Here’s Why Automaker Subscription Features Are Here To Stay, Even Though You Hate Them
The recurring revenue generated by subscription features is becoming too important for car companies to pass up.
Remember that time the internet chastised BMW for charging a subscription fee for heated seats? BMW eventually put on its flame suit and clarified that its subscription was only for owners that didn’t purchase heated seats initially, yet that still meant it had the parts installed in every car that could subscribe, but didn’t offer it to the consumer unless they paid up. This type of behavior is becoming more frequent in the auto industry, proving that pushing consumers towards services that earn automakers recurring revenue is, unfortunately, the future.
Subscriptions are a love-hate relationship that have existed for decades. You subscribe to music and video streaming services, pre-curated dinners, entertainment, delivery services, or maybe even a box with dog toys in it. It’s only natural that the auto industry would tap into the same market.
With changes to technology and the legacy auto sales model, the auto industry is already doing exactly that. The writing has been on the walls of executive offices for years, and companies are pivoting to offering software to enable automakers to sell vehicles with features more akin to the subscription-as-a-service design. It’s time to take a serious look at the future of cars because heated seats are just the cushion for what’s to come.
What’s Driving Change
Wall Street loves subscriptions. We’re not just talking about the auto industry here—in general, a subscription is a way to achieve annual recurring revenue, something that helps to predict the health of a company outside of just the amount of products it sells in a year. And since stock prices are generally forward-looking, it makes sense to base a company’s valuation on something that it will continually earn from.
The next decade will prove to go down as one of the most interesting in automotive history—perhaps only second to the introduction of the modern automobile. You see, the ice is thawing and the golden age of the combustion engine is coming to a close, albeit with some well-placed resistance from enthusiasts and silver-haired people in positions of power. But like life’s three guarantees, the rise of the electric car is inevitable.
The average new car buyer is more interested in EVs than ever before. And why wouldn’t they be? Every modern automaker is pushing EVs as they work to achieve a high-volume output of battery electric vehicles. And one of the biggest selling points of an electric car is its reduced operating cost over the lifespan of the vehicle. That sparks one big question from both automakers and the network of dealerships that sell their cars: where is the after-sales revenue coming from?
According to automakers, the answer is software. Whether it be subscription-based, or one-time purchases to increase power output, automakers are looking to the digital world to increase profits even more. Stellantis CEO Carlos Tavares anticipates that the company will rake in $22.5 billion in software sales alone by 2030.
Alongside the rise of EVs comes a world of connected cars. The ability to phone home to the mothership (and in some cases, one another) enables automakers to rake in huge sums of cash through software sales, data collection, and cost-cutting means once thought to be impossible. Picture an invisible person riding alongside you at all times, collecting every iota of data about your driving and the environment, then beaming it back to the mothership to be analyzed by clusters of computers. That’s the power of connected cars.
Dealerships, however, aren’t really getting a direct cut of the revenue once the car leaves the lot, which means that the traditional car dealership model could be in for a big change, too.
Legacy automakers are married to the dealership model. Like it or not, they rely on these franchises to handle the maintenance, repair, and sale of their vehicles.
With the rapid transition to electrification, many new automakers have begun to pop up, and these companies have specifically avoided the idea of utilizing distributed dealership franchises to handle the after-sales experience. This direct-to-consumer model has sparked quite a bit of controversy in the industry, especially amongst new car dealers that rely on the legacy model in order to stay afloat, but it has been hugely successful at improving the amount of money that stays in the OEM’s pocket. In fact, Ford CEO Jim Farley recently suggested that the direct-to-consumer, fixed-price model has a $2,000 price advantage over legacy automakers.
When you walk into a dealership, you typically aren’t being offered a subscription to anything since after-sales subscription purchases don’t exactly make the dealer more money. For example, buying a subscription to start your car remotely from the OEM’s app is money directly into the automaker’s pocket and not to the dealer. However, a car salesperson is conditioned to talk up features that might bring an OEM a subscription purchase later on—like pushing a trim level that adds built-in hotspot functionality might result in a higher trim level being sold, essentially driving up the price. But the dealership doesn’t actually get money from those subscription services that the customer purchases to actually use the feature.
Despite not making money on the subscription models, some dealerships still foresee it as a potential way to streamline their own operations.
“I really like the subscription model because it leaves the economies of scale and allows for a broader use case for the vehicles I stock. It has strong benefits for the fleet market over retail, quite frankly,” Ryan Pritchard, Chief Revenue Officer of Pritchard Companies, a national enterprise of automotive dealerships, said. “For example, power windows and power locks. Some fleets want it, some don't. But a dealer could stock just one vehicle that can activate [the feature].”
That streamlining could potentially save the dealership operational expenses down the road. And in reality, it’s not like the dealership makes a ton of money on the front end of a new vehicle purchase anyway. Instead, the dealership might focus on how much it can make through the backend of the deal through avenues, like financing and OEM incentives.
