Will Subscription-Based Service Disrupt the Automotive Industry’s Sales Model?

Some automotive companies are experimenting with subscription-based services to capture additional younger customers, which are shunning ownership models and to potentially get ahead of a potential downturn in the market.

The chart above shows that the U.S. automotive market has enjoyed a healthy recovery since the most recent sales drop during the 2008 financial crisis. However, the automotive sales are cyclical, U.S. population is shifting from suburban and rural areas towards urban living and younger generations are delaying – or outright skipping – getting their driver’s licenses. For all those reasons, automakers are looking for new ways to capture additional revenues through non-traditional sales channels.

Peugeot SA – the parent company of the Peugeot, Citroen and DS car brands – is using its Free2Move ride sharing service as a springboard to reenter the U.S. market after more than two decades of absence. Other companies are looking at a subscription-based sales model. This sales model allows customers to sign up and pay a monthly subscription fee for access to a fleet of manufacturers vehicles. While we are still far away from a universal and widespread use of this model, few high-end car manufacturers have been considering this approach which would generate a subscription revenue inflow that would be more consistent than the fluctuations of the traditional purchase approach.

General Motors’ (NYSE:GM) Cadillac division, Ford Motor Company’s (NASDAQ:F) Lincoln brand, Volkswagen AG’s (FWB:VOW) Porsche brand and the Volvo Group (NASDAQ OXM:VOLV) have been experimenting with similar services. Now, Daimler AG’s (FWB:DAI) Mercedes brand and BMW (FWB:BMW) announced their own foray into the subscription model as well.

Neither company has communicated details of their specific plans. However, both companies plan to use small-scale test programs in the U.S. to evaluate potential profitability and long-term feasibility of these programs. While BMW has no previous experience with subscription plans, Mercedes can draw on experience from their current pilot program in Germany and a similar program they run in Italy with their Smart-branded vehicles.

If these pilot programs are successful and the customers adopt the new sales model, the subscription-based car sharing services could disrupt the automotive industry, in the same way that Napster and Spotify disrupted music sales or the way Netflix changed how we rent and watch movies and show.

Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.