August 15, 2018
There’s a lot of buzz around subscriptions as a new ownership model, with various industry pundits forecasting major disruptions for dealers. I see things differently.
I believe there are several major barriers to subscription growth for non-dealers, and opportunities for dealers to thrive, should subscriptions break through as a significant ownership model. Let’s review the two types of subscription models emerging.
In a pool model, consumers purchase access to a pool of vehicles and can switch vehicles depending on the availability of vehicles in the pool. This model resembles a daily rental fleet where the pool owner absorbs the asset utilization and remarketing risk, albeit with less frequent remarketing events, since there is no need to remarket after each owner.
The pool model appeals to consumers who have very divergent vehicle needs, e.g. small commuter car during the week and large pick up on the weekend to pull the boat.
OEM subscription models such as Access by BMW, Book by Cadillac, and Porsche Passport are pool models. Dealers launching subscription models are also pool models.
It’s difficult to find the details of how these pool models work, but OEMs would likely be much more strict on mileage and age restrictions. Dealers, on the other hand, would likely be willing to keep vehicles in the pool longer. For example, an OEM might keep vehicles in the pool up to two years and 24k miles, whereas a dealer might keep vehicles in the pool up to four years or 48k miles.
I envision a world with luxury and non-luxury tiers…but also nearly-new and aged tiers. Less expensive tiers could offer vehicles that are three- to six-years old with up to 70k mile vehicles.
The second subscription model is serial ownership, which is a speed dating version of leasing. Consumers can swap out their vehicle every few months for another vehicle offered by the fleet operator. The fleet operator absorbs the risk of finding a new owner for that vehicle either within its subscriber base or elsewhere.
The only company I know pursuing the serial ownership model is Fair, Scott Painter’s new venture. Fair is basically a flexible, used vehicle lease. The payment on Fair actually goes down over time, encouraging consumers to stay in the vehicles longer. This makes a lot of sense with the lower depreciation curve, switching costs and remarketing costs.
At end of ‘lease’, Fair sends the vehicle back to a dealer for a regular lease remarketing cycle. Dealer has first right to purchase before upstream and downstream remarketing.
The primary barrier for the pool model is driving utilization; actively finding subscription holders or consumers to utilize idle vehicles.
For serial ownership, the primary barrier is the high remarketing cost associated with frequent vehicle turns. For example, in traditional leasing the vehicles turn in 36 months, so the associated $1200 hard and soft remarketing costs amounts to less than $40 per month and can usually be recovered in the next vehicle sale.
If under a subscription model, vehicles turn every three months and similar remarketing techniques are used that would amount to over $400 per month, reducing subscriptions to a “rich person’s toy”, as Edmunds rightly stated.
Under either scenario, dealers can take steps immediately to strengthen their capabilities in four areas that will be critical for subscription success.
Implications for Dealers
Serial ownership is the most likely model to emerge at scale. It is unclear how a pool model is going to improve on the existing daily rental model and places the availability risk on the consumer, undermining the core value proposition.
However, many studies indicate consumers would like to churn vehicles more frequently but are prevented by economics and an unpleasant sales experience. While serial ownership does not inherently fix the economic challenges, it encourages OEMs and dealers to collaborate on finding a solution and does facilitate a frictionless vehicle transfer from the consumer perspective.
Should serial ownership subscription emerge as a viable ownership model, we see dealers, particularly multi-franchised groups, advantaged to provide the service.
First, dealers have more options to drive remarketing costs and utilization by integrating subscription fleets into their used vehicle inventory and loaner fleets. Secondly, multi-franchise dealers can offer subscribers the broadest possible vehicle access. Finally, dealers have the infrastructure to cost effectively service the vehicles over and between subscription terms.
While we see many hurdles to overcome before subscriptions go mainstream, dealers can invest in the core capabilities to succeed should that time come, and doing so will reap more immediate rewards today.