For years, automakers have been looking for business models beyond car sales to diversify their profit pools. While pay-per-use models—car sharing, ride hailing, and other mobility modes—have become more common, the alternatives to outright ownership have been limited to short-term rental (not always cheap) or leasing, with typically longer-term commitments and restrictive terms.
With the rise of the sharing economy and subscription services, from software-as-a-service to Spotify and Netflix to mobility services, it was only a matter of time before car subscriptions would arise.
Vehicle subscription offerings from OEMs have been around for several years. But the market only recently has begun to gain traction with consumers and investors, as business models continue to evolve and an expanding pool of providers hone their formulas for competing. In 10 years, car subscriptions could easily become a $30 billion to $40 billion market. For many OEMs, the results have been lackluster, yet some startups, particularly in Europe, have fared well. Does this mean car subscriptions are an improbable bet for the automotive industry? Or is it just a matter of time before the business model kinks are worked out? What will it take, in resources, capabilities, and strategy, to turn car subscriptions into a thriving part of the auto retail industry? And how are the different providers poised for advantage?
Car Subscriptions at a Glance
In Europe and the US, OEMs and other players—dealers, traditional rental and leasing companies—have already made their foray into subscriptions, joining a number of startups. So far, Europe remains the largest market by revenues. Venture capital continues to flow in.
The subscription model is showing it has legs in the mobility arena, if Amsterdam-based micro-mobility provider Swapfiets is any indication. This pioneer in mobility subscriptions offers programs for bicycles, electric bikes, scooters and mopeds throughout Europe, and many others are following suit.
How Subscriptions Work
Subscriptions share some characteristics with rentals and leasing, but the distinctions (particularly with leasing) can be fuzzy. (See “Subscriptions Versus Rentals and Leasing.”) Basically, the consumer pays a monthly fee for a car, with most or all costs (except fuel) included: maintenance, repairs, roadside assistance, registration fees, insurance, and taxes. The commitment period varies from one to several months or in yearly increments from one to two years or more. Typically, the longer the commitment, the lower the monthly fee.
The difference between subscriptions and traditional rentals is relatively clear. The services for both are for the most part all-inclusive. Rentals offer ultimate choice, but are typically structured around daily or weekly time commitments rather than a month or beyond.
Leasing is another story. Most leases require a minimum two- to four-year contract and impose stiff penalties for canceling. Many exclude additional services, such as insurance or repairs. However, full-service (or “all-inclusive leases”), more common in certain European markets, cover everything but fuel. They are essentially subscriptions, only with a longer minimum duration. Although customers generally get to configure the car they’d like, choice and flexibility typically end there.
Another way to view the difference is in the way the product is marketed and sold. Subscriptions make car acquisition a modern digital experience—from shopping and comparing to transacting. And consumers deal directly with the provider. In this respect, subscriptions represent an opportunity for OEMs to establish a digital channel for selling to end users. They’re a natural entry point into digital and direct sales.
Interestingly, since subscriptions were introduced, rental and leasing companies have begun to blur the distinctions even further. (See exhibit.) Some leasing companies have moved the terms closer to those of subscription services (in particular, shortening the minimum contract period). At the same time, to hedge against cancellation risk and costs, subscription companies are offering monthly fee discounts that encourage customers to accept longer-term (for example, minimum one-year) agreements.
From the consumer’s perspective, car subscriptions are an attractive proposition when compared with car purchasing, offering convenience, flexibility, and a minimal commitment. The customer avoids the substantial upfront cost of a car purchase, along with the other hidden costs of ownership. (Although some plans involve an upfront sign-on fee.) This is an important selling point, as people generally underestimate 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%. Subscriptions also eliminate the tedious and paperwork-laden process of a conventional purchase. Customers needn’t worry about maintenance, inspections, finding a trustworthy mechanic, or buying tires. Subscriptions eliminate the risk of trying a new brand or type (such as an EV) even more than traditional leases—and more important, the financial risks associated with a long-term commitment for an asset that depreciates quickly.
Subscription offerings are not at all homogeneous. Some providers offer multiple brands, models, and types. Some (namely, OEM subsidiaries) offer just single brands. Some specialize in vehicle segments: premium or mass, internal combustion engine (ICE) cars or battery electric vehicles (BEV). Some, such as Porsche Drive, let customers swap for a different type of car for no extra cost—say, exchanging the SUV for a convertible when spring arrives. Importantly, in their brief history, subscription models have been evolving. The premium-priced, single-brand product (offered primarily by OEMs) that touted the option to swap cars has not gained traction. What is succeeding, at least in Europe, is a different model, one similar to full-service leasing. (See “Three Myths About Car Subscriptions.”)
