In recent times the automotive industry has seen the development of vehicle subscriptions in many forms. There have been many early adopters to this consumer-friendly ownership methodology to include Volvo, Cadillac, Ford and others. As quickly as this new and exciting methodology was created, we saw several OEM’s cancel or sell their version of the platform creating a sense of disbelief throughout the automotive industry. The rise and fall of subscription services like “Fair” caused additional concern from the automotive dealer body.
Fast-forward into 2020, we continue to see success stories surrounding several subscription platforms. We also have seen record breaking acquisitions/mergers of subscription providers in the early part of this year. Many OEM’s are now revisiting their recent efforts in the subscription space and several other OEM’s have announced a launch of subscription services for their new vehicles. The ever-changing demand from consumers and the flexibility the subscription model provides is why activity has increased lately. Like most new methodologies there are early adopters who embrace the change while many simply reject the opportunity.
The curiosity surrounding subscription services generates many questions from automotive dealers which in turn potentially creates a false narrative about the methodology. Many are surrounding the risk involved or lack of profits within the subscription model. Like most myths there is usually truth mixed in with exaggeration.
Potential Risk Factors
Is there potential financial risk involved with offering subscription services? The answer is yes, the risk involved is similar to the loaner fleets many dealers have today. The liability of personal injury associated with both models would make anyone nervous. We all heard horror stories regarding vicarious liability claims. Truth be known, the risk associated with subscription services are no greater than the risk within your loaner fleet. Most subscription providers work closely with industry leading insurance providers to offer dealers the best possible protection. In some cases, coverage provided by subscription providers are more comprehensive than many dealers have on their loaner fleets.
Additional risk for dealers can also be present when reviewing potential excessive wear and tear on the inventory used for subscriptions. These risk are real yet avoidable with the proper protection designed specifically for subscription models. Most dealers have seen/experienced a consumer who purchases a vehicle and within days were exposed to a pothole that damaged a rim or rendered a tire unrepairable. There is everyday risk when driving a vehicle that can be costly for dealers if not properly covered.
Dealer’s Potential Revenue
Subscription services profitability can be measured in a multitude of ways. A reduction in vehicle cost provides higher turn rate on inventory while providing additional reoccurring revenue streams. All can be accomplished within a subscription model. Providers who offer the flexibility within a subscription model for dealers to set individual parameters for profit while allocating for expenses within the subscription price offer the best solution. There are standard costs associated with subscriptions like vehicle depreciation, reconditioning, floorplan expense, and insurance within the business model. All the expenses associated with subscription services are most likely or should be accrued within the monthly subscription price. How dealers utilize the allocated revenue to offset the appropriate expenses is a matter of self-determination.
It would be easy to brush off subscriptions as another fad in the industry. However, consumer demand continues to grow year-over-year. The repositioning of subscriptions from OEM’s indicates this methodology is not just another fad and should be closely considered by automotive dealers as the future alternate to vehicle ownership. The ability to Position subscription services alongside conventional purchase methods will enable dealers to benefit from the growing consumer interest in subscriptions.