Despite the hype, companies have struggled to turn car subscription services into money makers. An important strategic question continues to orbit the boardrooms of global automakers and other automotive companies: Is there a path to profitability for subscription services?
The data seems to point in that direction. In a Bain & Co. survey of 1,500 automotive consumers last year, 64% of Chinese consumers said they were likely or very likely to consider getting a car subscription with their next vehicle purchase, as did 30% and 21% of respondents in the U.S. and Germany, respectively.
Developing a winning subscription offering will be an important strategic step, especially for automakers. If executed well, it means opportunities to create new revenue streams, market used and electric vehicles, win new customers and strengthen a company’s digital muscles.
The COVID-19 pandemic has provided an opening for companies to hone and scale up their vehicle subscription offerings. The majority of consumers in the U.S., Germany and China say these services are more attractive during an economic crisis, according to Bain’s survey.
The question is: What does a winning subscription model look like? The offerings to date have struggled to gain traction because they’ve mostly involved new cars and often have very flexible contract terms, which implies a high cost for the provider. The result? A niche product that’s prohibitively expensive for most consumers and difficult to operate profitably.
The key to developing a profitable car subscription service is to recognize a few common misconceptions that have held these services back, and redesign them accordingly:
Subscribers want a brand new car. In reality, the vast majority of consumers are open to driving a well-maintained, young (up to three years old), used car through their subscription, according to last year’s Bain survey. Fewer than 15% of consumers in each country said they’d accept only a new car.
Customer preferences are consistent everywhere. Actually, consumer preferences vary between countries and within them, making it difficult to create a one-size-fits-all model. For example, U.S. and Chinese consumers consider a low subscription price the most important factor, while Germans’ top preference is flexibility of the car return.
The subscription has to charge one all-inclusive price. The all-inclusive, fixed monthly rate is certainly popular; more than half of consumers in the U.S. and Germany prefer this payment option, as do 30% of Chinese consumers.
But a significant share of consumers like having flexibility, and many are willing to pay extra for it. In China, 37% of consumers prefer a fully flexible billing model, while 32% of German consumers and 24% of American consumers prefer this option. Many consumers in all three countries said they’d be willing to pay the equivalent of an extra €66 to €109 ($79 to $131) per month for flexible features such as the ability to change cars once per quarter.
Customers’ vehicle preferences are the same for subscriptions and purchases. Consumers appear more willing to branch out with their vehicle choices in a subscription model than they might be if making a traditional purchase. Bain’s survey found that a subscription vehicle plan increases many consumers’ willingness to get a premium brand, a larger car and/or an electric vehicle, but the majority still prefer a brand they know well.
Car manufacturers will dominate the market for car subscriptions. In reality, the race appears to be wide open, though the winners might vary by geography. Many consumers do prefer a subscription to a single car brand: 41% of consumers in China, 40% in the U.S., and 32% in Germany. That bodes well for automakers’ subscription services. But there’s still plenty of opportunity for rental companies and vehicle subscription start-ups. They’re quickly developing subscription plans offering more vehicle-switching flexibility, and they have the ability to price their plans aggressively to grab market share.
One of the overarching takeaways from these five misconceptions is car subscription providers likely will take a page out of the telecommunications playbook: The leading providers will develop a deep understanding of the different needs of their target customer segments and will offer a range of different vehicle subscription contract types to appeal to all groups.
The business models likely to gain the most traction in the coming years are more narrowly focused and not as radical as the original car subscription vision that garnered so much hype. Nevertheless, after years of vehicle subscription services not reaching their full potential, the pandemic has opened a window for companies to rethink these services.
It’s unclear how big of a market this new wave of subscription programs will create. But if companies design and execute them well, they can turn into profitable enterprises that provide a meaningful lift to the rest of the business.
Mary Stroncek, Klaus Stricker and Raymond Tsang contributed to this article. Zayer (pictured above, left), Wendt (pictured, left), Stricker, and Tsang are partners in Bain & Co.’s Automotive & Mobility practice; Stroncek is an associate partner in the practice.