehicles, car subscriptions are also a low-risk approach. Consumers who may be discouraged from new brands or pure electric vehicles prefer to subscribe to the early adopters.
Especially for pure electric vehicles, subscriptions can avoid one of the disadvantages of buying electric vehicles at present: the decline in vehicle residual value due to the shortening of battery life. The closer a car is to a battery warranty, the lower its salvage value, as new batteries cost between $5,000 and $16,000. However, due to the rapid pace of improvement in battery technology, the cost of batteries will come down.
Subscriptions are also an attractive supplemental option for B2B customers. Fleet services and companies that provide shuttle buses to employees often use long-term rentals. Subscription services enable enterprise customers, especially small and medium-sized businesses, to quickly adjust their fleet size to demand and react flexibly to changing business conditions.
A new ecosystem
As in other areas of the automotive industry, new business models have been allowed to flourish at the technical level, creating new opportunities and challenges for incumbents and start-ups.
For automakers, car subscriptions offer a way to be closer to the user, with greater control over the customer experience by delivering valuable digital services directly. The rapid change in consumer demands and attitudes towards mobility today, and the way and where people work are being redefined, is an important advantage.
OEMs were among the first companies to offer car subscription services. Audi's Audi Select (which has been incorporated into Audi on Demand) was launched in 2014.
Other OEMs include Volvo's Care by Volvo, Porsche's Porsche Drive, Lexus One in Lexus, BMW's Access by BMW (abandoned), Cadillac's Book by Cadillac (suspended), Mercedes-Benz's Mercedes-Benz Collection (abandoned), jaguar Land Rover's Carpe (now Pivotal), as well as other services at Nissan and Hyundai.
The supplier ecosystem includes two other broad categories: traditional automotive downstream entities (dealers, leasing companies, and long-term rental companies), and digital mobility companies and startups such as Fair, Cluno, Drover, and Bipi, which take advantage of relatively low barriers to entry with disruptive business models.
Online automotive markets, such as AutoScout24, are tapping into this space through partnerships. British online car sellers Cazoo entered the subscription market with the acquisitions of Drover (December 2020) and Cluno (February 2021). Cazoo's goal is to list on the New York Stock Exchange through a Special Purpose Acquisition Company (SPAC).
Since 2015, more than $700 million in venture capital has poured into car subscription startups. Launched in the U.S. in 2016, Fair has gone the long way in attracting equity financing ($600 million to date). Eight of the 10 startups that raised more than $1 million in equity financing are based in Europe.
Car subscription startups have slightly weaker levels of financing compared to other emerging transportation markets, such as self-driving cars and electric vehicles, largely because they don't require similar capital investment to develop new technologies.
The Boston Consulting Group (BCG) estimates that by 2030, the subscription market in Europe and the United States could reach 5 million to 6 million subscriptions, accounting for 15% of new car sales and worth $30 billion to $40 billion.
It's worth noting that this prediction is based in part on ordinary long-term rentals and "all-inclusive long-term rentals," as the lines between the two models and subscriptions are blurring.
Europe has the potential to become the largest subscription market. In the United States, new car subscriptions are mainly provided by OEMs, and American startup Fair can only build its own business model around the second-hand car market. In China, so far, the subscription model has not stirred up any waves.
Different market routes
How service providers manage vehicle supply is key to success. Some companies, such as Cluno in Germany, mainly buy vehicles.
The cost of vehicles in the subscription business accounts for about 50% of revenue, so it is important to be careful when purchasing. A 20% purchase discount can increase gross margins by 10%. Notably, some startups are getting discounts of up to 35 percent from OEMs eager to boost sales.
In addition, if a vehicle appears on the balance sheet, it means that the rapid depreciation of the vehicle is accounted for. Every subscription supplier who intends to purchase a vehicle has to go to great lengths to increase its financial performance when purchasing.
However, vehicle procurement requires strong financial resources, along with risks associated with vehicle utilization and salvage value.
Some suppliers take an asset-light approach by partnering with dealers or long-term rental companies. Madrid-based Bipi does just that.
Long-term rental banks buy thousands of vehicles each year and lease them to corporate customers, including asset-light customers. Either way, these vehicles will not appear on the balance sheet of the ordering company.
Essentially, the automotive subscription business has four business models: integrated suppliers, pure service providers, marketplace suppliers, and SaaS vendors. Either way, each competitor has to weigh their ability to build and buy.
