There is no uniform subscription model – but there are four main factors that are key to success

Subscription blog series – Episode V

In the previous articles of our blog series, we introduced subscription models and the different types of providers, the key dimensions of a subscription product, and customer insights based on our global customer surveys. In addition, we described how OEMs and captives can respond to the current COVID-19 pandemic with a general flexibilization of their product portfolio.

In this final article of our blog series, we will present the challenges and success factors for the implementation of a subscription or flexible mobility product, with a special focus on the particularities of different business models.

To supplement our market and customer research in this matter, we talked to several experts, including CxOs of subscription model providers and mobility experts of captive finance organizations.

There are many types of subscription products – these are the differences

The main distinction of these models is between asset-heavy and asset-light variants, depending on whether the provider owns and manages the vehicle fleet itself or solely provides a digital platform as a marketplace or an intermediary. For further differentiation, we can use other comparing criteria, such as the different core business models, sales channels, and contract closure partner of the customer.

Each of these models has different implications for the involved players, implying different challenges and corresponding success factors, which we illustrate in detail in Figure 1.

For OEM and captives it is of utmost importance to set up efficient processes and incentives to gain dealer commitment and establish a holistic fleet management. Dealer-based models must carefully evaluate the “make-or-buy” decision when it comes to a subscription platform and, in the case of dealership groups, ensure scalability. In contrast, for asset-heavy third-party providers, the aspect of managing their fleet is most important, as they act as stand-alone players managing their assets independently without backing of an OEM or captive ecosystem. Last but not least, independent, asset-light third-party providers have to convince dealers with a compelling product to reach critical mass. This requires a clear business case focus and initial guidance to fuel the supply side of their marketplace.

Key success factors for all subscription business models

Independent of the particularities of each business model, we identified a set of common, key success factors as displayed in Figure 2, which are valid for the setup of a subscription model, but also for a general flexibilization of the product portfolio, as we described it in our previous blog post:

1. Create a compelling offering based on customer centric research

Customer preferences and expectations towards a (digital) mobility solution differ significantly among locations and demographic characteristics. Which type of vehicle do your customers desire? Which extent of flexibility do they demand and how much would they be willing to pay for it on a monthly basis? Which model would be coherent with your company’s overall brand appearance? These questions can only be answered by making the effort to take the customer’s perspective, meaning to conduct customer surveys and observe the pain points and development needs of traditional car purchasing. Based on that, for example, personas of potential customers can be created to design and ideate a product to target their specific needs. After this initial phase, an MVP product within a defined geographical spread and limited upfront investment can help to validate and sharpen the concept.

2. Embed flexible mobility in your overall lifecycle management

The economics of a subscription model require careful calculation, as the up-front investment is substantial, independent of the type of provider. Unsurprisingly, the economics turn out to be highly different for new and used cars. Our current market perception is that the most successful subscription models are based on used cars, as the initial depreciation in value of new vehicles is too high. This holds particularly true for models with short minimum contract periods and high frequency of vehicle flips. But also, for longer contract terms, managing the asset and embedding it into a holistic lifecycle concept is a key priority. In summary, all subscription providers’ main focus has to be on determining which cars are suitable at what time. It needs to be defined how to cross-leverage the vehicles during their lifecycle as for example rental cars or remarket them in leasing and financing or finally sell them as used vehicles on the market.

“You have to establish an on-point asset management – otherwise you will fail.”

– CEO of a third-party subscription provider (asset-heavy)

3. Get residual value calculations right

Traditional residual value calculation is based on static runtimes. Today, OEMs and dealers can calculate the residual value of their cars accurately for contract terms of, for eample, 12, 24, or 36 months. But how does that change when a contract can be terminated each month? How do “vehicle flips” affect the residual value? And how will electric vehicles change the game of residual value management? To overcome this challenge, new innovative tools are required to manage residual values and holistic manage the overall lifecycle and efficiently allocate your car fleet. For that reason, we see more and more leading subscription providers applying artificial intelligence to cope with these data intense calculations.

