- Despite early buzz, car subscriptions are growing slowly
- Covid-19 has impacted car subscriptions in surprising ways
- User demographic is older than one may think
The idea of car subscription services is not a new trend, but as mobility continues to evolve, it’s a segment that is becoming more interesting to automotive marketplaces. Some have already rolled out the service, while many others are considering it.
In the last few years, more than 100 car subscription services have sprung up around the world, most offered via third-party software vendors and standalone sites.
The promise is tantalizing: Don’t buy a car. Subscribe instead. For a single, all-inclusive monthly fee, you could change cars as often as you want, even every month — a sturdy sedan for commuting in winter, a sporty 4×4 for summer outings — and, best of all, cancel whenever you fancy.
Evolution, rather than revolution?
However, despite the initial buzz and, in some cases, tens — even millions — of dollars raised, none have gained substantial market share or taken much of a dent out of classic automotive sales. Many of the subscription pioneers have now pivoted, updating both their business models and consumer propositions.
In perhaps the most dramatic example, U.S.-based Fair.com was forced to hit the breaks in 2019 when its lead investor got cold feet about injecting more money into the company. The CEO stepped down, 40% of Fair’s staff was laid off, and downloads of its consumer app were suspended.
What went wrong?
The main problem was that consumers didn’t particularly want what they were being sold.
Take Faaren, for example. The Wurzburg, Germany-based car subscription service proudly proclaims on its website, “A convertible in summer and an SUV in winter — drive what and when you want.” Lost your job? Cancellation requires just 21 days advance notice.
The reality: “Most drivers are not changing that often. They’re keeping their car on average for 10-18 months,” Faaren CPO Maximilian Renoth told the AIM Group.
We heard pretty much the same at every car subscription company we contacted.
At Madrid-based Bipi, one of the first car subscription services when it launched in 2017, most subscribers keep their vehicles an average of two full years. “Only 3% want to swap more frequently. It’s a pain to change cars,” Bipi CEO Hans Christ told the AIM Group, even though the site formally requires just a three-month minimum stay with a particular vehicle.
ViveLaCar, which operates in Germany, also allows subscribers to cancel with three months’ notice. “Drive your car for as long as you want, if it no longer suits you, simply give it back or find a new one,” the company’s website reads. As at Faaren, though, consumers rarely swap before 10 months, company founder and CEO Mathias Albert told the AIM Group.
Norway’s leading classified site, L.no, doesn’t have its own car subscription service yet — it’s getting ready to run a pilot shortly with several vehicle providers — but Hilde Sommerstad, who is heading Finn’s car subscription initiative, has been doing her research.
“Thirty days is what’s often offered, but it’s not what people do or want. It seems more like a unique selling proposition (USP) than something users really exploit once they become subscribers,” she told us.
Aaron Tan, CEO and co-founder of Singapore-based auto marketplace Carro, told us that even though customers can change vehicles after a month (for used cars) and six months (for new ones), “they are reluctant to do so.”
That doesn’t mean that car subscriptions don’t offer something of value — they do. It’s just that subscriptions today are looking a lot more like short-term leases. Schibsted-owned Blocket, the leading automotive classified site in Sweden, even conflates the terms, calling car subscriptions “private leasing.”
What’s working? Bundles!
The main difference between traditional leasing and car subscriptions: “The bundling of finance, insurance and service,” Blocket marketplace director Henrik Littorin told the AIM Group. “The key feature is convenience — that is, the ease of having access to the ‘fun parts’ of a car but not having to own it.”
The message that you can swap your car for a new one whenever you want wasn’t resonating with potential customers. But every one of the car subscription providers with whom we spoke offers a bundle of some sort, with major repairs, routine maintenance, taxes, licensing and registration covered under the monthly subscription fee. Some companies, such as Bipi, will even arrange to pay any traffic fines for you. Carro in Singapore has developed a usage-based insurance package that charges drivers based on how far they go rather than a flat premium.
Drivers are responsible for their own gas, of course, and subscription packages generally come in tiers, with varying kilometer limits (only a few companies include an all-you-can-drive option). Monthly rates depend on the size, level of luxury and duration of the commitment (the longer a customer takes the car for, the better the deal — another clue that month-to-month swapping isn’t attractive to either consumers or providers), but for the most part fall in the $300 to $500 range for small to medium-sized cars.
Most of the cars offered via subscription are new (or, every once in a while, “slightly used,” which can happen when a subscriber defies the odds and returns a car after just a month). Some services take a down payment or security deposit; others aim to make subscribing as Netflix-like and simple as possible. Carro CEO Tan even went so far as to describe its car subscription program for us as a “Netflix for Cars.”
