An Analysis of Subscription Services in the Automotive Industry
April 14, 2021
The subscription service business model has been around for decades. In the past, there wasn’t much for consumers to subscribe to besides newspapers and magazines. But these days, there are subscription services for food, clothing, cosmetics, TV shows, music, workout classes, and even razor blades. As a result, consumers are often subscribed to more services than they can count.
The subscription service business model is becoming increasingly popular in many different economic sectors, including the automotive industry. How is the automotive industry using the subscription service business model? Is offering a subscription service a profitable venture for automotive companies?
An Overview of the Subscription Service Business Model
Most businesses use a transactional business model, which involves charging consumers for the products or services they use in a single transaction. But a subscription business model does not involve a single transaction. Instead, consumers pay a fixed amount on a regular basis in order to access all of the products or services offered by a company. Most subscription-based services charge consumers these recurring fees either monthly or annually.
Consumers who pay this recurring fee are known as subscribers. As long as they continue to pay the fee, they can continue to access all of the products or services that the company has to offer. But if they stop paying the fee, they are no longer subscribed, which means they can no longer access these products or services.
There are three main types of subscription services: replenishment, curation, and access. Replenishment subscription services provide consumers with recurring deliveries of certain products such as diapers, razors, or dog food.
Curation subscription services provide consumers with a variety of new items or personalized experiences. For example, consumers who sign up to receive subscription beauty boxes will receive a curated selection of cosmetic items every month.
Access subscription services give subscribers exclusive access to lower prices, special perks, or certain products or services. Netflix and other streaming platforms are perfect examples of access subscription services.
All three types of subscription services are popular among consumers, but the automotive industry primarily uses the access subscription service model.
Subscription Services in the Automotive Industry
The automotive industry currently uses the subscription service business model in these two distinct ways:
- In-Car Services
- Car Ownership
Many automotive manufacturers now use the subscription-based business model to offer consumers access to exclusive in-car services.
One example of this type of subscription service is Mercedes Me Connect, which is offered to consumers who own Mercedes-Benz vehicles. Car owners who subscribe to this service will gain access to various services, including:
- Remote engine start
- Remote door lock/unlock
- Remote diagnostics
- In-vehicle access to certain apps, including Yelp and Google
- Vehicle locator
- Updated vehicle data, including fuel levels, tire pressure, mileage, and more
- Smartphone-to-car communication
Mercedes-Benz also offers several other types of subscription services, including Mercedes Me Entertain, which gives subscribers access to iHeart Radio and an in-vehicle WiFi spot, and Mercedes Me Secure, which offers automatic collision and alarm notifications, emergency call capabilities, and more.
Each of these services has its own monthly fee. For example, Mercedes Me Secure is $199 per year and Mercedes Me Entertain is $18 per month. Mercedes-Benz owners who don’t pay these subscription fees cannot access these services, which means they miss out on a lot of the features that their vehicle has to offer.
BMW also plans on launching a subscription service that allows consumers to access certain in-car features. Last year, the automotive manufacturer revealed that all vehicles would be designed with certain add-on features such as heated steering wheels and adaptive cruise control. However, BMW owners will only be able to use these features if they pay a monthly subscription fee. BMW owners could activate these features at any time by subscribing to this service.
This subscription service would allow BMW owners to pick which features they want to pay for and which they don’t need. But the announcement was met with considerable backlash from consumers who were not receptive to the idea of paying for features that are built into a vehicle they purchased. These consumers believe the purchase price of the vehicle should cover the use of all of its features.
In the past, automotive consumers who wanted to use a vehicle for an extended period of time typically had to choose between buying or leasing one. But a third option is now available to these consumers: subscribing to a car service.
Automotive consumers who subscribe to this type of service must pay a monthly fee in exchange for unlimited access to a specific vehicle. Subscribers don’t technically own the vehicle, but they can use it as much as they would like while subscribed to the service.
Subscribing to a car service may sound similar to leasing a car, but there are several differences. First, a car subscription service is far more flexible and typically offers shorter terms than a lease.
Second, a monthly subscription fee covers more than just the use of the vehicle. In most cases, it also covers insurance, roadside assistance, and maintenance services. This makes access to a personal vehicle far more affordable for the average automotive consumer.
Some car subscription services also give consumers the chance to switch vehicles at any time during their subscription. For example, a consumer may want to drive a SUV during the week, but switch to a sporty sedan or convertible on the weekends. All of this would be covered by the monthly fee.
A number of automotive manufacturers have already launched car subscription services. BMW launched its subscription service, Access by BMW, in select markets in 2019. Mercedes-Benz also tested out its own subscription service in Nashville, Philadelphia, and other major markets in 2019.
Several automotive manufacturers have launched national car subscription services, including Volvo. Automotive consumers who subscribe to the Care by Volvo service pay a monthly fee to use various Volvo models, including the XC40, V60, and S60 sedan.
