With some exceptions, automakers have struggled with moving to mobility-as-a-service by offering car subscriptions. Some even shut down car subscriptions after debuting with much fanfare—the result of not having a clear understanding of what consumers wanted from a car subscription and underestimating the emotional aspect of car ownership. But three trends could help pave the road to recovery for this business model should automakers choose to seize the opportunity.
Before 2020, younger generations shrugged off the ritual of buying their first car. Surveys showing that Gen Z no longer views car ownership as a necessity have coincided with a decline in young adults holding US driver’s licenses. But attitudes changed as more people saw private vehicles as the safest transportation option during the pandemic. Now automakers have the opportunity to capitalize on a surge in car ownership interest and the accompanying rise in new car registrations among both Gen Z and Millennials—subscription services offer a middle road for the newly car curious who don’t want to rush into full car ownership.
A second subscription opportunity comes from the ongoing computer chip shortage that has squeezed the supply of new cars. With chip shortages expected to last into 2023 and car prices soaring, car subscriptions could be a more cost-effective and safe way for consumers to bridge the gap until their new vehicle is back in stock.
The fast-growing market for electric vehicles represents a third opportunity for the subscription model to tempt more drivers into trying out electric vehicles without having to make a long-term commitment. The subscription approach can prove especially helpful in easing customer concerns over having to deal with battery degradation and replacement in electric vehicles.
The prize for automakers is a car subscription market that is rising in Europe and could reach an estimated $30 billion to $40 billion in Europe and the US by 2030, according to BCG analysts.
Lessons from the Road Already Traveled
Automakers must steer carefully with subscription models to avoid the potholes of the past. Still, there are important lessons from failed early subscription ventures to keep in mind.
- Pricing must be competitive: Early automaker subscriptions were often more expensive than a car lease for the same vehicle models. Automakers need to ensure the cost of the subscription is lower than the total cost of ownership for that duration as a first step to making this an attractive option.
For example, a Bain survey found that consumers in the world’s largest automobile markets, China and the US, chose “overall low price” as the most important benefit from a subscription service.
- Find a balance on flexibility: Some automakers designed their subscription services around providing the flexibility to swap car models at any time. But a 2020 Bain & Company survey found that just 25 percent of all consumers listed flexibility to change cars as a major criteria when considering a subscription service.
Similarly, many automakers have assumed that most consumers want the flexibility of being able to pay month by month so that they can cancel at any time. In reality, customers seem to prefer lower monthly prices over having such flexibility.
- Turn dealers into partners: While it’s tempting to jump straight into the direct-to-consumer market, automakers may pay a high price for cutting out the dealerships that have traditionally dealt directly with buyers and customers. Some automakers have already faced lawsuits in certain US states after attempting to sidestep dealerships through subscription services.
A more collaborative approach involves enlisting dealerships to act as sales agents and customer service representatives for new car subscription services. Dealerships have decades of sales and customer experience, along with having their own service and maintenance infrastructure to support car subscription customers.
- Don’t hit the brakes early: Automakers should avoid abandoning their subscription services on the side of the road if initial success eludes them. Customer feedback and continual iteration on plan features can help create viable subscription models in the long run—subscription leaders in other verticals such as software as a service (SaaS) did not always get it right the first time around.
Care by Volvo is an example of how to keep iterating your way to success. After launching the service in 2017, Volvo stuck with it and continuously updated the package offerings to make the subscription more appealing—notably by expanding the selection of vehicle models and by allowing customers to cancel after four months instead of being stuck in a two-year contract.
Automakers must also educate potential customers on why subscription packages can provide a better alternative than short-term rentals, leasing, or full ownership.
The Subscription Road Ahead
If their value proposition is right, subscriptions can perform as full-featured trials for car ownership in exchange for a relatively low monthly fee. If automakers fail to innovate, they risk giving over the wheel to rental car companies and new mobility startups that stand closest to automotive consumers.
But if they succeed, automakers can pave the way for converting temporary subscribers into ride-or-die customers—91 percent of customers who signed on with Care by Volvo in its first year of UK operations have been new to the Volvo brand.
The Takeaway
- With younger consumers taking new interest in personal vehicle options, subscription models offer an alternative for automakers to meet demand for mobility-as-a-service.
- The car supply crunch provides a temporary window of opportunity for subscription services, while the shift toward electric vehicles offers a longer-term opportunity.
- Car subscriptions must be competitively priced compared to alternatives such as car ownership, leasing, rentals, ride hailing, and ridesharing.
- Automakers should consider partnering with dealerships or even rental companies to support both subscription sales and customer service requests on the ground.
- Play the long game by using customer feedback to improve subscription offerings instead of giving up too early.
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