But where uncertainties start to arise are with after-sales service. Dealers make substantial revenue from vehicle service, and that could be a real problem when looking into the future of the auto industry.
The average age of an on-road vehicle is just over 12 years. Given that some states are looking to ban the sale of gas cars by 2035, it could be very possible that EVs make up the vast majority of vehicles on the road by 2050. By this time, the dealership model could be significantly disrupted given the lack of vehicles coming in for general maintenance items. While it’s impossible to suggest that EVs won’t need repairs, maintenance items—oil changes, brakes, gaskets, and other items linked to combustion powertrains—may be significantly reduced. And as automakers become more seasoned in building out technologically complex vehicles, the trips for electronic-related repairs could also be reduced.
While automakers don’t lose money on service directly—the cost of labor is revenue generated by the dealership—they do lose out on the revenue generated by part sales, meaning the need to make up for that loss somewhere else, like subscription fees and software sales.
The lack of regular maintenance could eventually become a big problem for dealerships in the future. In fact, this may pivot the entire vision of what a new car dealership actually is. Instead, the dealer might become a pseudo-fulfillment center, where customers can preview models, take delivery of made-to-order vehicles, or bring their car in for service when it’s needed. The dealership might also focus on core services, such as sensor calibrations, battery refurbishing and conditioning, or other general maintenance items, albeit less frequently than with an ICE vehicle.
And that face, the physical location where a customer can go, makes all the difference, according to Pritchard.
“Somebody has to own a relationship,” he said. “It comes down to having a responsive service network. And in order to do that, I really think it would be fruitful to not cancel the dealer.”
Consumers Don’t Like Subscriptions… Yet
It’s no secret that the average car consumer—at least from an enthusiast standpoint—is very anti-subscription. Nodding back to BMW’s heated seat subscription snafu from earlier this year, many consumers responded by bashing the automaker. Some swore off the brand altogether due to its continued stance towards subscription models, and others maintained that once a vehicle is equipped with hardware, the owner of the vehicle should have every right to use the hardware that is essentially standard.
Consumers have a particular bone to pick with automakers who like to constantly remind owners of the pay-to-win mentality. Audi, for example, was berated for doing exactly that in the new E-Tron just months prior to BMW’s debacle.
In both of these cases, the feature responsible for the backlash was available to purchase up-front but ultimately wasn’t selected. This is something that Pritchard believes needs to be fixed before consumers ultimately accept the idea of subscription models.
“The feedback I received was, ‘I didn't ask for heated seats, I bought the base model. And now I'm reminded every day that I don't have the heated seats,’” said Pritchard. “So I think for this model to work, the consumer has to have the option to opt-in and pay for the feature in full upfront, versus the alternative.”
If automakers fix this glaring in-your-face issue and sensibly make subscription options available, it could push some consumers towards subscriptions rather than away. Behind the curtain is the hidden potential for the consumer to save a bit of cash.
Cars are also becoming more expensive thanks to the amount of tech packed in. As automakers purchase a higher volume of components to achieve both modularity and price benefits (again, economies of scale), it becomes possible to stuff these components into vehicles at little-to-no extra cost. Tesla, for example, recently hiked the price of its Full Self-Driving (but not really) Beta software to $15,000. That’s not exactly chump change—it’s enough to raise a vehicle’s monthly payment by around $300, and if the owner purchases a new car, the feature doesn’t travel with the owner. Instead, an owner can opt to subscribe to FSD Beta for $199 per month and not have any long-term financial commitment.
For a consumer, this means the ability to potentially enable features once locked behind higher-cost trims à la carte and possibly even save money in the long term should they only purchase features seasonally. For automakers, it means double-dipping with no extra cost.
The potential cost savings, combined with a new generation of car buyers, just may be the ticket for subscriptions to become favorable.
“If it's rolled out appropriately, I think [a subscription] lends itself to a very attractive model for a new generation,” Pritchard said. “Right now, the people that buy cars are the same people that bought CDs, whereas tomorrow, the people who are subscribing to cars are the ones subscribing to Spotify, or subscribing to Netflix. So you've got this millennial mindset that I really think this is accommodating.”
Two Winners: Manufacturers and Big Data
Manufacturers really are the winner in the end when it comes to subscriptions. While the consumer may see a benefit, automakers are seeing dollar signs—and not just at the business-to-consumer (B2C) level, either. In fact, multiple companies have launched efforts to help automakers generate revenue up and down the supply chain with business-to-business (B2B) revenue models.
This revenue is achieved by partnering with a service that provides data brokering capabilities like BlackBerry’s IVY. Automakers can essentially sell the anonymized data collected from their vehicles to Tier 1 suppliers—think Bosch or Magna being able to learn about its components in real-time and for diagnostic purposes without ever having to physically touch one of its components again because the vehicle is connected and automatically supplying this telematic information to the OEM.
“You get to know your vehicle better. You know how it's been utilized in [different] markets and you can see the interactions of how the car has been used and operated,” Blackberry's Vice President of IVY, Peter Virk, said in an interview with The Drive.
