Car subscription services have emerged in recent years as an alternative to traditional car buying and leasing. With a subscription, customers pay a monthly fee to have access to a vehicle. The fee covers costs like insurance, maintenance, roadside assistance, and vehicle swapping. Major automakers like Audi, BMW, Mercedes-Benz, and Volvo now offer subscriptions.
According to some reports, the car subscription market size was USD 5 billion in 2022 and is projected to grow at a 35% CAGR between 2023 and 2032. The model has gained rapid popularity because it offers flexibility and convenience compared to traditional ownership. However, questions remain about the long-term profitability and viability of subscriptions for automakers.
Benefits for Automakers
One of the key benefits of a subscription model for automakers is the potential for recurring monthly revenue versus relying solely on one-time vehicle sales. With a subscription, automakers can generate predictable cash flow each month the vehicle remains in service. This provides more stability than sales, which fluctuate with economic conditions.
Subscriptions also give automakers direct access to customer data and preferences, allowing them to upsell additional features or services. As customers add options onto their subscription package, automakers can generate more revenue from each user over time. With a traditional purchase, automakers lose touch with buyers after the sale.
Additionally, subscriptions shift more residual value risk onto automakers versus leasing models. However, for automakers, holding fleet assets on their balance sheet can be less risky than depending on the retail values of used cars. Automakers have more control over depreciation rates on their own fleet.
Finally, subscriptions provide automakers a way to test new technologies, mobility services, and business models with customers. Rather than requiring owners to make large upfront investments, subscriptions allow automakers to get concepts and innovations in front of users quickly at a lower cost.
Risks and Challenges
While subscriptions offer benefits, automakers also face significant risks and challenges with this model. One major risk is the large upfront fleet costs required. Automakers must hold, purchase or lease a large fleet of vehicles to have on hand for subscribers, leading to high inventory costs. There is also uncertainty around optimal fleet utilization rates. While a utilization rate of 70% may seem high, it means 30% of the fleet is sitting idle, dragging down asset efficiency.
Another risk is potential resale value deterioration when vehicles are returned from subscription fleets. Used EVs and cars with lots of mileage can face significant depreciation versus new models, so recovery values are unpredictable. There is also the challenge of customer retention and managing churn. Subscribers may switch between brands frequently, lured away by deals from competitors. This makes loyalty and retention harder versus traditional ownership.
Finally, subscriptions could potentially cannibalize automakers' other sales channels. For example, customers who may have leased or purchased through traditional financing may now prefer subscribing. This could reduce more profitable revenue streams in favor of subscriptions with unclear profitability.
Profitability Analysis
The profitability of car subscriptions depends heavily on the cost structure and revenue model. Some of the major costs include vehicle depreciation, maintenance, insurance, and personnel. According to BCG, vehicle depreciation accounts for over 70% of total costs. Proper fleet management and optimization can help control these fixed costs.
On the revenue side, monthly subscription fees provide recurring income. Upsells for higher-end vehicles, add-on features, or mileage overages can also boost revenues. The key metric is utilization - the percentage of time vehicles are rented out. Typically a utilization rate of 70-90% is needed to m.
Compared to leasing, subscriptions allow automakers to recognize revenues monthly rather than upfront. However, they also bear higher risk of vehicle worth less than residual value at return. Relative to ownership, subscriptions provide more flexibility but lower lifetime customer value.
Integrating Subscriptions into Automotive Retail
To maximize the profit potential of car subscriptions, integration into the wider automotive retail strategy is essential. This requires coordination both horizontally across sales, marketing, and finance functions, as well as vertically with OEMs and captive finance arms. The goal is to optimize profitability across the entire vehicle lifecycle from acquisition to eventual resale.
On the horizontal side, subscriptions must be tightly coupled with sales initiatives and incentives to ensure seamless lead sharing. Marketing campaigns can promote subscriptions as an alternative ownership model while showcasing the latest models. F&I can bundle subscriptions into financing packages and provide backend support. According to McKinsey, this level of horizontal integration enables a frictionless customer experience and higher lifetime value.
