It was the year 2020 when at least five automobile manufacturers like Audi, BMW, Cadillac, Porshe, and Tesla were rolling out a subscription model for certain features of their high-end cars. This meant that customers were to pay monthly or annual subscription fees to use features like active driving assistance or voice recognition. This would be despite the fact that such features are already built into the car.
Tien Tzuo, Founder and CEO of Zuora – a company that helps in creating subscription programs said - “Your car could be a gigantic, heavy phone-slash-credit card. I think it’s a really short step to figure out how to turn that car into a $30-a-month revenue stream,” he says. He added that if subscription-based models prove successful, they will be here to stay.
Cars – History and Function
The year 1886 saw German inventor Carl Benz patent his Benz Patent – Motorwagen, which came to be regarded as the birth year of the 4-wheeler. The 1908 Model T, an American car manufactured by the Ford Motor Company, was one of the first cars made that was affordable for the masses. In the United States, cars were adopted speedily to replace animal-drawn carriages and carts. In other parts of the world, including Europe, demand for automobiles increased after World War II.
Driving, parking, passenger comfort, and lights are all essential parts of a car. Over the years, the automobile has evolved to include various other features and controls to make the driving experience easier. These include rear-reversing cameras, air conditioning, navigation systems, in-car entertainment, etc. The 21st century has also witnessed the next-gen electric cars being commercially available.
Subscription-Based Car Model – Meaning
The business of building and selling cars is one that operates on relatively low margins. However, automakers are now aiming to build their profits substantially by charging customers monthly or annual subscription fees to access certain features. This has been possible due to the increase in internet connectivity of vehicles, enabling over-the-air software updates that were pioneered by Tesla approximately a decade ago. The deep internet connectivity of vehicles means that car companies can reach inside a vehicle to add new capabilities and tweak things from a distance. This technology can be monetized to offer certain services like heated seating, remote key start fobs, and various other creature comfort features.
Mark Wakefield, who runs the automotive and industrial practice at the consulting firm AlixPartners observed that such an approach will allow car makers to streamline manufacturing to uniform specifications and owners can then add features of choice, a la carte.
How Does a Subscription Plan Work for Car Companies?
In 2020, the car manufacturer Porsche gave a detailed explanation of how its subscription plan would work. The service also called Function on Demand will give car owners two options – outright purchase of a car feature or a monthly subscription fee to utilize the feature. The Porsche Intelligent Range Manager is the only feature currently that is available as a subscription feature. This feature optimizes the car’s navigation system to maximize the EV’s range and minimize charging stops. The outright purchase of this feature would cost USD 474 while a monthly subscription would cost USD 12 after a three-month trial period.
In the same year, Tesla made its ‘Full Self-Driving’ feature available as a subscription. Its subscription price for basic Autopilot to FSD capability is USD 199 per month, and for Enhanced Autopilot to FSD capability, it is USD 99 per month.
A monthly subscription fee would be charged for the Cadillac Super Cruise active driving assistance after its free trial. An Audi spokesperson said that the car’s Function on Demand system would allow some owners to buy the navigation after the purchase. The car manufacturer will expand the navigation system to include more features in the future.
Another luxury car manufacturer, BMW, allowed the owners of certain car models to subscribe to features like real-time traffic alerts, navigation map updates, and live concierge service from its ConnectedDrive store. The automaker is now selling a subscription service for heated seats in countries like the UK, Germany, New Zealand, and South Africa for about USD 18 per month.
By the beginning of 2022, brands like Lexus, Toyota, and Subaru were inviting owners to pay for the convenience of being able to lock or start their cars remotely through an app. In some BMW car models, automatic high-beam headlights can be unlocked through a subscription payment. General Motors and Ford are offering subscription plans for access to their hands-free highway driving systems. Automakers are aiming to generate USD 20 billion in annual revenue from offering such software-based services by 2030.
Monthly subscriptions expire and do not automatically transfer to subsequent owners, unlike an outright purchase which becomes a part of the car features. A managing attorney at Consumer Law Group, Daniel Blinn said that automakers might have to include warranty coverage for features for the time period that the subscription is alive. He further elaborated - “They’ve been paid to provide that service. That is going to extend the manufacturer’s obligation to make repairs.”
Advantages and Disadvantages of a Subscription-Based Model
A subscription-based model, especially for car features, will have a very clear set of advantages and disadvantages.
- Over-the-air capabilities present a huge opportunity for carmakers to introduce new subscription models over time.
- It is a recurring revenue stream for years after the initial purchase.
- It builds long-term relationships with the end consumer leading to brand loyalty.
- Customers only pay for required services as needed and not as part of the upfront cost of the car.
- Consumers who do not choose certain subscription services may still end up paying a high-cost upfront at the time of purchase, as the cost involved in installing necessary equipment will be a part of a new car.
- Because of the absence of law clearly stating the necessary features that form a part of the mandatory installation, carmakers may try to play around with safety features.
- Customers may feel like they are paying twice - once for the function to be built and again for activating it.
- Car manufacturers are still unclear about subscription-based pricing, which needs to be regulated by law to insulate consumers from heavy rates.
As of right now, most of the subscription plans are coming from luxury automakers, as their client base is well-equipped to absorb an annual or monthly fee. However, industry analysts are predicting the introduction of subscription-based car models to the mass market as automakers are looking for new revenue streams in an effort to fund their ambitious plans to build electric, connected, and autonomous vehicles.
What is the cost of a Porsche Intelligent Range Manager subscription?
The outright purchase of this feature would cost USD 474, while a monthly subscription would cost USD 12 after a three-month trial period.
Which car companies offer features on a subscription base?
Companies like BMW, Tesla, Cadillac, Porsche, Audi, Toyota, Lexus, and Subaru offer certain additional features on a subscription base.
What are the advantages of the subscription-based model?
Some of the advantages of a subscription-based model are:
- Over-the-air capabilities present a huge opportunity for carmakers.
- It is a recurring revenue stream.
- It builds long-term relationships with customers.
- Customers only pay for required services as needed.