Integrated suppliers. This type of supplier is involved in every step of the value chain: procuring vehicles, establishing core technologies, contracting directly with customers, handling deliveries and operations, and reselling the vehicle at the end of its market life.
But the integrated vendor does not need to perform all of these activities in-house. They can choose to outsource parts of the process, such as vehicle delivery or service. Cluno, finn.auto, and Drover are following this model.
Cluno is more like an asset-heavy company, while finn.auto and Drover are hybrid, offering both on-balance sheet and non-balance sheet vehicles. Integrated vendors can design customer experiences to their specifications.
Pure service provider. This type of vendor typically creates a brand that works with another entity to handle logistics, vehicle delivery, or customer-facing activities.
This is the pattern that many OEMs are currently following. But they have begun to invest heavily in technology infrastructure and capabilities to support the future of online direct sales. As a result, subscription businesses may prove to be a good proving ground for boosting their digital business capabilities.
Market suppliers. In this mode, the supplier does not supply vehicles. Instead, it provides front-end interactions: marketing, listings, and directing customers to dealers, long-term rental companies, or other companies that actually offer vehicles.
In some cases, such as Bipi, it contracts directly with customers. Its vehicle suppliers are responsible for operations. With this asset-light model, vendors can leverage the infrastructure of partner vendors, such as EasePlan and ALD Automotive.
Marketplace providers negotiate with long-term rental companies, which then handle operations, resale, and other functions. Once a partnership is established, market suppliers can quickly scale up.
The disadvantage of this model is that they are subject to the processes and standards of the vehicle suppliers on which they rely, and have limited control over the service.
SaaS vendors. SaaS vendors are customer-facing platforms or front-ends (via OEM) created by smaller subscription vendors, or by those vendors that actually provide vehicles. As a result, it's asset-light and scalable, just like a software company. The main examples are Ridecell, Clutch and FreshCar.
Different advantages
Many companies entering the subscription business start very differently.
Technology companies and startups have an advantage in terms of platforms and technology infrastructure, as well as online B2C marketing and brand building. They also have disruptive ways of thinking as well as agility. Those that adopt an asset-light business model have lower capital requirements and can scale up quickly.
So, in terms of comparative advantage, what are the respective advantages of established entities?
OEMs. As a supplier of new cars, OEMs have two basic advantages: cost advantages and the ability to control discounts. However, the volume of business is still small, so this advantage is somewhat one-sided, at least for start-ups.
In addition to building their own fleets at cost prices, OEMs have pricing advantages and the potential to make a profit as the market grows.
OEMs need to strike a balance and find a way for subscription services to increase business volume rather than undercut new car sales. While maintaining a good relationship with the dealer network.
OEMs need to balance these advantages with the risk of a shorter holding period with the customer (for example, if the customer is below the average long-term lease term during the subscription period). This means that OEMs must devise a business model that encourages long-term renewals from customers.
Subscriptions can be seen as the ultimate form of a test drive, a marketing tool to attract future buyers who can try out new models with zero risk, even for those who never considered buying a car.
dealer. As a traditional channel for car sales, dealers have always been closest to customers, including B2C and small B2B customers.
They have consumer recognition of the brand, supply channels, and a very lucrative service and repair business. They also have resale experience for long-term rentals, used cars and swap vehicles.
As with OEMs, subscriptions serve only as an additional or complementary source of revenue for resellers, rather than eroding traditional sales models. However, if consumers get subscriptions directly online, then subscriptions also pose a threat to resellers. Resellers may also lose their service and repair business because subscription sellers hand over service operations to third-party vendors.
Long-term rental companies. Historically, long-term rental companies have been the equivalent of prototypes of subscription services, with all the relevant capabilities of the entire value chain.
Companies that offer all-inclusive long-term rental services, such as EasePlan, ALD and Fabaano, have a strong position in the value chain. They already provide all the links involved in the subscription. They understand the economics of services such as maintenance, repair, inspection, insurance, and licensing and registration.
However, because they were all B2B before and lack brand recognition among consumers, many companies only have a small range of visibility on the web.
Today, long-term rental companies are keeping a close eye on the dynamics of the subscription market and, in some cases, acting as vendors.
Subscription value chain and supply management issues
The value chain of the automotive subscription market consists of five major segments. Some vendors are involved in only one of these steps, while others involve multiple steps.
Procurement of vehicles. This step includes purchasing a vehicle as well as handling auto finance and insurance for it.
