Innovation and production cycles must progress ever faster in order not to jeopardize competitiveness1. Out of this need, new concepts and process models are being developed to respond to the changing market conditions.
Revolution Subscription Models
Subscription models are becoming increasingly important. The market potential/volume has more than doubled in recent years 2. The reason: modern consumers are placing less and less emphasis on the possession of goods and are increasingly focusing on the use, i.e. the consumption of goods - i.e. use instead of own. The flexibility, freedom and individuality of the offer are particularly important here3.
The automotive industry has also recognized the trend towards subscriptions. Subscriptions in the automotive industry work in the following way: Customers can book the vehicle they want, depending on the occasion and their personal needs, as long as they have an active subscription. Responsibility for maintenance or insurance, for example, lies with the car manufacturer4. Global players such as BMW, Porsche and Lexus already offer their customers subscription models. Many OEMs report that this has enabled them to attract new customers in particular. However, switching to a subscription-based pricing model is not as easy as it initially sounds. Car manufacturer Cadillac, for example, recently had to pause its subscription model in order to reorganize financing and sales via specialist dealers. However, with the following tips, car manufacturers can easily and safely switch to a subscription model in order to remain competitive:
1: New accounting principles
The first step is for car manufacturers to realize that billing for subscription models is based on usage. This means that the focus is no longer on the number of units sold, but on the kilometers driven, for example. In practice, a fusion of tiered prices, such as monthly fixed costs, and usage-based prices - i.e. miles driven - has proven successful. In fact, companies that include usage-based prices in their billing generally grow 1.5 times faster than companies that use traditional billing. For this reason, monitoring mileage is an essential part of the pricing model.
2: Reseller channels
Another aspect to consider is the reseller channels and their increasing importance. Customers demand a high degree of flexibility, which leads to regular interaction between specialist dealers, customers and service providers. By introducing a subscription model, car manufacturers are therefore developing a service provider relationship with their end customers. At the same time, end customers have no contact with the manufacturers of their vehicles when making conventional car purchases.
3: Smooth customer service
High-quality and simple customer service is an essential success factor, as the power of customers over the success of a company is constantly growing. Conversely, poor customer service can spell doom for a company. The Netflix subscription is a role model for a smooth process - the same should apply when taking out a car subscription.
4: Potential for economic growth
Although vehicle ownership increases the potential for economic growth, it also leads to great responsibility for car manufacturers and service providers. Maintenance, repairs and insurance are now added to the "normal" business. Nevertheless, this is a positive development that offers opportunities for growth: through the frequent use of properly maintained vehicles, economies of scale can be achieved, leading to major cost savings5.
5: Expansion of service-based offerings
Another positive aspect of a subscription model is the expansion of service-based offerings. Apple has long understood the principle: When Apple announced various company figures in February 2019, it published figures on the install base for the first time. They wanted to highlight the potential of their entire service business. Just like car manufacturers, sales figures are falling, which is why Apple is increasingly focusing on the service business. Starting with iTunes, they are continuously developing services to retain their customers. Car manufacturers should develop this strategy and use service business not only as an additional sales channel, but also to strengthen the relationship with their customers or even acquire new customers. The integration of subscription models in service-based offers can bring major benefits6.
6: Leasing is not the same as subscription
When switching to a subscription model, it is important to keep the actual goal in mind: it is about developing a long-term and close customer relationship and increasing monetization opportunities. A subscription is not a lease. Leasing is a financing method that does not regulate ownership or have a direct impact on the relationship with the customer7.
Be aware of special challenges
As the Cadillac example shows, switching to a subscription management model is feasible, but there are risks to consider. One of the risks is underestimating the effort involved. The subscription business model is very different from traditional business models, which is why all business processes need to be adapted - and this requires budget. Another challenge is that customers leave the company and cancel their subscriptions if the customer benefit is not satisfactory. A third obstacle to switching to a subscription model is the conversion of the IT infrastructure, especially as this is now a prerequisite for competitiveness and does not represent a competitive advantage8.
A success story in the automotive sector
The Stuttgart-based start-up "Vive La Car" has capitalized on the subscription trend. They lend vehicles to end customers. Unlike similar car manufacturers, "Vive La Car" does not buy or own vehicles, but brokers them between car dealerships and end customers. More than 100 dealers have already entered into partnerships with the start-up and even at the beginning, more than 300 vehicles were offered by 60 contractual partners in Germany. This means that "Vive La Car" has the largest selection of subscription vehicles in Germany. This is now to be extended to Austria and Switzerland. They distinguish themselves by offering car dealers an additional sales channel and end customers a flexible subscription model that offers them advantages such as uncomplicated processing, fast availability and comprehensive service9.
Interest in car subscriptions is growing, with the number of car buyers surveyed who are interested in a car subscription rising from 22% to 32% between January and August 2019. Interest is greatest among younger people, as they tend to be less loyal to brands and are reluctant to enter into long-term relationships with providers. The good news for subscription providers: Drivers are also generally willing to pay more for a subscription than for a leasing contract, for example. The increased costs of vehicle maintenance can therefore be counteracted10.
Conclusion
With the automotive industry in crisis, car manufacturers need to take action and rethink their business models. What does this mean in concrete terms? Switching to subscription management is worthwhile, even though it differs significantly from the traditional business model. The flexibility created can strengthen customer relationships or win new customers, increase potential for economic growth or expand other offerings (e.g. service-based services). In particular, building a direct customer relationship that is better adapted to modern consumers and their needs can be very lucrative for companies, as streaming service providers such as Netflix show. Of course, the change and the associated risks should not be underestimated - but with an awareness of the challenges involved, a successful and secure transition to a subscription model can be achieved.
Learn more about Subscription Management
You may also be interested in these blog posts:
Subscription management: six steps to simple billing of flexible tariff models
Why are billing systems becoming increasingly important?
Billing models in the age of digital services and how to make customers happy in the long term
The blockchain for the expansion of digital subscription models
1 Cf. https://www.cicero.de/wirtschaft/automobilindustrie-krise-center-automotive-research-ig-metall-wertschoepfung-deutschland (26.11.19)
2 Cf.https://www.gsb.stanford.edu/insights/why-every-business-will-soon-be-subscription-business (26.11.19)
3 Cf.https://www.cloudcomputing-insider.de/herausforderung-subscription-economy-a-589548/(26.11.19)
4 Cf.https://www.linkedin.com/pulse/next-big-thing-subscription-economy-car-shiv-kumar-reddy?trk=d_public_post_promoted_post (14.01.20)
5 Cf.https://www.zuora.com/guides/5-takeaways-oems-considering-subscriptions/ (26.11.19)
6 Cf.https://www.zuora.com/guides/4-ways-the-auto-industry-can-connect-with-drivers-not-just-cars/ (15.01.20)
7 Cf.https://www.zuora.com/guides/5-takeaways-oems-considering-subscriptions/(26.11.19)
8 Cf.https://articles.bplans.com/the-subscription-economy-may-be-revolutionary-but-its-not-without-risks/ (15.01.20)
9 Cf.https://www.autohaus.de/nachrichten/auto-abo-plattform-vive-la-car-100-autohaeuser-bereits-partner-2416475.html(15.01.20)
10 Cf.https://www.handelsblatt.com/unternehmen/industrie/automarkt-start-up-vive-la-car-bringt-haendler-autos-per-abo-auf-die-strasse/25012272.html?ticket=ST-2398253-kdcbX7jJjtot2e2Icmlm-ap6(15.01.20)
