Automakers have been exploring for alternative business models to diversify their profit streams for years. While pay-per-use models such as car-sharing, ride-hailing, and other mobility modes have grown in popularity, the alternatives to outright ownership have been limited to short-term rental (which isn't always cheap) or leasing, which typically entails longer-term commitments and more restrictive terms.

With the rise of subscription services, from software-as-a-service in Spotify and Netflix, it was no doubt that car subscriptions would emerge

The automobile manufacturing industry is in transition. Customer mobility demands are evolving as new technologies give rise to novel products and services, requiring the industry to rethink its sales processes and explore new concepts. While owning a car is still vital to many people, service-oriented services are projected to rise significantly. Furthermore, the current economic uncertainty is driving customers' need for risk-free, flexible consumption patterns. Automobile OEMs, rental companies, and disruptors are all introducing car subscription plans that give users a great level of freedom. How do these car subscriptions vary from traditional rental, leasing, and financing offerings, and how much of a market do they have?

A Quick Overview of the Car Subscriptions Industry

Since 2015, more than $700 million in venture capital has poured into car subscription startups. Fair, launched in the US in 2016, topped the list in attracting equity funding (at $600 million to date), although eight of the ten startups with at least $1 million in equity funding are based in Europe.  Subscription startups receive less funding than other growing mobility markets, such as driverless vehicles and battery-powered vehicles. However, this is because they do not require equivalent capital commitments to develop new technologies.

The global car subscription market was valued at $3,550.4 million in 2019 and is projected to reach $30 to $40 million by 2030

Some forecasts of subscription market growth envision penetration rates at 20 to 40% of new car sales by 2030—predictions we consider overstated. We estimate the market in Europe and the US could reach $30 billion to $40 billion by 2030—up to 15% of new car sales—based on the volume of 5 to 6 million subscription vehicles. It’s worth noting that a share of this estimate may be served through longer-term rentals and full-service leasing, as the boundaries between these options and subscriptions are blurring.

Europe dominates the market in terms of revenue, followed by North America, Asia-Pacific, and LAMEA. The U.S. led the global car subscription market share in 2019 and is expected to grow at a significant rate during the forecast period, due to the increase in penetration of cars as a service and technological shifts in the automotive industry across the country. 

Europe has the potential to be the greatest market for subscriptions. OEMs have traditionally run new vehicle subscription programs in the United States. Fair, a startup based in the United States, formed its business model around used vehicles. The subscription model has sparked some interest in China so far. Regulations governing license plates and lease requirements stifle innovation, and, perhaps more importantly, vehicle ownership still conveys social prestige.

Beyond simple ownership, a variety of flexible car-use options have arisen throughout the years, ranging from renting to leasing. OEMs and other players—dealers, traditional rental and leasing companies—have already entered the subscription market in Europe and the United States, joining several startups.

Amsterdam-based micro-mobility service, Swapfiets, is an indication that the subscription model is gaining traction in the mobility space. This mobility subscription pioneer now has programs for bicycles, electric bikes, scooters, and mopeds all around Europe, and many more are on the way. And subscription will continue to grow in this industry.

How Car Subscription Differ from Car Rental and Leasing

Car subscription is a new model of ownership with fixed periodic recurring fees that mainly cover the insurance as well as maintenance expenses of the car.

When compared to car ownership, subscriptions are a more appealing option for consumers, as they provide convenience, flexibility, and a low level of commitment

When compared to car ownership, subscriptions are a more appealing option for consumers, as they provide convenience, flexibility, and a low level of commitment. The buyer saves money by avoiding the high upfront cost of an automobile, as well as the numerous hidden costs of ownership. This is a key selling feature because most individuals undervalue the total cost of car ownership.

A survey of 7,000 households in Germany showed that people underestimate the total cost of car ownership by more than 50%

A survey of 7,000 households in Germany showed that people underestimate the total cost of car ownership by more than 50%. Subscriptions also avoid the time-consuming and paper-intensive procedure of making a one-time purchase.

Although subscriptions shares some similarities with car rentals and leasing, the lines between them, especially with leasing, can be unclear sometimes. However, the customer pays a monthly price for a car that includes most or all of the following expenses (excluding fuel): maintenance, repairs, roadside assistance, registration fees, insurance, and taxes. The commitment length ranges from one to several months, or from one to two years or more in yearly increments. Typically, the longer the subscription commitment, the lower the monthly fee.

Customers who pay for a subscription don't have to worry about finding a reliable technician, purchasing new tires, performing maintenance, or inspections

Customers who pay for a subscription don't have to worry about finding a reliable technician, purchasing new tires, performing maintenance, or inspections. Subscriptions eliminate the risk of trying a new brand or type (such as an EV)—and, more importantly, the financial concerns involved with a long-term commitment for an item that depreciates quickly.

