Vehicle profitability as a concept and benchmark is perhaps the key metric to understand when running an automotive subscription business as it ultimately determines the viability of running a subscription business, whether in its infancy or at scale. Without profitability, or a clear path to profitability there will always be a runway that the business is on before cash runs out and/or funding becomes untenable. Thus knowing the drivers behind vehicle profitability, industry benchmarks and also tactics to improve profitability are essential knowledge items for all business owners and operators.
Benchmarks and Reporting
When it comes to understanding benchmarks for profitability, we’ve identified three that we believe are key to consider, monitor and improve over time in relation to both the industry and your own individual business. They are as follows;
- Resell/disposal margin
- Gross profit
- Operating/net profit
This metric seeks to understand what revenue/margin is lost on each vehicle between acquisition and disposal. For example, if you were to purchase a vehicle for $50k and then at the end of its usable life to your business, you sell it for $40k then you’d be losing $10k or selling/disposing at a 20% loss margin. Don’t be disheartened by the fact that there is a loss here when selling the vehicle at the end of its usable life, automotive vehicles after all are a depreciating asset.
What needs to be considered here is what revenue can you earn on that vehicle and at what margin over its usable life to you. If you can earn a net profit (explained below) of $12k then you’ve actually come out profitable on the vehicle over its tenure within your business. As a industry benchmark we are seeing -30% in terms of the resell/disposal margin with a caveat around the asset class - i.e. those vehicles that maintain value better over the course of 1-3 years can attract a better resell margin, and also gross/operating profit as a result.
The gross profit on a vehicle reflects the revenue earned on that vehicle in the time you have it in your business minus the cost of earning that revenue. So for example, if the vehicle earns $50k over its lifetime but it costs you roughly $20k to keep that vehicle usable via servicing, maintenance, insurance, logistics, customer acquisition and staff costs (e.g. customer support) then the gross profit would be $30k.
Within the industry we’re seeing gross profits of 57% with the same caveat as above regarding asset class i.e popular vehicles with less maintenance overhead can have a higher gross profit/margin vs others.
The operating or net profit on a vehicle is similar to the gross profit (as described above) with the exception being that we add in all costs across the business in a blended manner to determine the profitability. This means not only the costs to get the vehicle into a subscription and then usable and utilised but everything else- e..g rent, staff costs, general and administrative etc etc.
Note that this blended cost is an approximation - so for example if a business had 100 vehicles for subscription and the operating expenses were $100k each month, we’d apportion $1k to each vehicle as the operating cost. If then each vehicle was generating $2k in revenue each month the operating profit would be $1k per vehicle. In terms of industry benchmarks we’re seeing 12-20% as operating profit which further strengthens our conviction about subscription being a profitable, sustainable revenue model.
Tactics To Improve Profitability
As you can see from above, the factors around improving vehicle profitability typically revolve around improving the resell margin, keeping the vehicle on the road at a good utilisation and leveraging economies of scale to keep your operating expenses down as you scale beyond your initial vehicle fleet. More in detail below:
Minimising Asset Depreciation
By minimising the depreciation on your assets across their usable lifetime in your business you can ensure that your resell/disposal margin remains as high as possible. Tactics include buying vehicles that have a decent resell value and also disposing of your assets before they compound in the depreciation curve.
Utilisation / Lifetime Value
By keeping a high utilisation and/or lifetime value you ensure that you are generating as much revenue as possible across the usable lifetime of the asset. This can mean discounting where required, having loyalty bonuses to increase the duration of subscriptions and ensuring you can take advantage of subscription demand in a just-in-time manner.
As above, your pricing needs to be tuned enough to ensure subscription demand remains high and your operating profit is positive, Discounting can work in the short term to generate demand and build brand but as you approach maturity its vital that the business hits an inflexion point where pricing drives operating profit.
Economies of Scale
The benefit of scaling when done correctly is that you generate economies of scale. For example, the cost of providing customer experience may be the same at one subscription vs 50 subscriptions and the same as with other components of your business. It is critical that you setup scalable, efficient processes that ensure margin and profit increases as fleet size increases, and doesn’t just maintain.
While the above list isn’t exhaustive, it can be used as a guide on where to focus to ensure vehicle profitability is first reported on, secondly benchmarked and thirdly improved as you and your business gain maturity. As a key driver of the success of your business we strongly suggest investing in people, processes and software that give you this clarity of insight so that you can also ride the wave of automotive subscription.