Subscriptions and short-term leasing agreements address “our current economic uncertainty, as well as the general trend for greater flexibility in all the products and services we consume (gym membership, phones, TV packages, car payments, etc.) pointed out Paul Harrison, head of strategic partnerships at U.K.-based Leasing.com.
With a subscription, a user doesn’t usually have the option to buy the car at the end, although that’s not necessarily a downside — it saves the customer the bother of arranging for financing with a potential expensive balloon charge at the end of the term.
As a result, even though car subscriptions look like leases, they’re closer to a rental model (and typically are structured that way in local regulators’ eyes).
Early adoption of online
Other than in Italy, where subscription vendor CarPlanner works with third parties (banks and insurance companies, in particular) who offer the service to their customers in person, arranging a car subscription is generally done entirely online — from picking out the car to payment (subscription services have been among the first players in the automotive ecosystem to embrace Internet transactions).
And with Covid-19 pushing consumers to steer clear of riskier in-person interactions, most car subscription providers now offer home delivery as well — although not always as a freebie.
“Pre-Covid, you could save the delivery fee by taking the train to Bedford, get your car and drive off,” explained Alex Rose, chief marketing officer at U.K.-based car subscription marketplace Drover, which was acquired in Dec. 2020 by local digital dealer Cazoo. “Right now, we’re doing delivery only. We charge you based on how far from Bedford you live.”
Moreover, as the pandemic pushes people away from public transit and car-sharing, a car subscription represents a lower-investment option in a period of unpredictability.
“Vehicle subscription is an antidote to the affordability concerns and economic uncertainty faced by today’s car shopper,” said Scott Painter, as he launched a new venture, NextCar, which has dubbed its subscription offering “car-as-a-service.” Painter, who previously founded Fair.com, called car subscription “an attractive value proposition for consumers before the pandemic [that] is even more compelling today.”
How do the numbers stack up?
Enthusiasm aside, car subscriptions are still tiny compared to the overall automotive sales market. Last year, Finn.no asked consumers whether they’d tried subscription in the last year — only 1% had, although 3% said they were planning to give it a whirl in the next 12 months.
Renoth from Faaren told us that there were no more than 20,000 car subscription vehicles on the road in Germany, one of the subscription space’s hottest markets, compared with more than 47 million cars registered in the country. Renoth predicted car subscriptions could jump to 25% to 30% of the market by 2025, but it’s hard to see how you get to 14 million in five years under even the most optimistic scenarios.
In the U.K., Rose told the AIM Group that Drover has customers “in the low thousands.” Given Drover’s early launch and relatively high profile in the country, we would have expected that number to be higher, but the company has been in the process of shedding its service providing cars to ride sharing companies (which at its peak accounted for 50% of Drover’s revenue). “We wound down our Uber driver business and have been a consumer-only business since the spring,” Rose explained.
We expect Drover’s business to jump now that it is joining Cazoo. “Once we have integrated the platforms, there will be far more cars available for subscription,” Drover CEO Felix Leuschner told the AIM Group in December.
Cazoo will ultimately be able to “offer its customers the option of purchasing, financing or subscribing to the thousands of cars on its platform,” Leuschner added.
Carvolution in Switzerland, admittedly a small market, has sold just over 1,000 subscriptions direct to consumers; the company is now pinning its hopes on a pivot towards a b-to-b-to-c model, where its customers will be the companies that sell to end users, rather than the subscribers themselves.
Carro CEO Tan reported that the Singapore-based company has “hundreds of subscribers currently” although “the demand is always higher than supply.”
Fair.com has long been the behemoth of the subscription space. The Santa Monica, California-based company claimed it had 45,000 subscribers at its height and was live in 35 cities, although an AIM Group check last year turned up zero vehicle inventory in 14 of those cities. The company also claimed it had put 28,000 consumer and 50,000 Uber subscriptions on the road since its inception. (We reached out to Fair for updated numbers but didn’t hear back.)
Subscription sites that offer multiple brands are the norm, although there are manufacturers that have chosen to go it alone — Care by Volvo, Porsche Passport, Book by Cadillac, the Mercedes-Benz Collection, among others. Some are choosing unique branding for their subscription offerings, if only to cut some of the confusion with competing leasing or sales channels. Toyota’s subscription service in Norway, for example, is called KintoFlex.
So who owns the cars?
The customer clearly does not own the car with a subscription service — that would defeat the whole subscription model. But the question of whether a car subscription provider finances the vehicles it offers or works with a third party — a dealer, OEM or car manufacturer’s captive bank — affects the entire value proposition, from how much a company needs to raise up front to what happens to the car when it’s returned by the user.
When Carvolution got started in Switzerland in 2018, co-founder and CMO Léa Miggiano thought owning the inventory made sense. “We bought our first 10 cars, but obviously that was going to be too expensive for the long-term.” Now Carvolution finances its fleet through the third parties with which it works.
