Tech-driven subscription models are turning the automotive industry upside down

By Jayne Scuncio December 26, 2018

This story was originally published in the November/December issue of Smart Automotive Magazine. It was written by Iman Ghodosi, VP and GM for APAC, Zuora.

 

The subscription model is revolutionising the way many industries operate, with the emphasis shifting from selling products and services to building direct and ongoing relationships with customers that now expect ‘more’. The Australian public transport industry is an example of this, with both the Melbourne City Council and the Adelaide City Council announcing recently that they are considering a monthly transport subscription fee for a combination of public transport, bike share and ride share services. With subscription models already being adopted for public transport initiatives, it is not difficult to see why the Australian automotive industry and car manufacturers are now embracing the benefits of subscription as well.

 

It’s already happening overseas

 

As Zuora’s CEO and cofounder, Tien Tzuo states in his new book, SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future – and What to Do About It, subscription services within the automotive industry will be as simple as choosing a mobile phone plan – you pick your model online, select a 24 or 36 month plan, add your upgrades and then head to the dealership to pick up your vehicle. And best yet – there’s no need for loans, price haggling, registration or insurance.

 

Key players in the automotive industry today are already offering subscription services overseas – including most name-brand auto manufacturers. BMW is currently testing out a subscription service in the US, allowing customers to trade vehicles as regularly as they want over a month-long period. Other automobile companies such as Cadillac and Volvo are actively testing subscriptions — and in a recent ad campaign in the US, Volvo even encouraged customers not to buy cars but to subscribe instead. Cadillac is offering the BOOK by Cadillac subscription system, in which consumers can rent up to 18 different cars per year. And Volvo already allows US based customers to subscribe to its compact SUV – the Volvo XC40 – for $USD600 per month which includes insurance, maintenance, wear-and-tear, 24/7 customer care and additional concierge services like the ability to have packages delivered to the car. For consumers, it’s a better option than a traditional lease because a lease limits users to one car for a fixed period of time, whereas a subscription allows customers access to frequent upgrades.

 

So what are the benefits of subscription models?

With a general lack of interest in car ownership being shown amongst millennials, car manufacturers are now competing with affordable ride-sharing services like Go-Get, and a generation of consumers who are more ‘practical’ than they are auto-centric. As manufacturers look to aggressively compete against ride-sharing companies now eating into their market share, subscription-based models for the automotive industry are taking hold in Australia and elsewhere. For both global and local manufacturers, subscription services mean more predictable demand, as well as the ability to act on the direct insights into customers that a subscription model enables. For consumers, this could potentially mean earlier or increased access to international car models, greater choice of vehicles for different occasions, and in many cases, removal of maintenance costs altogether.

 

Meanwhile, the introduction of subscription car services will no doubt create disruption and opportunities for those industries reliant on the automotive industry, i.e the insurance and maintenance industries. Such industries will also need to reevaluate their business models to cater to their changing markets.

 

The current model isn’t profit-friendly

 

The current business model for the automobile industry relies on franchised independent dealerships selling cars to individuals and businesses, where profits are reliant on the continued sales of cars. However, there is a lost opportunity in the volume of vehicles often sitting by idly, waiting to be purchased and therefore not contributing to profits. This business model is fast experiencing disruption, as consumers  begin to value convenience and access to upgrades over ownership.

 

There has also been a shift from consumers wanting to physically own products, to wanting to be able to consume products as a service in order to gain more value. Specialists have found that people are spending more money than ever on technology, but this focus has been on online subscription services, rather than on physical technological devices. For car manufacturers and retailers, it is no longer just about selling cars from the lot – the emphasis is now on transporting the customer and making this journey as personalised as possible.

 

Consumer demand is driving the change

 

The automotive industry is undergoing extensive change with the growing development of electric vehicles, self-driving vehicles and driver-assistance systems altering the way people move around their environments. The effects of electrical vehicles will be felt on the automotive industry by as early as 2020, with 86% of consumers already looking for driver-assistance systems to increase safety. The desire for consumers to be able to use products as a service and increased technological advancements in the automotive industry are likely to fuel change towards a subscription-based model.

 

Subscription services are attractive to consumers compared to traditional ways of purchasing products, with the main reasons being flexibility and convenience. Consumers also like smaller up-front investment costs and a reduction in the overall cost of using the product, two additional benefits afforded by subscriptions that ownership can’t match. Plus, consumers enjoy being able to adjust capacity and cancel their subscriptions with relative ease. For car-owners, this is particularly important due to the substantial debt and maintenance costs that come with owning a vehicle. Furthermore, paying a periodic (usually monthly) recurring subscription fee can increase the perceived benefits and pleasure associated with using a product.

 

Subscription models for the automotive industry can offer customers a flexible and convenient middle-ground between owning a car and using a ridesharing service. They can also provide consumers with greater choice over what vehicle they want to drive. This opens up drivers to a world of affordable luxury, allowing them to move around the urban environment in style. No longer a pipe dream, consumers can rent out their ideal car at a fraction of the cost of buying it outright.