Build a technology platform. As with online sales, subscription vendors need to create a user interface and user experience (front-end software for customer-facing interactions like marketing and bookings) that is as attractive as those of well-known e-commerce sites.
In a market that is still in its infancy, it's especially important to deliver an engaging experience. Companies must also establish core back-end software and tools for operations and management processes.
Acquire and retain customers. This step includes providing a seamless new user onboarding and sales process, as well as features to help retain customers. Companies must strive for the highest average subscription period to ensure a high contribution rate per customer.
Manage business and fleet. This step includes processes such as customer service, car repair, damage and claims, and vehicle delivery and return. Many of these processes require maximum efficiency to maintain healthy economic benefits.
Vehicle resale. Once the vehicle is too old or for other reasons to continue subscribing, it must be sold to a secondary buyer, such as a dealership, or to a B2B or B2C market, auction or consumer.
Proceeds from resales are an important income for asset-heavy companies. Subscription providers have also become car traders. They need to be particularly good at procuring vehicles and reselling them after the subscription period ends.
Obstacles to OEMs
Auto subscriptions fill the gap in the consumer market, adding a new point of profitability to an industry facing growth woes. However, it has not yet risen as strongly as other recent mobility options, such as electric vehicles and ride-hailing services.
Most companies have yet to find a path to success. Some companies, including Mercedes-Benz, Cadillac and BMW, have abandoned or suspended their subscription businesses.
Clearly, car subscriptions are a multi-faceted product, and many of its "variants" can become challenging economic activities. What is preventing OEMs from scaling up? This is also the key to the entire subscription market.
There are many factors at play.
The product does not match the market. Some vendors enter the industry with the assumption that vehicle replacement services and monthly pay-per-month features are what customers care about most.
As BCG's research suggests, both of these assumptions turn out to be wrong (myths 1 and 3). Both of these features add to the cost, which in turn pushes up the subscription price. For example, changing vehicles requires additional costs and leads to underutilization of spare vehicles.
Limitations of single-brand products. If only OEMs' vehicles are available, the flexibility of the project will be limited. Often, customers subscribe not for the brand, but just because they need a car.
Beyond their core capabilities. Many of the capabilities required for the automotive subscription business are now beyond the traditional core competencies of automakers, such as digital first, user-friendly technology platforms, advanced fleet management, and ongoing customer relationships and customer engagement models to ensure customer retention.
Still, automakers are increasingly recognizing the need to evolve digitalization and direct customer sales (as do other market players). Subscription products can be an entry point for these customers and ultimately turn them into long-term buyers.
Market Restrictions. In some markets, OEMs must avoid competing with their dealers. Referring to Volvo's approach to coordinating the delivery of products with dealers, this is a potential solution. Distributors act as delivery and service locations, increasing revenue and winning new customers. However, such an approach will also reduce the flexibility of OEMs.
Risk aversion for sellers. Some OEMs prefer certainty of vehicle sales to uncertainty over subscription terms. The logic of this thinking, however, is that in the event of slower sales growth, subscriptions will largely cannibalize car sales rather than increase sales.
Subscriptions may help boost sales, and consumers experience the ultimate test drive through a subscription, rather than a traditional 15-minute test drive. It may also bring new customers to market, or they will never consider owning a private car.
Sometimes, the reason for failure is simple: a company abandons a new project prematurely just because it hasn't achieved a ROI yet.
Any new idea may require some twists and turns to succeed. Most importantly, the product must be competitive and attractive. This may explain why some new OEMs, such as Lynk & Co and Canopy, are entering the subscription battlefield.
There is no opposition within them, and the newer business models (long-term rental types) have overcome their initial difficulties and are now ready to succeed.
How can a subscription business take off?
If the subscription business is only targeting those who only need it for a few months, it can't reach a very large scale. Subscriptions must be positioned as a viable option beyond car purchases and long-term rentals.
By offering attractive prices and convenient, seamless, hassle-free service, vendors can incentivize customers to opt for longer subscription periods.
Subscriptions require a different direction from the usual thinking of manufacturers. Innovation is done by taking into account the interests of the customer first and by building an organizational structure in a way that fosters collaboration and responsiveness.
All participants need to assess the risks and rewards of entering the business. For all businesses except start-ups, they need to assess the potential impact on existing sales efforts, recognizing that their core business is facing their own internal challenges.
To gain viability, market participants must figure out how best to attract and retain customers, and how to optimize business models.
The first step is to think about the customer's value proposition. What do customers care about most? Eliminate redundant features or vehicles that are not big selling points. Continuously refine products with testing, customer research, reviews, and an agile, iterative approach based on customer feedback.