He pointed out that people have been driving ICE cars for the last half-century. “So OEMs have gotten very good at knowing how those cars operate. But EVs are a bit of an unknown. Are people always supercharging? Trickle charging them? Waiting till they're empty? Always topping them up? What are the weather challenges happening? And so forth. There's a whole piece that the OEMs use themselves to improve their product. That helps the whole ‘saving money’ piece.
“Then, there's the element of making money,” Virk went on. “So this is where the OEMs could say, ‘Okay, if we've got these data points together, and these ecosystem providers, we could start to generate revenue by selling a new software-defined feature, function, or service.’”
Companies like Sonatus are working to make these data points not just readable, but also actionable on a software level through what is essentially a software-defined vehicle. Jeff Chou, the CEO and co-founder of Sonatus, told The Drive that this opens up virtually limitless possibilities for automakers to act on data points and incorporates existing hardware into brand-new vehicle functions for additional revenue.
For example, if an automaker wanted to spice up its winter package, it might use the logic from Sonatus’ system to learn the outside temperature of the vehicle, the weather forecast in the vehicle’s current location, and the vehicle’s typical departure times to know when to flip on heated seats so that they are ready for the driver by the time they are ready to drive. Or, of course, that functionality could be baked into an automaker’s app, which a subscription fee is then associated with. Another prime example is parental controls. Sonatus’ software integration opens up the capabilities for parents to set a digital profile for teen drivers that provides geofencing capabilities, driver behavior alerts, and even time restrictions around the hours someone can drive—almost like an enhanced version of a valet key.
It also enables automakers to continue earning revenue after the vehicle leaves the dealership and even beyond the first owner by coupling used vehicle buyers to the subscription model later on in life.
“It’s like a laptop, you don't buy them on day one for what they do on day one,” said Chou, referencing new vehicles. “They evolve over the course of your ownership. And we see vehicles in the same way.”
“[Automakers] need to have a reason why people upgrade every three to seven years when they buy a new car. A subscription model helps ease that pain so that they're not paranoid, like, ‘How do I convince my customers to buy a new car?’ Well, the answer is you're not making money on the printer. You're making money on the ink. So what you want to do is you want to sell the platform—the car—but then to get the upgrades, that is when you have a subscription.”
Chou said that Sonatus also offers data brokering services, much like BlackBerry’s IVY, and expects that to be a large portion of supplier-stack revenue for automakers.
Other Forms of Revenue Generation for OEMs
Data-driven subscription products will soon be a huge profit driver for automakers on both the B2B and B2C sides. There are also two other areas that companies like BlackBerry and Sonatus expect automakers to tap into for profit.
The first is usage-based products. Insurance is something that the auto industry has been seeing a lot of. It started with those pesky little OBDII dongles, but has since progressed to in-car telematics that are wirelessly beamed to insurance providers. Some OEMs, like Tesla, are even building out their own insurance products as an additional revenue stream.
Likewise, predictive maintenance falls under the same category. Automakers can enhance their visibility into service needs beyond the typical mileage-based service intervals, predictively pumping maintenance needs to the owner and dealer simultaneously for additional revenue. And in a world where dealer profits may ultimately be disrupted by the move towards electrification, this could be a big help in increasing service revenue for dealerships.
Speaking of electrification, don’t forget about usage-based charging subscriptions. Automakers may look towards partnering with large EV charging networks to form tiered or usage-based charging tied directly to the vehicle (so as long as it supports ISO 15118).
The second category is something we’ve seen poked at before: in-vehicle purchases. Automakers have begun to tap into this market already by offering owners the ability to treat their cars like a marketplace to order food, beverages, or parking straight from the vehicle’s infotainment screen. Some automakers may be looking to take a cut directly from the payment processor or reap advertisement fees from partnering companies that may want to advertise their products inside of the vehicles.
As the old guard passes the torch to younger car buyers, automakers are questioning whether or not the idea of car ownership is ultimately appealing. In sprawling urban centers, many commuters have ditched the idea of four wheels altogether. In 2019, the Wall Street Journal published an article showing that fewer teens were springing for licenses than ever before.
Obviously, cars aren’t going anywhere anytime soon. And automakers clearly need customers in volume in order to sell vehicles at an affordable price, meaning this could be perceived as a potential problem in the future. So the answer might be turning the complete vehicle ownership experience into a subscription.
If that sounds familiar, it’s because some automakers have tried to do exactly that before ultimately hanging up their hats. Dealers weren’t happy with the idea of being cut out of the loop, either, which may only be part of the reason these services didn’t take off. But what if a customer can look to one provider and pay for all of their vehicle needs? Think registration fees, insurance, and maintenance—all in the form of a single payment to one company. The subscription pill might be easier to swallow if customers are already used to microtransactions and subscriptions in the vehicles, which is exactly why the in-car subscription could soon begin to make its way to a new car near you in the coming years.
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