Subscription Services: One Size Doesn't Fit All

“The American Dream is moving from ownership to access,” says John Phelps, vice president of Clutch Technologies. “If we had tried to start this (a subscription platform) at the heart of the MTV Cribs era, it wouldn’t have worked. Now it’s ‘Look, I can push a button and a car picks me up that takes me to a jet to fly to an island and a yacht I don’t own.”

In the rental world, Benny Black is already leveraging this mindset. Black, owner of Platinum Motorcars, an exotic rental and sales company in Dallas, has started a subscription service for the 1-percenters who will pay for the convenience and flexibility to be able to swap out exotic cars on a whim.

But how do the other 99% view subscription services for automobiles as an alternative to a purchase, lease, or rental? Russ Lemmer, executive VP of Dealerware, a fleet management platform, led a team of strategy consultants to answer this question.

Their research unveiled that consumers are eager to try forms of vehicle subscriptions because they value the flexibility of choosing the make and model along with the lack of commitment. However, “As you layer in the costs to deliver such a model, and even price above that (for operators) to capture some margin, demand dries up to almost zero,” Lemmer says.

Lemmer says that a subscription model makes sense when you consume enough of a product to lower the cost per use to a reasonable level (watching a hundred Netflix movies), or your service offers greater convenience (alleviating a visit to the store to buy razors), or you’re easing a production burden (offering a home meal kit).

But those conveniences don’t necessarily translate to exchanging automobiles, Lemmer says. “If the model churns out a price that’s three or four times the cost of a comparable lease and services, they say the lease is fine,” he says.

To be clear, Clutch Technologies is not focused on a high net worth demographic. Clutch provides the technology infrastructure that powers many types of subscription services offered by automakers, dealer groups, and vehicle-sharing platforms.

Clutch’s white label platform is configurable to a variety of models, from new and used vehicles or both, offering white glove pickup and deliveries or self-service at the store, to unlimited vehicle “flips” and varying time frames.

While Phelps won’t pick a winning horse, he’s able to assess general indicators for success based on the multiple subscription types that Clutch powers. “The secret sauce to profitability lies in the provider’s control of supply and demand of a shared vehicle fleet and the ability to dynamically allocate that fleet to consumer patterns,” he says.

This requires rethinking traditional utilization, where a vehicle is typecast upon production as a retail sale, loaner car, lease, or a fleet vehicle for the first 12 months to three or four years of its life.

“We’re trying to break the traditional ‘channelization’ strategy,” Phelps says, adding that the procurement type could change on a daily basis, from a daily rental to a subscription for four months to a long-term lease.

As different models find their ways to profitability, subscription services remain a hot automotive trend. You can’t open a web browser without seeing another vehicle subscription service coming online, while another one shuts down.

“Right now, everyone is focused on capturing data and getting the financial models right,” says Jenn Reid, senior director of product marketing at Equifax Automotive Services. “You don’t want to scale the model too quick.”

Is the traditional car rental model suited to avoid the pitfalls and leverage the advantages? Is the time right for daily car rental to jump on board?

We can draw some conclusions from a type of subscription program run by Solomon Cramer, a licensee owner of Budget Harrisburg. Cramer has been operating his program for more than six years.

A New Revenue Stream

Cramer’s program was born out of a Budget Rent A Car program called the Budget Mini Lease. “We call it our long-term rental program instead of a subscription, but it’s fundamentally the same thing,” Cramer says.

The program has about 700 regular customers at present, a mix of consumer and corporate accounts. For a monthly payment, the program covers the vehicle, insurance, roadside assistance, and routine maintenance.

The program requires a two-month minimum between flips — on the long end in the subscription world — though Cramer says he does that to avoid competing with his traditional rental business. Program members needing a shorter rental are offered a discount on a daily rental.

Cramer writes new contracts every 30 days to keep within the regulations of daily rental. The average customer length in the program is seven months.

The best type of client for Cramer’s program are those “looking for a late-model vehicle with no maintenance where a lease doesn’t really work for them, especially if they’re putting on heavier miles,” he says. “And they’re willing to pay a premium to switch out.”

He’s also defined the customer types that won’t work: those looking for an 80-month sales agreement, a subvented 36-month lease on a compact car, or “a truck buyer who will change his own oil and run it into the ground.”