There are also a handful of startup companies and automotive dealerships that offer their own car subscription services. PrimeFlip gives subscribers in New England access to a wide range of sedans and SUVs, whereas Revolve only offers subscriptions to luxury vehicles. Consumers who subscribe to one of these services aren’t limited to vehicles from a specific manufacturer, so they can enjoy the benefit of driving various makes and models.
The cost of a car subscription can vary greatly depending on the service, type of vehicle, and location. For example, subscribers to Care by Volvo pay anywhere from $600 to $875 depending on what type of vehicle they want to use. But it can cost nearly $1000 per month to participate in Audi’s luxury car subscription service.
Signing up for a used car subscription service is much more affordable. Members of these services can use a reliable used vehicle for as little as $150 to $200 per month.
What Are the Benefits of the Subscription Service Business Model?
There are many benefits to using a subscription-based business model to generate revenue. First, this type of business model gives automotive companies the opportunity to establish a regular and recurring revenue stream. Monthly or annual subscription fees are guaranteed revenue for these companies. The more subscribers the company has, the more revenue the company can generate through monthly or annual subscription fees.
Having a regular, recurring income stream can make it easier for automotive companies to evaluate their financial health and manage their inventory. It can also make it easier for companies to rapidly expand since they know they can depend on this regular income to finance their growth.
Companies can build stronger relationships with their customers using a subscription service business model, too. The relationship between the subscriber and company could last for months or even years, depending on how long the subscription lasts. This gives companies the chance to turn each subscriber into a loyal lifetime customer.
A subscription-based model could also lower the barrier to entry for a company’s products or services. For example, consumers may not be able to afford to pay $20,000 for a vehicle in a single transaction, so this price might be a barrier to entry. But paying a few hundred dollars per month for access to a vehicle is more affordable, so even if they end up paying more over time, this subscription price lowers the barrier to entry.
Using a subscription model can also increase a company’s return on its customer acquisition costs. The longer a customer remains a subscriber, the higher this return will be for the company.
Companies can generate even more revenue from their subscribers by offering upgrades or add-on features. Since subscribers already have a strong relationship with the company, they are usually more receptive to upselling. It’s also easier to reach these customers since they already provided their contact information when signing up for a subscription.
These are some of the many reasons why so many businesses have adopted the subscription-based business model.
What Are the Drawbacks of the Subscription Service Business Model?
There are some downsides to the subscription business model, too. Some companies that want to use the subscription-based business model must make a substantial initial investment in order to provide customers with products or services that are worth the subscription fee. Smaller companies may not have the resources to make this investment. However, this typically does not apply to the automotive industry.
Companies must also commit to investing in adding more value to their subscription services on a regular basis. If they fail to continue to add value, consumers may lose interest in the service and end their subscription. This is especially important for companies that offer month-to-month subscriptions that allow consumers to opt-out of their subscriptions at any time.
The subscription-based service model is also becoming increasingly popular, which means companies must be prepared to deal with a lot of competition. This could make it more difficult to acquire new customers and secure a large market share.
Another drawback of subscription services is that small issues can easily turn into major problems. Every subscriber receives the same product or service, which means if there is an issue with the product or service, it doesn’t just affect one customer, it affects the company’s entire customer base. A minor glitch in the system, for example, could disrupt service for thousands of subscribers.
These are some of the many challenges that companies must prepare for before using a subscription-based business model.
Are Automotive Subscription Services Profitable?
There’s no doubt that the subscription service business model is becoming increasingly popular, especially in the automotive industry. But is this business model profitable for automotive companies?
Most companies need to make a substantial initial investment in order to launch a subscription service. However, automotive manufacturers already have everything they need to launch these services.
For instance, manufacturers already have countless vehicles at their disposal that they can offer to consumers via a subscription car service. They also already have the technology to offer consumers the option to subscribe to digital services such as remote engine start and remote lock and unlock. Because of this, automotive manufacturers may not need to generate a lot of revenue in order to turn a profit on these subscription services.
But how much revenue can subscription services generate for automotive companies? It depends. Mercedes-Benz, for instance, sells about 2.5 million passenger vehicles per year. It’s unlikely that every consumer who purchases a vehicle would subscribe to the Mercedes-Benz Me services.
But say half of these new car owners subscribe to the Mercedes Me Secure service, which costs $199 per year. This would generate nearly $250 million in revenue per year for Mercedes-Benz, which is a small fraction of the company’s annual revenue of over $110 billion.
Based on this example, it’s clear that Mercedes-Benz cannot rely solely on subscription services for revenue. But the company can use these services to generate a substantial amount of additional revenue every year.
This is just one example, but it illustrates how automotive companies can benefit greatly from launching subscription services. There’s no question that automotive companies can profit off of using the subscription-based business model to offer consumers exclusive services or short-term access to vehicles.