NEW ROADS: Subscriptions bring challenges, but also new ways to reach shoppers

CARY, N.C. - 

Editor's Note: This is the debut story in Auto Remarketing's “New Roads” series, examining the latest technology and innovation impacting the retail automotive space. 

Much like the wave of online car-buying services launched over the last handful of years, the subscription model and other related alternatives to vehicle ownership are seeing the same ripple effect.

The pool of providers is already quite deep, with automakers and startups alike jumping in with their own versions.

In fact, a consumer advice piece from Edmunds, which details the OEMs and startups in the subscription space, includes a couple handfuls of players providing such services.

“What you’ll see, like we’ve seen before, is that you’ll have a number of companies provide that service as an intermediary upfront,” said Sam Mylrea, the chief executive officer of PureCars, in a January phone interview.

“That said, I think in the next five years … the vast majority of dealers will adapt and have that offering internally, where they’ll offer that flexibility to the consumer in kind of a one-month payment based on the tier of vehicles,” said Mylrea, whose company provides digital marketing services.

And many vehicle subscription providers, though not all, already have dealers as part of the equation, said Edmunds senior consumer advice editor Matt Jones.

He gives the example of Care by Volvo and the Fair flexible used-car leasing platform.

Others were created by dealers, Jones added.

However, it’s too early to tell if dealers are really jumping in feet first.

“There isn't an answer for that yet, as it's still such a new model,” Jones said by email, when asked if the subscription model had caught on with dealers.

“It is safe to say that some dealerships like the idea enough to pour a bunch of time and money into creating their own offers. So some dealers are certainly behind the idea.”

 Mylrea, the PureCars CEO, said that based on his discussions with larger dealer groups, the shared economy and the rise of services like Uber and Lyft has not yet had as strong an impact as once feared.

“That said, I think what it’s forcing dealers to do is really re-look at how they’re stocking, merchandising and how they’re actually selling their vehicles. Very similar to how quickly the whole idea of leasing rose in the 70s, I think dealers are being forced to re-look at how they sell a vehicle outside of the traditional financing and leasing terms,” he said.

“I think we’ve seen it with a number of dealers adapt to a, kind of, pay-per-month subscription membership where consumers can adapt their car based on their needs – and maybe their needs that day or that week – and really not be tied into a 36- or 39-month lease,” Mylrea said.

He added: “The way consumers are utilizing a vehicle has changed, and I think just like a number of other industries, consumers are really looking for their own customized experience. They have very specific demands of what they’re looking for, and they expect to have those demands met. And it’s really forcing dealers to adapt.”

And it appears they’re doing exactly that, at least in the early stages.

Not ‘just a fad’

Gary Galloway is senior product marketing manager at Netsertive, a provider of digital marketing solutions.

He said dealerships will put more emphasis on this kind of service as it gets more of a foothold in the marketplace.

“So as this gains traction, I think more and more dealerships will be paying attention to it,” Galloway said in a February phone interview.

“And I talked to a couple different owners of groups and dealerships, and the general consensus is it’s just a fad; they’re not really too concerned about it … I would suggest otherwise,” he said.

“It’s something they should definitely be paying attention to, because this can have an immediate impact on car ownership, car buying, the whole car-buying process, much more immediately than self-driving cars," he said.

“That’s not going to have an impact on dealerships for a decade or so,” Galloway said of autonomous vehicles. “But this can have an immediate impact, like within the next year. So it’s certainly something they should be paying attention to.”

The challenge or averseness dealers may have to this model may come down to a lack of profitability in it for them — at this point, anyway.

“A lot of these dealers aren’t making money until they get the holdback money from the manufacturer for when they sell a car,” Galloway explained, referring to the practice of automaker paying a dealer after a car is sold.   

So for example, these might be tiered incentives where a dealer gets an increasingly higher number in holdback per vehicle for each sales range they meet, he said. 

“So if you’re not selling the vehicles, you’re not getting that holdback. That really does, in some cases, makes the difference between being profitable and not for a dealership on a monthly basis. If there’s not titling of these vehicles, there’s not holdback,” Galloway said.

“So it’s really something that the manufacturers need to come up with, and that’s why these manufacturers are piloting this as well, so they can properly incentivize local dealerships to participate in this.”

Dealers and automakers will need to make a “coordinated effort” to figure out that part of the equation, so that the model can be a profitable one for dealers, Galloway said.

“The trick to making this stick and to make this work is for the OEM, the brand, to figure a way to properly incentivize the local dealerships to participate,” he said. “Because that holdback money is very critical for a lot of dealers … to be profitable.”

Prices vary

Concerns over profitability could be what’s driving prices for some subscription models so high, Galloway said.

And some of it may have to do with the luxury versus mainstream vehicles involved in the programs. There certainly is a wide range in pricing with some of the luxury varieties costing up to $2,000 or $3,000 per month with others as low as $200-400, according to the Edmunds report.

“The values of the vehicles vary, and that can cause some pretty different prices.  For example, a Porsche 911 being offered in the Passport program can easily exceed $100,000, and a Cadillac Escalade tops $85,000,” said Jones, the Edmunds editor. “But a used Ford Fiesta, (Canvas by Ford uses more mainstream used cars) might have a retail value of under $10,000. The program prices seem to reflect those differences.”

The prices “may level out eventually,” but at the moment there is a wide chasm, he said.

Should dealers do it?

Asked how dealers can determine if subscriptions are a worthwhile model, Galloway of Netsertive said it really depends on the specific store and the intricacies of the local market. If the area has high leasing numbers, it might be something worth considering, he said.

“It’s going to take a little bit of coordination at the dealership level just to have a fleet of cars available for pick up, but a lot of these dealerships are used to doing that with their service loaners,” Galloway said. “And some dealerships have over a hundred service loaners sitting there.”

There could be some “nuances” to floor plan financing these vehicles, which could vary from automaker to automaker, he added.

Another key point is that it could take a major marketing effort to raise consumer awareness of subscriptions, Galloway said.

Asked how dealers could reach potential consumers interested in this model, Mylrea of PureCars said: “Consumers, I think, have gotten a lot more specific about what they want. And how we’ve seen that adapt, whether it’s a monthly subscription or it’s a lease payment or they want to buy the vehicle outright, I think it puts more and more pressure on the dealer and vendors like PureCars to be able to target the right consumer that’s in market and really be able to use first-party, third-party data to really know what that consumer’s looking for, and serve them with a very, very relevant ad.”

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