Through our research, we’ve discovered a few important misconceptions about car subscriptions that both current and would-be industry participants should bear in mind.
Myth #1: Consumers want to swap vehicles regularly. Only one out of four consumers list swapping as a major criterion for buying a subscription. Affordability and cost transparency are much more important. Moreover, the swapping feature and its associated costs drive up the price.
Myth #2: Subscriptions are too expensive. Actually, some vehicles are available for as little as €199 a month, all inclusive. The perception about high cost is largely a leftover from swapping-type models.
Myth #3: Most consumers want month-to-month subscriptions. Month-to-month plans are considerably more expensive, and eight out of ten consumers favor a lower price over a premium experience and features. Many consumers are simply looking for mobility, viewing it as a commodity. Month-by-month subscriptions (which can be canceled anytime) are proving to be in low demand. At this point, providers are offering them primarily for marketing purposes.
Changing customer preferences, among them the waning interest in owning physical products, have been accelerating the shift to subscription-based offerings beyond software and digital services. In addition, the COVID-19 pandemic drove many urban residents and commuters away from public transit and shared mobility modes to seek the safety of private vehicles.
There are a number of other reasons that car subscriptions are gaining consumer interest.
Buying a car the traditional way is tedious. Many consumers find the conventional car-buying experience—at least everything past the test-driving part—to be a hassle. They dislike the sales pressure. The purchasing process itself is slow and complex, and involves a lot of paperwork, especially the financial portion. Price transparency is often lacking. At this point, online purchasing is still a fairly limited option for new cars, mostly because of industry structure and the patchwork of regulations governing direct OEM sales, particularly in the US. (As of 2020, only 1% of new car purchases took place online.)
Ownership is less flexible and can be risky. The commitment is long, whether buying the car outright, financing it, or leasing, and leasing comes with severe cancellation fees. The residual value loss in buying a car discourages people from changing their vehicle as often as they’d like. The individual car owner takes on residual value risk, a risk that can prove painful for anyone who buys a car and then experiences a job loss or other form of financial instability, as many did during the pandemic.
Car ownership is losing its luster in many parts of the Western world. Ownership for young people is no longer the status symbol or all-consuming aspiration it was just a generation ago. 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 percentage point decline in one generation. People have a more utilitarian attitude about driving, and studies show that growing numbers of people (especially city dwellers) do not think they need a car to get around.
Subscriptions are a low-risk way to try out new brands and BEVs. Consumers who might shy away from new brands or battery electric vehicles are more willing to try one out through a subscription. For BEVs in particular, subscribing eliminates a current drawback to ownership: the decline in resale value owing to reduced battery life. The closer a car is to the end of its battery warranty, the lower its resale value, as new batteries cost anywhere from $5,000 to $16,000. Given the rapid pace of improvement in battery technology, however, the cost of batteries will go down.
Subscriptions are an attractive supplementary option for B2B customers. Fleet services and companies that provide vehicles for their employees typically lease vehicles. Subscriptions enable business customers, particularly small and medium-size enterprises, to quickly adjust their fleet size based on demand, and nimbly react to changing business conditions.
The Emergent Ecosystem
As in other segments of the automotive industry, technology has allowed new business models to flourish, creating new opportunities and challenges for incumbents and startups alike.
For automakers, car subscriptions offer a way of getting closer to the end customer and having greater control over the customer experience by offering valuable digital services directly. At a time when consumers’ mobility needs and attitudes are changing so rapidly—and how and where we work is being redefined—that’s an important benefit.
OEMs were among the first to offer car subscriptions. Audi Select (merged into Audi on Demand) was launched in 2014. Other OEM offerings included Care by Volvo, Porsche Drive, Lexus One, Access by BMW (since abandoned), Book by Cadillac (suspended), Mercedes-Benz Collection (since abandoned), Jaguar Land Rover’s Carpe (now Pivotal), and additional services from Nissan and Hyundai. The ecosystem of providers includes two other broad groups: traditional automotive downstream entities (dealerships, rental companies, and leasing companies), and digital mobility companies and startups, such as Fair, Cluno, Drover and Bipi, which have exploited the relatively low barriers to entry with a disruptive business model. Online car marketplaces such as AutoScout24 are tapping into the space via partnerships. Cazoo, the British online car seller, has entered the subscription market by acquiring Drover (in December 2020) and Cluno (in February 2021). (See Exhibit 1.) Cazoo aims to go public on the NYSE via a special purpose acquisition company (SPAC).