Paying For a Vehicle Using a Subscription Service

I read with interest an article a month or so ago that described how BMW and Mercedes-Benz were going to test subscription services in several countries. My interest comes from my background in the technology industry that has used subscription based licensing for nearly 20 years.

Basically a subscription service means two things:

1. For the consumer, they pay one figure to one vendor that covers all the items that may be necessary to ensure the reliable operation of the product and for businesses that means an operational expense rather than a capital one – this is an important distinction because a different budget is consumed and allows for some buying decisions to be made quicker.

In the case of a vehicle, the monthly subscription cost would include a portion of the vehicle’s capital cost and then an estimate of the operational costs to run it such as maintenance (parts and labour) and insurance. Tyres and other consumables except fuel are likely to be included.

2. For the manufacturer, subscription payments enable the bean counters to be able to forecast revenue more precisely because once a contract is signed, the cost is rateable over the life of the paperwork. This helps with budgeting and planning because the revenue stream will be constant per vehicle. It should also mean that more revenue comes into the parent company through their finance arm rather than have 3rd party auto shops and insurance companies taking their cut of the overall spend of the consumer. The downside is that the manufacturer cannot claim the full sale value up front on the books and they cannot take the full cash to the bank either. This will have an impact on the financials reported at the end of the financial year, with the finance officer trying to paint a rosy picture when the numbers suggest otherwise.

My first thought – and what peaked my interest is that this is really nothing new. It’s a new name for an age old method of vehicle ownership. I lease a car for day-to-day usage and pay a monthly fee that includes everything (including fuel) through Toyota Finance, even though it isn’t a Toyota. With a subscription service, the consumer will still need to sign for a specified period of time, just like a lease. It would not be possible to only lease on the days you want a vehicle, that concept would still remain with the car sharing schemes in operation today.

One option that the German manufacturers are apparently considering is the ability to swap vehicles based on the consumer’s usage. For example, the original plan is to run a BMW 2 Series and then the mother-in-law comes to stay so it is swapped for an X3 or X5 for a short period. On another occasion, the 2 Series is swapped for a convertible 3 Series for a holiday. I could see a logistical nightmare for the manufacturer and a lot of redundant stock if this isn’t managed correctly – and more importantly could cause a load of customer dissatisfaction.

For me, my lease is novated which means that it is paid out of pre-tax dollars and I settle up with the taxman at the end of the year. If a subscription service can be structured the same way it may be very successful based on a non-swappable agreement.

However, there are some existing private subscription services already available. There is a company in South Florida called Revolve who will sign you up to a high end luxury vehicle for a fee of around $2,300 per month – and you can swap cars within the boundaries of their fleet.

Another, similar service is YOYO in California who use the Starbucks ordering method: Tall, Grande, Venti and they do it on a per mile charge starting at 50c/mile. They also offer unlimited swapping, although I doubt registered users would swap a lot and I wonder how big the fleet is to allow this to happen. I also wonder about the depreciation costs of vehicles not in use.

As we evolve to the fully autonomous car, a subscription agreement might work well with the insurance companies squeezed out of the market – if the possibility of a crash is limited then the amount of risk is drastically reduced and therefore the underwriters might as well work direct with the manufacturers and cut out the middle man. It is clear that the local mechanic will also be squeezed out and the manufacturers service centres will dominate again. Your friendly local guy will end up specialising in the ever reducing number of “classic” cars.

We are in an age of renaissance for the canny manufacturing groups – we really have six big ones today that control most of the market. They could absolutely dominate the whole industry eco-system within 20 years leaving a trail of failed service providers in their wake.