Car Subscription what's the big deal?
What’s the (big) deal?
There’s a lot that’s been written about car subscription and much of it actually makes the whole thing seem more complicated than it could be. So, I set out to see if I could explain what it is in simple terms and how we got here…Maybe most importantly, is it going to stick around and help me to get behind the wheel?
When we think about it, pretty everything these days, in the modern world, is paid monthly, right? Whether it's Netflix, Sky, BT, or even the mortgage - it’s all about stumping up the monthly cost for these services…Except, that is, the second most expensive thing that most of us have to shell out on! The car.
So, why is this? Well, could it be that most cars are sold by car dealerships and they like selling cars! They make money on the finance and get lucrative hand-outs from the brands that made the cars.
Gone are the days of ‘cash is king’ when buying a car. Dealers want you to take out a fixed term agreement, typically 36 months as they make a tidy sum on each deal: On the finance for the car itself, the part exchange that the customer trades in and even a hefty bonus from the car manufacturer for achieving sales targets. Happy days.
Well, not so happy for the poor customer, right? They have to put up with the sheer inconvenience of traipsing to a car dealer forecourt and do battle with a car salesman who is paid a lowly salary, boosted by commission if they sell lots of cars…It’s often a high pressure sales environment and many customers feel uncomfortable. Customers often feel uncomfortable with the idea of ‘haggling’ over the price of the car and the value of their own car, if they are looking to sell it, before jumping into a new one.
This backdrop is why a product emerged, before car subscription reared its head…According to TheCarExpert.co.uk, more than 80% of all private new car purchases in the UK are paid for using a person contract plan or PCP and remarkably, the majority of these deals still take place in the UK’s dealership showrooms.
This is one of the most popular ways to buy a car in the UK. PCP agreements work in a similar way to personal loans or car finance options. You pay an initial deposit, (typically 10%) and then take out a loan for the remaining amount. This is then paid back monthly with interest. With interest rates so low over the last decade, the monthly payments have been attractive and then there’s the convenience factor of being able to step out of the agreement at the end - typically after 24 or 36 months.
Surprisingly, online buying is still a fairly limited option for new car customers, mostly because of the (outmoded) way that the motor industry is structured, where car manufacturers (aka OEMs), wholesale cars to franchised dealerships and as long as those dealers stick to the rules, when it comes to branding, leave them to get on with selling cars. This model has stuck around for a century or so and so it takes a lot to break the mould…
The fact is that the majority of new cars are still bought at local dealers and this despite the influence that lockdown had on people’s buying habits. While online buying is becoming more popular with customers, the lion’s share of cars in the UK are bought from a dealer and in the USA, this is even more the case, given their considerable leverage over the car brands and how cars are sold. To give you an idea, a single international car dealer group, Penske Automotive, based in the US and owner of Sytner Group in the UK, generated $25 billion revenue in 2021!
That said, you can’t stop a ‘rising tide’ forever and so as more and people see the rise of the sharing economy and subscription services, for pretty much every walk of life, including music - Spotify and TV - Apple, Disney and Netflix, it was only a matter of time before the convenience of subscription would catch on when it comes to getting behind the wheel.
So, how do subscriptions work? Well, they share some characteristics with rentals and leasing. Simply, the customer pays a monthly fee for a car, with all costs (except fuel) included: So, maintenance; repairs; roadside assistance; car registration (if it’s a new car); insurance (a big deal this one and not always included…) and road taxes. How long a customer signs up depends on the provider and varies from one month to one, two or three years. Typically, the longer the commitment, the lower the monthly fee.
Of course, in these changing times and particularly post lockdown, entrants such as ONTO have emerged to piggy-back on both the trend to electrification, offering only electric car subscriptions and the move to buying online.
So what’s the big deal? From where the customer’s sitting, car subscriptions are an attractive proposition when compared with buying a car. Subscription means convenience, flexibility and frequently, far less commitment (just 1 month is possible).
