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The Rise of Car Subscription Services
In the past few years, the sharing economy and subscription services such as Netflix and Spotify have been disrupting industries. Similar to the slogan “there’s an app for that”, which was popular a decade ago, “there’s a subscription for that” seems like a fitting slogan for the current scenario and car subscription services have been gaining traction of late. Until recently, the alternatives to ownership were short-term rental or leasing, both of which were unattractive from a consumer’s perspective. But car subscription services are an attractive proposition as they offer individuals access to a suite of cars for an all-inclusive price. With rising interest from consumers and investors alike, the car subscriptions market is estimated to become a US$ 30 billion to US $40 billion market in the next 10 years, according to BCG. So what has led to the rising trend of car subscriptions? How can car dealerships jump on this trend? What are the different car subscription models?
What are car subscription services?
Car subscription services allow consumers to access cars by paying a monthly fee which includes costs for repairs, maintenance, roadside assistance, insurance, taxes and registration fees. The commitment period ranges from one month to several months or years. Usually, the longer the commitment, the lower the monthly fee.
Cars subscriptions are fast emerging as an alternative to leasing or rentals, but the differences between them are blurring. Subscriptions are similar to leasing, mainly in the sense that there’s no personal ownership, but terms are generally shorter and more flexible. Unlike subscriptions, insurance and maintenance costs are not included in leases. Another differentiator is that subscriptions allow the individuals to swap cars every month or so, and, in some cases with just a few days' notice.
What are its advantages?
Compared to purchasing a car, car subscriptions are better as they are more convenient, flexible and require minimal commitment. The customer avoids the huge upfront costs of purchasing a car, along with the other hidden costs of ownership. Often the total cost of car ownership is underestimated, as was revealed by BCG’s survey of 7,000 households in Germany which showed people underestimating the total cost of car ownership by more than 50%. Subscriptions are also less cumbersome as they eliminate the tedious and paperwork-laden process of a conventional purchase.
Subscriptions also make it easier to try out new brands or types of vehicles such as EVs and eliminate the financial risks associated with a long-term commitment for an asset that depreciates quickly.
Why are car subscription services popular now?
According to Bain & Company’s survey of 1,500 automotive consumers in 2020, 64% of Chinese consumers said they were likely or very likely to consider getting a car subscription with their next vehicle purchase, similar figures for the US and Germany were 30% and 21% respectively. There are multiple factors that have led to the rise of car subscription services-
- • Pandemic: The pandemic forced commuters to stay away from public transit and shared mobility modes and seek the safety of private vehicles.
- • Buying and leasing: Buying and leasing cars come with their own restrictions. Buying involves significant upfront costs, tedious paperwork, and the purchasing process itself is slow and complex. Leasing comes with longer commitment periods and severe cancellation fees.
- • Need for car ownership: Car ownership could become a thing of the past as the younger generation no longer view cars as the status symbol or all-consuming aspiration it was just a generation ago. Millennials and Gen Z are accustomed to subscription services, and car subscription often fits better into their personal budgets.
What are the different car subscription models?
A variety of subscription models have cropped up over the years. Some providers offer multiple models, brands and types, while others, such as OEMs, offer just single brands. Some providers specialize in vehicle segments: internal combustion engine (ICE) cars or battery electric vehicles (BEVs), premium cars or mass-market variants. When it comes to swapping cars, some are flexible while some aren’t. Some plans allow changing a car every few days- sedan on weekdays and SUVs on weekends. Other plans limit exchanges to a certain number per month or per year. There are also plans that let users upgrade their cars when new models become available.
Currently, the monthly fee ranges from US $500 a month and above based on a number of factors such as the residual cost of the vehicle, the garage location of the vehicle, and additional insurance options.
According to Bain & Company, the winning subscription model involves striking a balance between consumer preferences and financial feasibility across the following elements:
- • Ability to switch vehicles (or not)
- • Length and flexibility of the contract
- • Age of the cars offered
- • Pricing models
Who are the major players in this segment?
The major players in this segment are classified into three groups, namely- Original Equipment Manufacturers (OEMs), traditional downstream entities, and mobility platforms and startups.
OEMs were among the first to offer car subscriptions. Car subscription fleets offered by OEMs are usually brand new and come with a suite of perks and other concierge services, and so they are offered mostly by more premium automotive OEMs. Examples include Audi on Demand, Lynk & Co, and Porsche Drive.
Traditional downstream entities can further be broken down into dealerships, rental and leasing companies. Examples for rental and leasing companies include Hertz My Car and ALD Automotive, respectively.
There are many startups and platforms offering car subscription services examples include AutoScout24 and Cluno, among others.
How can car dealerships jump on this trend?
Dealerships have always been the closest to the customer, both B2C and smaller B2B customers. As the conventional channel for car sales, they have brand recognition and their own profitable service and maintenance operations. In general, dealerships view subscriptions as an additional or supplemental source of revenue. Subscriptions could be the ultimate test drive, an avenue to attract future buyers who can try new models at no risk. So getting subscriptions right is important now more than ever.
One of the ways to get it right is by creating an attractive user interface and a smooth user experience. Dealers must also build the back-end software and tools for operations and administrative processes. However, setting up an own car subscription platform and integrating it into an existing dealership system means significant investments for car dealers. But what if there was a plug-in solution offered by automotive industry experts that can help dealers to get started with this new business model fast and easy. Enter Carve8 — the car subscription specialist.
Advantage to dealers-
- 1. Discover new target groups: More and more customers want greater flexibility in choosing their cars. A car subscription is a perfect way to reach new target groups and maintain long-term customer relationships.
- 2. Low entry-barrier: With minimal set-up costs, you can implement your own car subscription model in the twinkling of an eye!
- 3. Your branding, your prices, your vehicles: You are the professionals for your market and your customers, which is why you decide on branding, product and pricing. We take care of the rest as your car subscription experts.
- 4. We take care of the platform and the process in the background: Thanks to our expertise in the automotive industry, we are very familiar with the digital infrastructure of car dealers. We integrate the car-subscription platform fast and easy into your existing systems and on your website,
- 5. 100% digital and flexible: From car selection with relevant filter functions, registration and verification, right through to the processing of a contract, credit check, billing and payment – it's all 100% digital. For us, digitization is the logical answer to customer requests for more convenience in sales.
Carve8 is a company of the 1886Ventures - the next Technology Venture Group. Originally born as Mercedes-Benz Flexperience, a project of the former corporate incubator of Mercedes-Benz, Lab1886, the platform was developed together with automotive sales experts.
It was piloted at eight car dealers in four countries and has been continuously developed since 2018. After the transformation of Lab1886 into the open innovation platform 1886Ventures in December 2020, Carve8 became an independent white-label car subscription expert with sales know-how in the premium segment.
Subscription models can become profitable given that companies design and execute them well, and as the market matures, players and subscription models will evolve. With the increasing acceptance of online services and subscription-based models, it is possible that subscriptions will likely emerge as one of the future pillars of car ownership.