Subscribe instead of buy – what has long been customary in the software and entertainment industries has made its way to the automotive sector. But are car subscriptions a one-day wonder or a sustainable development? How does the average driver react to these offerings? And what does this mean for automotive manufacturers?
Would you want to keep your smartphone for eight years before purchasing a new one? For most people, this sounds very unappealing. However, when it comes to cars, in the US, the average length of ownership is 8.4 years, a recent study found. The reason for this? Costs, probably. In the oft-dubbed subscription era, car manufacturers are shifting their focus to a new type of customer: one who demands more flexibility and, at the same time, is more open to sharing. To avoid being left behind by the competition, manufacturers are expanding their offering.
Convenience at fixed costs
One business model that can make the dream of regularly driving a new car come true is car subscription. Following the example of streaming services such as Netflix and Spotify, customers pay a fixed monthly fee and have their pick of a brand’s different models, which they can exchange for newer models at previously specified intervals.
Unlike car sharing, users don’t rent vehicles for minutes or hours, but months. And in contrast to car leasing, subscribers aren’t bound to a contract for many years. There is also no down payment, and the costs are predictable. For a fixed monthly rate that includes items such as insurance, maintenance, repairs, tire changes, insurance, and taxes, car subscription users have the option of always driving a new car, which they can book online and get delivered to their front door and, if necessary, have picked up again and swapped for a replacement vehicle.
Expensive and rare
The upside for customers is obvious: cost transparency, flexibility, and convenience, just to name a few. The downside: higher costs compared to more traditional models like buying or leasing.
For instance, Volvo’s subscription service Care by Volvo starts at 700 US dollars a month for the 2019 S60 or 2020 XC40 – and other brands are even more expensive. The cheapest plan from Mercedes-Benz Collection is 1,095 US dollars per month, and at the high end, Porsche Passport offers access to a pool of luxury vehicles for 2,000 to 3,000 US dollars a month (including unlimited “flips” and concierge delivery). Apart from the hefty price point, access is another major problem for prospective users. In the US, only Volvo offers its car subscription services nationwide; everyone else debuted in select markets.
In Germany, the situation is similar, if not worse. Only a few automobile manufacturers like Audi, BMW, Mercedes, Porsche, Volvo, and General Motors Cadillac offer car subscriptions in very restricted areas like Munich and the Ruhr region. Independent providers like Cluno, Sixt, and Carship perform a little bit better, offering a variety of brands nationwide.
Manufacturers and drivers: Are they on the same page?
The reason most established car manufacturers are at least thinking about introducing subscription models is their target groups’ changing demographic. Younger people living in urban areas don’t attach as much importance to owning their own car. To attract this customer group as well as foster customer loyalty with people who don’t own a car, manufacturers are applying lessons from other industries and offering cars as a service.
But is this something drivers actually want? We recently conducted an extensive survey of German and US car customers who have bought, financed, or leased a new or used car with cash. In addition to purchasing criteria, we questioned participants on their opinions of new mobility trends like electric cars, autonomous driving, and car subscriptions.
Most drivers uninterested in car subscriptions
Our key insights? It turns out that only a certain customer group is interested in car subscriptions and willing to pay for it. The majority of new and used car drivers (nearly 70 percent in the US, 60 percent in Germany) are not really interested in purchasing a car subscription.
Looking more closely at the customer segment interested in car subscriptions, their willingness to pay is higher in the US than in Germany. More than 60 percent of the former are willing to pay more or just as much for a subscription as for their current vehicle, and US customers would pay 12 percent more on average for a subscription model. In Germany, one-third of prospective users are willing to pay more than for their current vehicle, and 50 percent expect the subscription to be cheaper.
Key factors for attractiveness and resistance
Drivers who aren’t interested in car subscriptions listed several reasons for not purchasing the service, namely no particular interest in changing vehicles (US: 57 percent, Germany: 52 percent), control regarding insurance (US: 49 percent, Germany: 56 percent), and expensiveness (US: 35 percent, Germany: 34 percent).
And those interested in subscribing? When asked for the key criteria they value in car subscriptions, drivers in the US named: 1. all costs-inclusive monthly payment, 2. lower capital expenditure, 3. on-demand use, 4. flexible vehicle swaps, 5. monthly renewals, and 6. guaranteed mobility. German drivers prioritized the benefits similarly: 1. lower capital expenditure, 2. all costs-inclusive monthly payment, 3. monthly renewals, 4. guaranteed mobility, 5. on-demand use, and 6. flexible vehicle swaps.
Interestingly, providers primarily advertise regular vehicle changes and short notice periods, which are the major cost-driving parts of their offering. However, as the figures show, customers are much more focused on cost transparency and low capital expenditure, both of which are also already available in classic leasing models.
To sum up, car subscriptions are currently making a lot of buzz. In order to make this a profitable business, OEMs have to focus on the right customer segments and need a tailored offering that balances customer needs and cost drivers.