Defining Car Subscription as Short-term Contract Hire to Capture Demand
Car subscription has emerged as a viable solution to the much-publicised shift in demand from car ownership to car “usage”. Unfortunately, wider uptake suffers from a lack of definition of the specific product that will ultimately capture demand.
To succeed in car subscription, prospective suppliers must better define the product and the price point that subscribers actually want. Only then can they effectively align resources to deliver an attractively priced product.
Car Subscription - Part of the car-as-a-service (“CaaS”) economy, subscription provides the use of a vehicle and a bundled suite of services for a proscribed term at a fixed monthly fee. As shown below, the product sits firmly between daily rental and those longer-term leasing products that have come to dominate car sales.
However, it is precisely that product "gap" that causes confusion. Is subscription a long rental or is it a shorter-term lease? More than just semantics, definition of the successful subscription product impacts alignment of promotional, operational and fleet-related resources that are required to meet customers' expectations.
Where is the Demand? – The success of car subscription to date confirms that customers are willing to pay a premium for flexibility. However, a number of observations indicate that there is a limit both to how much premium a customer will pay and how much flexibility they actually want.
Consultants Oliver Wyman identify two separate pools of car subscription demand in both Germany and the US, each defined by the customer’s willingness to pay. While a few luxury manufacturers identify a certain level of demand for a super-premium, super-flexible product at a premium price, the chart below indicates a much larger opportunity seeking a lower price point based on much more "conventional" cars.
In their 2020 interview with Car Dealer Magazine, Drover executives characterised their average subscription term to be 13-15 months. A quick look at market pricing provides some perspective on their customers' demonstrated choice.
Month-to-month subscription of a brand-new Peugeot 3008 Allure (as of February 2021) will cost about £950/month including fees, maintenance and insurance. Drover’s pricing compares quite favourably to recent quotes for the 30- and 90-day rental of a Hyundai Tucson (or similar) vehicle from Avis Rent a Car (each in excess of £1,100/month).
However, by committing to 12- and 24-month fixed-terms, Drover subscribers dramatically reduce cost to as little as £525/month and £490/month respectively. Pricing for these arrangements compare quite rationally with 24-, 36- and 48-month personal contract hire arrangements from Nationwide Vehicle Contracts (each adjusted to reflect fees, maintenance and insurance).
From these two complimentary observations, the opportunity in car subscription seems to lie in:
Fixed-term arrangements (9-12 months) for
Conventional mid-priced cars
At a price point related to that asked for longer-term contract hire.
Conclusion- Subscription demonstrates potential to have a meaningful place in the retail automotive sector. While customers may initially be attracted to the uber-flexible "month-to-month" form of car subscription, the greater opportunity seems to lie in demand for the "fixed-term" form, more analogous to those contract hire leases that have come to dominate new car sales.