The same is true at Faaren, ViveLaCar, CarPlanner, Blocket and Bipi.
Automotive marketplace AutoScout24 in Germany offers car subscriptions through its LeasingMarkt.dedivision, which aggregates vehicles from car subscription partners such as Cluno, Like2Drive and Flexxdrive; those companies, in turn, source their vehicles from dealers and OEMs, which provide the financing.
Drover has driven in the opposite direction. By next year, all the cars it offers will be owned by the company itself. That’s a 180-degree pivot from the company’s initial model where Drover procured vehicles “in a classic marketplace play, from anyone with excess inventory,” Rose told the AIM Group.
The problem was that Drover couldn’t guarantee a specific car would be available, hence the pivot, Rose said.
Bipi’s Hans Christ feels that Drover and its new parent Cazoo are entering into a risky business with its new model. “You need a lot capital, you need to be very good at buying at the right price and selling at the right price,” he told the AIM Group. “We think we can scale our business to hundreds of thousands of cars by building a tech platform for our partners to sell their own inventory digitally.”
That’s not stopping Carro in Singapore from doing a Drover: CEO Tan told the AIM Group that all subscription cars on the site are owned by Carro.
Fair, meanwhile, is pursuing a hybrid model. The company lists inventory for its dealer partners on its website and app; once a consumer chooses a car for subscription, Fair buys the car and rents it out to the customer. When the customer ends the subscription — 15-18 months later on average — Fair offers it back to the dealer who has the right of first refusal. If the dealer declines, Fair sells it on the open market. Fair holds the title and handles the registration on behalf of the customer, who simply shows up at the dealership, presents his or her ID, and drives away.
Fair is unique among the car subscription companies we looked at since it works exclusively with used, not new, vehicles. Fair rebranded last year as a “used-vehicle leasing platform.”
Compare that with Sweden where Blocket’s Littorin told us that “just a tiny fraction of the Swedish leasing market is used cars, as there are heavy subsidies toward new-car leasing from OEMs. This means that you are able to privately lease a new car for the same or even cheaper price than a used car.”
What’s in it for the dealers?
Convincing dealers to sign on with a car subscription service can be a tough sell. In Norway, for example, “dealers are not so incentivized because used-car sales are going so well,” explained Finn.no’s Sommerstad. At the same time, she pointed out, “dealers recognize that a subscription business model is coming in the longer term and they think that it’s something users will eventually want. They just don’t see a big reason to push it now.”
ViveLaCar’s Mathias Albert disagrees. Car subscriptions can work to a dealer’s advantage for so-called “loser” cars, he said — those vehicles that get stuck on a dealer’s lot for too long, that are not the most popular cars, or where a dealer paid too much. “In this case, it’s better to put the car on subscription and sell it later [when it returns] as a used vehicle.” Such a scheme can even cover the deprecation on a car.
Albert gives the example of a car that cost $30,000 but after a year had depreciated to $27,000. The subscription revenue for that car during the same period could run as high as $6,000, he explained, making up the difference and then some.
Fair can help dealers move older cars, too, explained Pete Shaver, president of Huntington Beach Chrysler Dodge Jeep Ram in California, a Fair.com dealer partner since 2018. Most of the cars that Fair buys from Shaver are lower-cost vehicles that would otherwise go to auction at a smaller profit margin than customer sales provide.
“The algorithm Fair uses recognizes value and prices the payment for their customer accordingly,” Shaver told the AIM Group last year. “When we have an aged vehicle that hasn’t sold, we can price above auction but discounted and it sells.”
Offering subscriptions is also a way to create greater engagement between dealer and driver.
“Purchase customers won’t come back to the dealership more than once every five to seven years,” Fair.com co-founder Georg Bauer told the AIM Group. “Fair customers will come back four to five times more frequently. And when they come onto a lot and drive away in 10 minutes’ time with a car, they’re having a positive experience. There’s a sales opportunity from them just having a good experience there.”
Fair is now reaching out to manufacturers, as well; a new program announced in August allows Fair users to access previously owned vehicles from American Honda Motors online. Thirteen Honda and Acura dealerships in South Florida and six Honda dealerships in Southern California are participating in the pilot. Users select vehicles on the Honda Certified or Acura Certified websites and complete the transaction on the Fair app. Users then pick up their cars at a specified Honda or Acura dealership.
Who are the subscribers?
When we started researching the car subscription space, our hypothesis was that this would appeal to younger drivers — Millennials without the money for a hefty down payment or a loan to purchase a vehicle outright.
“That’s a misconception and way off the truth,” Christ corrected us. “At Bipi, the average customer we have today is 37 to 38 years old. We have a big base from 40 to 50 but not many from 20 to 30.”
