From razors and movies to lipstick and meal kits, subscription e-commerce services are booming. The market has grown by more than 100% each year in the past five years, according to a McKinsey study. In this era where ownership of anything has lost its luster and recurring revenue streams are coveted, this model should be a no-brainer for cars, right?
Indeed, the automotive market has jumped onboard, with programs allowing subscribers to rotate in and out of cars for one monthly price that includes registration, insurance, scheduled maintenance, and concierge service.
Subscription programs are offered by manufacturers, dealer groups, and tech/mobility companies. That said, “A subscription service is just a new name for good old-fashioned car rental, with technology and apps,” says John Possumato, CEO of Automotive Mobile Solutions and DriveItAway Inc.
So where is car rental in this equation? Before answering, let’s consider some of the challenges of a car subscription model — it’s a lot trickier than replenishing a razor supply.
Auto manufacturers can subsidize subscription programs at low volumes to see how they develop.
Dealers, on the other hand, must focus on profitability. First, they’ll need a variety of models made available to the whims of subscribers. The dealer will need to floor plan those vehicles and find lot space for them, just as they would for the new cars they sell. Yet their salespeople must resist the temptation to poach them, as that defeats the idea of the service.
When it comes to the profit equation, dealers must have enough patience and resources to grow the subscriber base while carrying those vehicles. They also need to take a hard look at the revenues and utilization needed to cover an asset that steeply depreciates after subscribers put the first miles on the cars.
Possumato says many subscription programs are evolving to address these issues. Some have moved out of necessity to limit choice and flexibility — by limiting the number of “flips,” by allowing a selection from a car class as opposed to a specific model, or by choosing a vehicle for subscribers based on their need (i.e., a night on the town or a family road trip).
Other plans have moved away from new vehicles; instead offering models with up to three years and 60,000 miles on them.
But for car rental, these aren’t necessarily problems. Unlike dealer sales, inherent in the traditional model is constant turnover and choice by car class; the depreciation curve works better, and agents wouldn’t need extensive retraining away from their main source of income.
In fact, these new services sound very similar to car rental programs that have been around for years, since subscriptions were only for magazines. Hertz’s Multi-Month program and Avis and Budget’s Mini Lease programs offer similar flexibility, though not through a slick app.
Lately, exotic rental car companies have also dipped their toes into these waters. Many have pulled back, complaining that managing their fleet against the whims of their demanding clientele isn’t worth it.
However, Benny Black, owner of Platinum Motorcars, an exotics rental and sales company in Dallas, is growing a small program of his own.
Subscribers to Black’s program pay a set monthly fee for a six-month minimum. With that, they get to choose from any car in his exotic fleet and use it for four days a month. His fleet consists of used exotics, including those for the program.
“If you’re using brand new cars with unlimited driving and unlimited flips, you can’t get away from the depreciation,” Black says. “But if it’s one to two years old, you’ve already wrote down the depreciation.”
Black has done the math to understand a monthly subscription price that lures in subscribers and keeps them while maintaining desired profit levels. The program’s daily fee is less than the daily rack rental rate, which is attractive to subscribers, though the tradeoff is having subscribers locked in for a set monthly fee for six months.
If potential customers assume sticker shock, Black counters with the cost and burden of actually owning a Lamborghini.
“A working dad might be able to buy a Ferrari, but mom’s not going to let him drop $300,000 with two kids on their way to college,” he says. “He doesn’t get to play in it every weekend with Bobby and Susan in soccer practice. But if I can have it in his driveway every other weekend, he’ll make time for it.”
Success depends on knowing his audience intimately, and catering to them in their environments. Black worked golf tournaments to integrate with a group of surgeons, some who became subscribers. He offered them a free day in the program for a successful referral. He also has connections with sports agents, who may subscribe to get their rookie clients into cars.
“I knew their egos, I understand their industries,” he says. “If I can sell to their egos at a fraction of the cost, and I make it as easy tapping a button and it’s sitting in their driveway, I can get them in the program.”
Black’s subscription program is powered Rent Centric’s technology. The app has other concierge services built in, such as condo rentals, shopping opportunities, and dinner reservations. The formula has worked so far: “My customers have been re-upping on their subscriptions after the first six months,” he says.
With daily rentals in the four-figure range, a subscription program for exotics has more wiggle room for profitability. Can this work for standard daily rentals?
“I think there are pockets of opportunity in various markets, but the retailer needs to understand what those opportunities are and unleash them,” Possumato says.
Possumato believes that rental operators are more equipped to jump into this market than dealers, because they have the platform, financing, and an insurance model that’s closer to subscriptions than a dealer’s playbook. “All they need is a tweak in the technology platform and a slightly different point of view than they have right now,” he says.
The jury may still be out on the secret sauce for profitability in subscription services. Yet for traditional rental providers, it’s imperative to experiment with new business models that expand their client base and provide greater convenience and flexibility for their customers.
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