by Owen Stuart
June 17, 2019
Quick question: what products can you sell as a service?
Clothing? Check.
Furniture? Check.
Music? Check.
Cars? Yes indeed. Even Americans’ love affair with vehicle ownership is going by the wayside – or so it seems. Proclamations of the end of personal car ownership are in vogue. Car subscription services – where consumers pay a fixed monthly fee to drive a vehicle they are renting – are one of the innovative services aiming to liberate us all from the responsibility of ownership. However, the prospects of car subscriptions as a mass-market mobility service appear limited.
Car subscription services are designed for convenience. Consumers aren’t locked into a contract; instead, they can choose to pay month-to-month for a vehicle as they need it. So if a subscriber is vacationing for the summer and won’t need their wheels, most services allow subscribers to cancel or delay their subscription for a month.
Car subscription services also bundle vehicle-related expenses, such as insurance, basic maintenance, roadside assistance, and registration fees into the cost of the service, so consumers don’t have to procure insurance or spend eternity waiting in line at a government office to get their vehicle registered.
Finally, subscribers can often switch cars during their rental period, which permits car enthusiasts to drive cars as long as they want and switch them out if they get bored.
Three primary types of players compete in the industry: automakers, car rental companies, and online startups.
Luxury carmakers are leading the way. For example, BMW, Cadillac, and Mercedes-Benz offer the Access, Book, and Collection car subscription services, respectively. Luxury brands are especially eager to rent cars, since many of their vehicles are leased anyway, not purchased. Other automakers supply non-premium models; for example, Ford purchased Canvas – a subscription startup – in 2018 and offers more mainstream vehicles such as the Ford Escape and the Honda Accord through the service.
Somewhat obviously, traditional car rental firms also offer subscription services. Examples include Hertz’s Hertz My Car and Enterprise’s Subscribe. Car rental companies’ multiple locations and car fleets at each spot allow them to offer car swaps more frequently than other subscription services. For example, Hertz allows two swaps a month, while Enterprise permits four swaps.
Finally, the ubiquitous nature of apps and the internet allows a variety of startups unconnected with an auto manufacturer or car rental firm to participate; examples include Fair and flexdrive.
What’s led to the rise of car subscriptions? Rising new vehicle prices are pushing vehicle buyers into the used vehicles market, but those have also increased in price. In addition, increasing earning power on the part of millennials – who are comfortable navigating smartphone-integrated services – has increased the attraction of vehicle subscription programs (almost all of which are conducted via phone apps).
Vehicle non-ownership also has benefited from millennials’ financial situation. Stagnant wages and price inflation have led to difficulty financing a new car for many members of this cohort. As a result, vehicle leasing rates rose between 2009 and 2018 – industry estimates place leasing rates today as high as 30% of new car sales. Leasing allows cash-strapped consumers to get in a vehicle without the steep down payment generally required when purchasing one.
However, future demand for these services seems limited. Financing a vehicle outright is initially more expensive, but saves consumers more money once it is paid off. In addition, the very high monthly price that these services charge will likely scare off all but high-income consumers who are willing to pay a premium for the convenience and flexibility.
There have been some industry efforts to make subscriptions more appealing to price-conscious consumers. For example, some subscription services, such as flexdrive and Canvas, are offering non-luxury vehicles that average monthly payments between $400 and $500. These prices might be more attractive to moderate-income consumers due to their lower price points. Average driving costs per person per year reach between $8,000 and $9,000 when car payments, insurance, gasoline, and registration costs are taken into account. In this context, lower-end car payments for vehicles, such as the $400 per month offered by flexdrive to use smaller/novelty vehicles such as the Toyota Yaris, Nissan Leaf, and SMART FourTwo can be a bargain.
However, consumers generally prefer SUVs and trucks (all else being equal) because the vehicles are perceived as safer and more comfortable, so consumers may not be attracted to low price point vehicles in these programs if they could lease or finance a larger vehicle for similar terms. It’s difficult for car subscription companies to offer larger vehicles at compelling price points since prices on these vehicles are higher than on sedans.
While subscription services seem like a hot new idea, their long-term viability is unclear. Without a way to lower the high prices consumers must pay to get the vehicles they want, car subscription companies are likely to continue battling for the attention of the high-income consumers that can afford to pay a premium for convenience.
We have you covered! For additional information and analysis of US industry trends, see Motor Vehicle Leasing: United States, a report published by the Freedonia Focus Reports division of The Freedonia Group. This report forecasts to 2023 personal consumption expenditures (PCE) on motor vehicle leases in nominal and real (inflation-adjusted) US dollars. Expenditures are segmented by vehicle in terms of:
To illustrate historical trends, total PCE, the various segments, and price indexes by segment are provided in annual series from 2008 to 2018. For the purpose of this report, trucks include light vehicles such as CUVs, pickup trucks, SUVs, and vans. Motorcycles are excluded from the scope of this report, as are medium- and heavy-duty trucks, and RVs (recreational vehicles).
While you’re there, check out some of our related reports, which include:
Owen Stuart is a Market Research Analyst with Freedonia Focus Reports. He conducts research and writes a variety of Focus Reports, and his experience as an analyst covers multiple industries.
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