The reason may be European-specific. “In the big cities, Millennials are all using Uber, car sharing and scooters,” Christ noted. “They’ll only need a car once they start a family.”
Thirty-eight is also the sweet spot for Drover, said Alex Rose, who pointed out that Baby Boomers “are used to doing their own servicing and taxes by themselves. They’ve been doing that for decades.” Younger customers, on the other hand, have problems getting insurance at decent rates, which makes it less profitable for a car subscription service with its one-size-fits-all pricing.
Faaren, by contrast, is targeting the very demographic the other companies eschew: 24 to 35-year-olds. Renoth described Faaren’s model as essentially long-term car rental with attitude. “Our target group would never sign up for a ‘long-term rental’ because it doesn’t sound cool.”
Carvolution in Switzerland is skewing older. “People who have already arrived in their lives, rather than 18-year-olds who just got their license, see our advantages immediately,” said Miggiano. While not eschewing the younger generation entirely, Carvolution aims at drivers “who have already owned a car and know how difficult it can be to sell and what the total cost of ownership is.”
At CarPlanner in Italy, the average driver is “45 to 55, male, professional and definitely not cash-strapped,” CarPlanner CEO Marta Daina told the AIM Group.
Carro is reaching out to three demographics, said Aaron Tan: “New drivers looking for their first car, Millennial generation drivers interested in the concept of sharing economy, and people who are in Singapore for a shorter period of time such as the expat community.”
Depending on the company, a down payment or security deposit may be required. At Fair, for example, a minimum upfront payment equal to four monthly fees is taken — an average of $1,080. ViveLaCar requires a down payment of one month. There’s no down payment at all at Carro, Bipi or Faaren.
The future of car subscriptions
The executives we interviewed for this article were surprisingly un-bullish on how fast and how far car subscriptions could penetrate.
Carvolution’s Miggiano was the most aggressive, suggesting that by 2030, subscriptions could constitute as much as 40% of the market. ViveLaCar’s Albert was only willing to go as high as 10% to 20%. “I wouldn’t expect it to be 50%,” he added.
Scott Painter’s NextCar venture cites McKinsey’s “New Realities of Premium Mobility” study which also puts the number at just 20% by 2025.
What most could agree on is that Covid-19 has shaken up the demand for subscription services.
Bipi said that requests for cars during the pandemic had tripled due to financial insecurity and fear of using public transportation. Drover and ViveLaCar say they’re finding increased uptake for similar reasons.
Littorin at Blocket said that Covid-19 “could very well have accelerated this development with individuals [who are] not willing to put 15% to 20% cash as a down payment for a car.” He added that, if the current situation continues, in five years, car subscriptions could catapult to become “the primary way of owning a car.”
Faaren has noted a change towards favoring higher priced and sportier cars for subscription. “People saw their summer vacations canceled. So, they now had 6,000 Euros to spend,” Renoth said. “If they can’t go abroad, they’d rather drive a BMW to compensate for it.”
Leasing.com’s Paul Harrison said that while car subscriptions “account for a tiny proportion of cars on the road today, the pandemic has triggered greater demand for flexibility in all our products and services, so I do see their role growing over time.”
Carro had already been seeing 500% revenue growth year-on-year, even before the pandemic, Tan said, “mainly driven by our subscription service and digitalized car purchase services. We are confident of the pay-per-use model going mainstream as early as the next three years.”
The biggest challenge for Bipi is simply that so little of the Spanish automotive classified ecosystem is digital — some 99% of car transactions are done in person, Christ said — so just getting dealers and manufacturers up to speed is first priority, before adding any bells and whistles.
“Cars is probably the only retail sector that hasn’t transitioned to online yet. We want to make offering a subscription to customers as easy as buying a pair of jeans on the web. We can sell in two months digitally what it would take six months to sell in a traditional channel.”
The biggest inhibition to the growth of car subscriptions, said Alex Rose of Drover, might not be the specific offerings “but the force of habit that goes into people’s car buying decisions. They visit 1-2 dealerships and buy a car. The biggest challenge is muscle memory.”
Will consumers ultimately flex those muscles and flock more to car subscriptions in the coming years? The jury is still out. Heck, we’re not even sure if we’ll be calling them “car subscriptions” by the time a tipping point comes around.
In terms of auto marketplaces adopting car subscriptions, this opportunity is still at a nascent stage. AutoScout24 in Germany is one of the few marketplaces worldwide that is actively offering the service, although it does this by aggregating third-party services on LeasingMarkt.de.
Going forward, marketplaces are likely to partner up with third-party providers to offer the service, rather than launch it in-house and take all the risk. It can function both as a defensive strategy against rival marketplaces offering car subscriptions and as a way to boost earnings from commissions.