To do this they need to:
Competitive prices. High prices are the pits that most early failure cases have stepped on. Setting competitive prices not only challenges competitors, but also means that pricing over purchases, long-term rentals, or other forms of mobility such as ride-hailing and car-sharing also has an advantage. Used cars, especially newer used cars, can also be offered for a cheaper monthly fee and are still attractive to customers.
Create a brand. A strong brand can increase traffic and reduce customer acquisition costs. For non-OEM suppliers, as their customer base grows, a strong brand can help them get bigger discounts when buying a car.
As cars become a necessity, OEMs brands may become less important to consumers, and brands from subscription providers are likely to wait for an opportunity.
Think of customer service as an integral part of your product. Suppliers need to provide excellent customer service, as well as customer relationship management and engagement. They need to proactively identify and address changing consumer needs through constant engagement in the ordering process.
In terms of optimizing business models, companies also have a lot of work to prepare, such as:
Develop a business model that leverages the benefits. Companies should assess their core competencies and consider working with other suppliers to fill the gap as long as they don't significantly diminish their value chain depth.
Improve procurement strategies. Given the high cost of vehicles, managing supply is a key aspect of building a sustainable subscription business. Non-OEMs need to subtly say that the price is "played down".
OEMs should be careful not to offer subscription services at a lower price than their dealers, so as not to oppose their own dealers. Bundled subscription pricing can avoid this problem.
Manage inventory to improve asset utilization. Subscription plans that allow customers to change vehicles have limited market potential. Operational efficiency, including maintenance, repairs and customer service, is critical. Partnerships and outsourcing in non-core areas could be considered.
In addition, entrants need to weigh the pros and cons.
Vendors of all types need to focus on the advantages, risks, and trade-offs of subscriptions. All market participants who own vehicles are exposed to the risk of residual value of vehicles. They need to pay close attention to the residual value and utilization rate of the vehicle, as there is an impact on the balance sheet.
Market volatility or miscalculation of salvage values can hurt businesses, and losses can be even greater for OEMs and start-ups.
For OEMs. Subscriptions provide an opportunity to develop an ongoing relationship with a customer that was previously unattainable.
How will subscription plans complement traditional sales channels? What is the best product that can be offered that maximizes customer value? Should I offer only one brand or multiple brands? What parts of the value chain should be involved and where should partners be sought?
If OEMs have established consumer-facing projects, they need to evaluate their capabilities in network marketing, customer relationship management, and operations. It is necessary to decide which capabilities to be built in-house and which to outsource to partners. It is important that they also evaluate the role that resellers play in their subscription business.
For startups. Maybe startups can get huge discounts from OEMs or long-term rental companies, but once the number reaches the scale, or the dealers start complaining, the discounts will be invalidated.
They also face other macro risks, such as a sudden and massive number of unsubscribes after a recession. In order to overcome these risks, new entrants in particular need to work to maximize user value and scale their business while improving economic efficiency. Where possible, they need to build flexibility in their commitments with suppliers.
What is the outlook for car subscription services?
Although still in its infancy, and despite its initial low profile, car subscriptions are not a whim. Consumers are increasingly receptive to online services and subscription models, which bodes well.
Subscription services are emerging at a time when the automotive industry is facing challenges. At a time when traditional retail models are being hit, OEMs and distributors recognize the need to offer attractive mobility products outside of traditional distribution systems to cater to changing consumer preferences.
So while startups are gaining momentum today, OEMs and long-term rental companies are likely to catch up through their own in-house subscription businesses or acquisitions.
Will subscriptions disrupt the automotive industry? Not in the short term.
While Netflix also makes movies, it hasn't surpassed Universal Studios, and Spotify's success hasn't shaken Warner Bros' position as a major record label.
However, the pioneers of these two subscription services have successfully tied the appetite of users. In the process, their valuations outpace existing companies in the industry.
Once a market leader emerges along the value chain, money is likely to pour into car subscriptions, as may some consolidations. In BCG's view, car subscriptions won't be a winner-take-all market. Apart from the low threshold, there is no single product. There is plenty of room for multiple vendors to cater to different market segments.
In short, subscriptions don't kill new car sales. Instead, subscriptions may spur future sales by exposing more people to the brand. Most importantly, subscription services meet the growing consumer demand for all-inclusive digital automotive products. It remains to be seen who will prevail in meeting this demand.
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