Will car subscriptions revolutionize auto sales?

For years, automakers have been looking for business models beyond car sales to diversify their profit pools. The latest study „Will Car Subscriptions Revolutionize Auto Sales?“, published by the IAA MOBILITY Conference knowledge partner BCG, takes a look at the sharing economy and explains how car subscriptions could easily become a $30 billion to $40 billion market in ten years.

With the rise of the sharing economy and subscription services, from software-as-a-service to Spotify and Netflix to mobility services, it was only a matter of time before car subscriptions would arise. Vehicle subscription offerings from OEMs have been around for several years. But the market only recently has begun to gain traction with consumers and investors, as business models continue to evolve and an expanding pool of providers hone their formulas for competing.

In 10 years, car subscriptions could easily become a $30 billion to $40 billion market. For many OEMs, the results have been lackluster, yet some startups, particularly in Europe, have fared well. Does this mean car subscriptions are an improbable bet for the automotive industry? Or is it just a matter of time before the business model kinks are worked out? What will it take, in resources, capabilities, and strategy, to turn car subscriptions into a thriving part of the auto retail industry? And how are the different providers poised for advantage?

Reasons why car subscriptions are gaining consumer interest

  1. Buying a car the traditional way is tedious. Many consumers find the conventional car-buying experience — at least everything past the test-driving part — to be a hassle. They dislike the sales pressure. The purchasing process itself is slow and complex, and involves a lot of paperwork, especially the financial portion. Price transparency is often lacking. At this point, online purchasing is still a fairly limited option for new cars, mostly because of industry structure and the patchwork of regulations governing direct OEM sales, particularly in the US. (As of 2020, only 1% of new car purchases took place online.)
  2. Ownership is less flexible and can be risky. The commitment is long, whether buying the car outright, financing it, or leasing, and leasing comes with severe cancellation fees. The residual value loss in buying a car discourages people from changing their vehicle as often as they’d like. The individual car owner takes on residual value risk, a risk that can prove painful for anyone who buys a car and then experiences a job loss or other form of financial instability, as many did during the pandemic.
  3. Car ownership is losing its luster in many parts of the Western world. Ownership for young people is no longer the status symbol or all-consuming aspiration it was just a generation ago. A study among Baby Boomers and Gen Z consumers showed that while about 75% of Baby Boomers consider owning a car a necessity, only 45% of Gen Z respondents think so. The proportion of 20- to 24-year-olds in the US holding a driver’s license fell from 92% in 1983 to less than 80% in 2018—a more than 10 percentage point decline in one generation. People have a more utilitarian attitude about driving, and studies show that growing numbers of people (especially city dwellers) do not think they need a car to get around.
  4. Subscriptions are a low-risk way to try out new brands and BEVs. Consumers who might shy away from new brands or battery electric vehicles are more willing to try one out through a subscription. For BEVs in particular, subscribing eliminates a current drawback to ownership: the decline in resale value owing to reduced battery life. The closer a car is to the end of its battery warranty, the lower its resale value, as new batteries cost anywhere from $5,000 to $16,000. Given the rapid pace of improvement in battery technology, however, the cost of batteries will go down.
  5. Subscriptions are an attractive supplementary option for B2B customers. Fleet services and companies that provide vehicles for their employees typically lease vehicles. Subscriptions enable business customers, particularly small and medium-size enterprises, to quickly adjust their fleet size based on demand, and nimbly react to changing business conditions.

About BCG's center for mobility innovation

Boston Consulting Group’s Center for Mobility Innovation covers the new wave of mobility products and services that are moving beyond the automobile, including intermodal platforms, mobility services, public transportation, logistics services, and smart infrastructure. The center’s experts help municipalities and organizations envision innovative mobility solutions and put them in motion.