Cramer’s customer base fits into a price band of about $500 to $600 per month. He’ll leave the higher end buyer — “the guy driving a CTS-V during the week who wants an Escalade for a weekend in the Hamptons” — to the premium automaker programs.

To illustrate his program’s value proposition to customers, Cramer recounts a conversation with an employee who was amazed a customer paid so much money for a Corvette for four months and didn’t get any equity out of it: “I told her the best thing for (the customer) was being able to hand back the keys and walk away,” he says. “He didn’t have another 68 payments to deal with.”

Verifying insurance for new customers is labor intensive, while developing a website to attract new business is outside of Cramer’s purview. “I was getting quotes for mid-six figures just to develop the technology to do this right,” he says.

For these reasons, Cramer started offering vehicles through Mobiliti, a third-party subscription provider. The fleet owner holds title to the vehicles while Mobiliti markets the platform to customers and covers insurance.

Different types of fleet providers, including car rental companies as well as franchised and non-franchised dealers, supply Mobiliti’s national networked platform. Through one portal, users have access to vehicles and brands from multiple providers in their area.

“It’s about choice and flexibility to the consumer and giving the fleet provider a new revenue stream they don’t currently have,” says Mobiliti founder Chance Richie.

The benefit for smaller rental companies, Richie says, is they can join a robust network with a lot of eyeballs that they couldn’t create themselves with 20 vehicles.

The Path to Profits

Automakers and car dealers have built their businesses around a transactional sales model. Daily rental operators, however, understand flipping cars in short intervals — much shorter than almost all subscription services.

The traditional rental model already assumes the costs associated with processing multiple transactions, cleaning the cars, and paying agent commissions on a daily, not monthly basis. “There are tremendous savings (realized in a subscription program) to being able to touch the vehicle every month or longer,” Cramer says.

A subscription plan even lowers some notoriously high customer acquisitions costs associated with car rental OTA fees.

There is also wiggle room on reservations timing that you don’t get at a rental counter. Cramer has found that subscription customers are often okay with waiting a couple of days to make the flip if the car isn’t available on the designated day.

Like the daily rental market, success with subscriptions depends on the ability to manage depreciation. “It’s the same reason why some vehicles work in rental fleets and some don’t,” Cramer says. “We’re looking for lowest net depreciation cost.”

For new car dealers, a subscription car returned prematurely with just 700 miles must find another subscription buyer, or it turns into a used car to sell — and the dealer is already upside down on depreciation.

If one of Cramer’s customers wants to flip before two months, Cramer will work with them, knowing that he could simply rotate subscription vehicles back into the rental fleet as needed. “That’s where rental becomes ideal for this,” Cramer says.

A program with used vehicles eases much of the depreciation burden. “You’ve eliminated the OEM margin and most of the dealer margin. You’ve gotten rid of first-year depreciation,” says Lemmer, adding that used vehicles allow more flexibility to price an offering to a wider audience.

Phelps says that two of Clutch’s larger partners will soon be leveraging off-lease vehicles for offerings in the $550 to $650 range.  

Lemmer’s enquiries have found that subscription customers don’t have a problem with used. “If you give consumers the make and model that they want, they’re fine with a used car,” he says.

The Road Ahead

These early stages of subscription programs can be characterized as the era experimentation. “The lifeblood of whether this works or doesn’t will be the analytics and the insights,” says Equifax’s Reid.

“The more use cases and demand — and therefore revenue — you can put against shared assets, that’s where we’re heading,” says Phelps.

Automakers are figuring out ways to lure new, younger customers that may not have looked at the brand. Others, such as dealerships, are looking for ways to maximize loaner fleets. “Service loaners aren’t highly utilized and they (dealers) have to carry them anyway,” Lemmer says.

Providers are jockeying for position for when autonomous vehicles finally arrive — which will most likely be accessed through subscription models.

As for today, “[A subscription service is] another avenue to spread inventory risk,” says Reid. “I like to think about it in terms of how it fits together in the ecosystem. At the end of the day it’s one more tool to get transportation into the hands of the consumer.”

Editor's note: The 2019 International Car Rental Show, convening April 14-16 in Las Vegas, will conduct a panel seminar titled “Subscription Models: Opportunity for Car Rental?”