The automotive industry has experienced a significant shift in recent years with the advent of the car subscription business model. As more customers seek flexibility and convenience, car subscriptions have emerged as a viable alternative to traditional car ownership and leasing. This article examines the profitability of the car subscription business model and explores the factors that contribute to its success.
Car Subscription Profitability
Typically, the question of profitability is posed in two contexts:
Is car subscription profitable as an independent business model?
A typical gross profit margin for any given vehicle utilised on subscription is anywhere between 25-35% on revenue earned.
This is calculated by considering the revenue components:
- Subscription Fees: This is the recurring fee paid by the subscriber.
- Add On Costs: These are variables fees paid by the subscriber such as additional mileage costs.
And deducting the following recurring costs to the business:
- Vehicle Depreciation: The apportioned value that the vehicle depreciates by while utilised on subscription.
- Vehicle Insurance: The apportioned cost for insuring the vehicle during the subscription period.
- Interest Payments: Any interest payments incurred for finance that may be applicable to the vehicle.
- Vehicle Maintenance: An apportioned cost for routine maintenance and repairs.
At a fleet level, the profitability of car subscription is dependent on a number of factors including customer retention, pricing strategy, fleet utilization and cost control.
How does car subscription profitability compare to incumbent sales models?
When comparing the profitability of car subscription with other incumbent retail sales models, it's important to understand that an apples-to-apples comparison is not usually appropriate.
While it may take longer for a car subscription model to generate the same profit margin as a traditional sale, there are various factors that can contribute to the overall profitability of this model. These include recurring revenue, higher customer lifetime value, lower customer acquisition costs, better inventory management, ancillary revenue, and adaptability to market trends.
Similarly, for a more traditional sales model we must also consider factors such as fleet acquisition costs, stock turn, holding costs and seasonal demand which will ultimately affect profitability performance.
An Ecosystem Approach to Car Subscription
Instead, with consumer demand driving growth of the car subscription industry, it's important for automotive incumbents and disruptors alike to see car subscription as a complementary business model that can lift the overall customer and revenue opportunities for a business.
This means understanding the strategic value that car subscription can bring to an automotive incumbent, this includes:
- Attract new customers: Car subscription services can appeal to a broader customer base, including those who may not have considered a particular brand or model previously. Subscription services can provide an opportunity for customers to try out a brand or a specific vehicle without the commitment of ownership, potentially leading to increased brand awareness and new customer acquisitions.
- Lower the barrier of entry: By offering a monthly fee that includes various services and amenities, car subscription services can make it easier for customers to access a brand or vehicle they might have considered too expensive or unattainable. This can lead to an expanded customer base and increased interest in the brand.
- Source of used car inventory: As vehicles are returned at the end of a subscription period, they can be sold as certified pre-owned (CPO) vehicles, creating a source of high-quality used car inventory. This can help the brand maintain control over the resale process and ensure that used vehicles are in good condition, ultimately benefiting their reputation and resale value.
- Keep customers in your aftersales network: By including maintenance, repair, and other aftersales services in the subscription fee, car subscription services can help brands retain customers within their service networks. This can lead to increased long-term revenue from parts, service, and maintenance.
- Make electric cars more accessible: Car subscription services can make electric vehicles (EVs) more appealing and accessible to a wider audience by reducing the upfront cost and providing bundled services such as charging infrastructure access. This can contribute to a brand's overall EV sales and help promote the adoption of sustainable transportation options.
- Strengthen customer loyalty: Offering a convenient and flexible car subscription service can increase customer satisfaction and foster brand loyalty. Happy customers are more likely to recommend the brand to others and choose the same brand for future vehicle needs, leading to increased long-term revenue and customer retention.
- Alternate path to purchase: Car subscription services can act as a stepping stone for customers who may initially be hesitant to commit to purchasing a vehicle outright. After experiencing a brand's vehicles through a subscription service, customers may be more likely to transition to ownership, either by purchasing the vehicle they were subscribing to or choosing a new vehicle from the same brand.
- Meet sales volume targets: In situations where sales volume targets need to be met, car subscription services can help brands reach their goals by offering an additional avenue for placing vehicles in customers' hands. Subscription services can potentially increase the overall sales volume and contribute to the brand's market share.