4. Incentivize dealers and establish convenient processes

Another important aspect to consider is the role and remuneration of dealerships in the ecosystem of a subscription model. OEMs and captives can easily leverage their large, traditional dealer networks for establishing customer facing service points. In contrast, third-party providers find this as one of their key challenges – even if some of them partner with (mostly multi-brand) dealerships. Independent on the circumstances of collaborating with dealers, however, all have to find a way to adequately remunerate their service partners and provide appropriate incentives to push their subscription product. Also – and absolutely comparable to traditional car sales – operative processes must be highly efficient to allow for a profit margin at the end of the day. Dealer processes have to be intuitive and convenient in order to be as easy as possible for dealers to administer their vehicles on a platform. This can be achieved, for example, through integrating the platform with the dealer management system.

Subscription models and flexible mobility will receive a demand boost

Over the past two years, subscription models and other flexible mobility solutions have emerged as a global phenomenon, however, with varying degrees of success. Several players have piloted their models, only few have managed to establish a sustainably profitable business while others already shut down their products again. This underlines the importance of the above-mentioned critical success factors, which have to be mastered to establish a successful subscription model. In short, it culminates in a firm’s capability to careful research customer demands, plan and innovate on the product side, and manage the ecosystem for economic success.

As we showed in our report COVID-19 and the automotive consumer, the desire for individual mobility is resurging, which, in our opinion, will boost flexible mobility solutions such as subscription models. Especially for electric vehicles, subscription has the potential to become a real alternative to car ownership. Therefore, providers, especially traditional OEM/captive constellations, should consider these as a supplement to their existing product portfolio.

“Subscription models do have a special moment in the post-COVID world. OEMs and their captives must now respond to the increased demand for individual mobility, especially to attract younger customer segments.”

– Markus Winkler, Head of Automotive & Mobility, Capgemini Group

At Capgemini Invent, we provide expertise and dedicated capabilities to support organizations from planning, ideation and piloting to global implementation. Please reach out to our experts Michael, Corinna, or Manuel for any questions, to get more insights in this field or discuss your concrete ambitions to flexibilize your mobility product portfolio.

Dr. Michael Zellner

Expert in Digital and Innovation

I’m convinced that the biggest changes in the automotive industry are yet to come, and that focus on ‘bringing to life what’s next’ is key to not only survive, but also to outperform competition in the future.
As one of our global automotive leaders – managing our global business for one automotive key client and running our global captive finance unit – my motivation is to support and lead clients through this transformation. The opportunity to develop trusted adviser partnerships is the most rewarding part of these relationships.
Being for more than two decades in the automotive and financial services industry, my experience ranges from strategy development through restructuring and reorganization to operations and IT systems. The common theme of my work is to support my clients to realize their full potential through innovation and digitalization.
Some recent successes:
Developed and implemented new mobility offers (e.g. subscription and rent solutions)
Implemented and rolled-out new distribution models for direct and agency sales (e.g. in markets in Europe and Asia)
Agile developed new digital solutions (e.g. point-of-sale, retention management and self-services)
Improved marketing and sales (e.g. to become more predictive and integrated) and optimized after sales (e.g. through dynamic pricing mechanisms)
Develop global digital strategy for a global captive finance group
Setup of a new global structure and governance model for digital services, as well as a globally-layered delivery model and future-oriented culture
Restructured a financial services group across multiple group companies to achieve substantial synergies
Supported the merger of two automotive startup companies
Closely collaborating with and being a founder and board member on startups sharpened my attention to quickly implement and scale lean solutions
Before my leadership role in Automotive, I built-up and managed our Insurance segment in Central Europe for several years and was responsible for shared services and outsourcing. Being the founder of an e-commerce and MedTech company sharpened my attention to quickly implement and scale lean solutions and provide insights on how to innovate and manage a business pragmatically.