The customer swerves the substantial upfront cost of a car purchase, along with the dreaded hidden costs of ownership, including, wait for it…depreciation! Car valuation specialist Brego reckons the average new car in the UK depreciates by up to 40% in the first year alone and on average, has lost around 60% by year 3. Of course, these are averages, but you get the idea. These things lose your hard-earned cash at an alarming rate!
Another key point is that people generally underestimate the total cost of car ownership and are sucked in by that new car smell…A survey of 7,000 households in Germany showed that people underestimate the total cost of car ownership by more than 50%. Also, on a practical level, customers don’t need to worry about finding a trustworthy mechanic, or even buying new tyres, which can be surprisingly pricey.
Subscriptions can also serve as a handy way to test drive a new car. It may be that you’re taking the plunge into the unknown with an electric car and with a subscription you can drive one for a month and see how you get on in the real world.
If you’re a business owner, (especially SMEs), subscriptions can also work in your favour. Rather than be tied into long term leases or worse, tying up large amounts of working capital, there’s more flexibilty, as you’re able to match the demand for cars with a product that is reviewed on a month by month basis, depending on business trading conditions.
From a commercial angle, car subscription is heading, in the next decade or so, to becoming big business. BCG forecasts that in 10 years time, car subscriptions could easily become a $30 to $40 billion marketplace.
What we are seeing on a positive note is much needed innovation in the previously staid Automotive industry. Lower barriers to entry have paved the way for startups to try their luck as the sector moves (somewhat reluctantly) to the world of mobility. Digital mobility companies and startups, such as Fair, Cluno, Drover and Bipi, have chanced their arm with a disruptive business model. Time will tell who wins out.
What I’ve personally discovered when looking at the subscription options, is that it’s very difficult to compare ‘apples with apples’. In other words, there are so many variables that it’s tricky to compare offers between rival companies.
And often, when digging, you find that all is not what it seems. For example, at the time of writing, can I really get into a new Tesla 3 with Cazoo for £799 on a month by basis, with no strings attached and insurance included? In a word, no. The rental term is actually 36 months and the shortest contract length is 6 months.
So the word of caution is…homework! You’ll need to have a good look at exactly what is and isn’t on offer and look out for those terms and conditions that will reveal what the deal is in reality. The devil is on the detail - ONTO for example, charges £100 for delivery.
Consider, is the deal on offer truly month by month, or a clever piece of marketing to draw you in? Is insurance included and if so, what cover do you get and who underwrites it. If maintenance is in the package, does it include accidental damage? Then there’s the MOT, road tax, and breakdown cover to think about.
One of the reasons I lean towards MyCarDirect is that you can easily get on the blower and have a chat with them. I’m a big online fan for many things, but I have to say that I prefer to talk to a human for the more complex things in life! Car insurance is a good example, as the devil’s in the detail and the same is true for subscription. What matters is not so much the deal, but what happens when things go wrong…Customer service then becomes paramount, not saving £50 a month on your chosen wheels.
Added to this is that MyCarDirect are agnostic, in the sense that they can offer you any make or model you choose, depending on availability of course. They don’t lean in any particular direction, or favour a particular car brand. They can also offer a genuine monthly subscription on a new or used car.
Will subscription bring traditional car dealers to their knees? I don’t think so. There will still be plenty of people who are happy to trek to a dealership and are sceptical about completing such a high value transaction, purely online.
For customers it’s another option that brings convenience, flexibility and wider choice to the party and removes some of the time and headaches that spring from the traditional search for a car. It’s a better use of hard earned cash and you won’t lose sleep over the dreaded ‘D’ word - depreciation. Bear in mind that whoever you take the contract out with has a vested interest in keeping your car in A1 condition, as when your deal finishes, the car comes back to them to sell on, or move on with another subscription deal.
So the big question to leave you with is this…Could this be the decade of the car subscription and if so, who will take the crown as the Netflix of the car world..? I’m a believer and it’s the future of mobility for most of us, but maybe not as we know it right now Jim!
Matt Stone is Automotive Adviser at Pario Ventures. He’s an exited entrepreneur who’s passionate about technology and how it impacts our lives. He’s held senior marketing and sales roles with some of the World’s greatest brands – Toyota, Bentley, Rolls-Royce and Manchester United TV.