Subscription services are not all created equal. Some companies offer a variety of brands, models, and varieties. Some companies (such as OEM subsidiaries) only sell a single brand. Some focus on certain vehicle segments, such as luxury or mass, internal combustion engines (ICE), or battery electric vehicles (BEV). Some, such as Porsche Drive, allow clients to swap for a different type of car at no additional cost—for example, when spring arrives, swapping the SUV for a convertible. Importantly, subscription models have evolved during their limited existence. 

5 Reasons Why Automobile Subscription Model is Successful

The shift to subscription-based solutions beyond software and digital services was accelerated by the change in customer tastes, including diminishing interest in owning physical things. Furthermore, the pandemic prompted many city residents and commuters to abandon public transportation and shared mobility in favor of the safety of private cars. There are a variety of other reasons why car subscriptions are gaining popularity among consumers.

1. Subscriptions provide a low-risk opportunity to experiment with new brands and Electric vehicles

Consumers who are hesitant to try out new brands or battery electric vehicles are more likely to do so through a subscription. Subscribing to Electric vehicles, BEVs, in particular, address an existing disadvantage of ownership: a reduction in resale value due to shorter battery life. The lower the resale value of a car, the closer it is to the end of its battery guarantee because replacement batteries can cost anywhere from $5,000 to $16,000.

2. Ownership is less flexible and perhaps dangerous

Whether you buy the automobile outright, finance it, or lease it, the commitment is long, and leasing comes with steep cancellation fees. The loss of residual value when purchasing a car discourages people from changing their vehicles as frequently as they would like. The individual car owner assumes the risk of residual value, which can be devastating for anyone who buys a car and then loses their job or has other financial difficulties, as many people did during the epidemic.

3. Buying a car the old-fashioned way is time-consuming

Many customers find the traditional car-buying process, at least up to the point of test-driving, to be burdensome. They despise being pressed into making a transaction. The purchasing procedure is lengthy and complicated, and comes with a significant amount of documentation, particularly in the financial section. Transparency in pricing is frequently absent. Because of the industry structure and the patchwork of legislation governing direct OEM sales, notably in the United States, internet purchasing is still a rather limited choice for new automobiles.  In 2020, only 1% of new car purchases was made online

4. B2B customers find subscriptions to be an appealing additional choice

Automobiles are often leased by fleet services and companies that supply vehicles to their employees. Business customers, particularly small and medium-sized businesses, can use subscriptions to easily modify their fleet size based on demand and react quickly to changing business conditions.

5. In many parts of the Western world, car ownership is losing its appeal

For young people, ownership is no longer the status symbol or all-consuming goal it once was.  A study among Baby Boomers and Gen Z consumers showed that while about 75% of Baby Boomers consider owning a car a necessity, only 45% of Gen Z respondents think so. The proportion of 20- to 24-year-olds in the US holding a driver’s license fell from 92% in 1983 to less than 80% in 2018—a more than 10% point decline in one generation People have a more utilitarian attitude toward driving, and surveys reveal that an increasing percentage of people, particularly city dwellers, believe they do not need a car to get around.

The Way Forward

If the subscription business just caters to those looking for a car for a few months, it won't reach full scale. Subscriptions must be considered an alternative to purchasing or leasing. Providers can encourage customers to pick longer subscription periods by offering value (a low price) and convenient, seamless, worry-free service.

Subscription products necessitate a different approach than the typical "hit product" mindset. To achieve that goal, they advocate for innovating with the customer's best interests in mind and structure the company in ways that favor collaboration and responsiveness.

All stakeholders in the automobile industry need to assess the risk and reward in entering the subscription business. For all but startups, they’ll need to evaluate the potential impact on existing sales, recognizing that their core business is facing its own challenges.

To attain viability, stakeholders must find the best way to attract and retain customers and how to maximize this business model to continuously increase their revenue. Step one is to hone the customer value proposition. What do customers care most about? Whittle out the superfluous features or vehicles that aren’t big selling points. Use testing, customer research, reviews, and the agile method of iterating based on customer feedback to continuously sharpen the offering.

Final Thoughts

Although subscription has dominated many business models in various industries,  automobile subscriptions will not stifle the sales of new cars to customers, as their subscription advocates may think. The ability to subscribe, however, will increase future purchases by introducing more consumers to businesses. Subscriptions, above all, meet rising customer demand for all-inclusive, digital automobile services. Hence, automobile subscription is a smart move for every OEM company.. If that’s something you’re looking into, reach out to Chargezen support team, or write to me at success@chargezen.com.