Vertical integration presents opportunities to leverage OEM incentives and coordinated vehicle inventory management. Captive finance arms, like GM Financial, can develop attractive subscription products while managing risks across portfolios. The Boston Consulting Group notes that vertically integrated subscriptions allow automakers to experiment with new revenue models while maintaining control over the customer relationship.
With horizontal and vertical integration in place, automakers can optimize profitability across the entire vehicle lifecycle. Data-driven acquisition incentives and targeted marketing campaigns can maximize upfront margins. During the subscription term, revenues come from monthly fees while costs are kept low through fleet optimization strategies. At resale, integrated channels allow extraction of the maximum residual value. This end-to-end approach is key to making subscriptions a profitable piece of an automaker's retail strategy.
Keys to Long-Term Profitability
In order for car subscriptions to be a sustainably profitable model for automakers, companies need to focus on several key factors:
Vehicle Fleet Composition
First, automakers must optimize their subscription fleet composition and vehicle lifecycles. Having the right mix of vehicle makes, models, ages and mileage is crucial to maximizing utilization rates and minimizing depreciation costs[1]. Companies can use data to determine optimal lifecycles for returning vehicles from the fleet before value deteriorates too much.
Technology Partners
Second, leveraging technology to maximize fleet efficiency and utilization is important. Rather than being seen as a cost center, platforms like Loopit can help drive additional revenue by providing insights on driver behavior, vehicle utilization, and ways to optimize the subscriber experience. This data can feed algorithms to better match vehicle supply and demand in different markets.
Upsell Opportunities
Third, automakers should get creative with upsell opportunities and ancillary services to boost revenues. Options like vehicle upgrades, concierge services, extended test drives and more can improve profit margins. Personalization and targeted promotions enabled by data analytics may also help drive additional spending.
Data Driven Decision Making
Finally, comprehensive data analytics will be essential to continuously refine operations and subscriptions marketing. By gathering and analyzing detailed usage data, automakers can identify ways to reduce costs, enhance customer retention and experiment with innovative offerings.
The Future of Subscriptions
The future of car subscriptions looks bright as they are likely to play an increasingly important role in automakers' overall retail strategy. Major automakers like Porsche, Volvo, and Audi have already launched subscription services, with more manufacturers expected to follow suit. According to BMW, subscriptions allow automakers to forge closer and more flexible relationships with customers in today's on-demand economy.
Luxury brands seem best positioned to profit from subscriptions in the near term, as affluent consumers embrace the convenience and flexibility. However, subscriptions also appeal to budget-conscious consumers who want occasional access to nicer vehicles, or flexible access without long-term commitment. The success of subscriptions will depend partly on macroeconomic conditions and consumer appetite for recurring monthly fees versus ownership. In times of economic uncertainty, shorter subscription terms may be more attractive.
Global car subscriptions could grow by over 30% annually in the coming years. However, profitability will require optimizing utilization rates, vehicle lifecycles, and customer retention. Automakers that leverage data and technology to refine operations and tailor offerings stand to benefit the most from the rise of subscriptions.
Conclusion
Based on the analysis, car subscriptions have the potential to be a sustainably profitable model for automakers, but it requires overcoming some key challenges. The recurring revenue and access to customer data provide clear benefits compared to one-time sales. However, the high upfront fleet costs, uncertainty around optimal utilization rates, and unproven customer retention mean subscriptions come with substantial risk. Automakers will need to use advanced analytics and technology to maximize fleet efficiency, creatively upsell customers, and refine operations over time. Partnerships can also help reduce costs and risk.
For subscriptions to succeed long-term, automakers need to focus on rightsizing fleet composition, leveraging data to optimize marketing and operations, and providing a high-quality user experience to retain customers. With sufficient scale and disciplined execution, subscriptions could play a valuable role in automakers' overall retail strategy. But effectively competing with leasing and ownership models requires unlocking operational efficiencies. If automakers take steps to mitigate risk and reduce overhead, subscriptions have the potential to be a small but sustainable part of the business.
