Netflix-ing the Car
Pay-as-you-go features will supercharge revenue per vehicle
I went through the process of factory ordering a new car recently. Going in, I knew exactly the trim and features I wanted. But, when it came to the advanced driving assistance package, I was on the fence.
I didn’t fancy paying an additional $1,000+ for predictive cruise control et al. Majority of my driving time is spent within city limits and I am cautious enough to not have much use for these features. But it would have been nice to have them for road trips or suburban treks.
I didn’t get the package. Now I regret it a bit because I will not have these functionalities for the next 4 years.
In future, we may not have to live with this regret.
As our cars begins to resemble our tablets, vehicle buyers won’t be tied to decisions made at the dealer lot.
Didn't get the AWD package with the lease? No sweat. Soon, it might be as easy as swiping the subscription button — for easy monthly payments — on the dash or the phone for accessing a feature for specific occasions or times, such as off-roading adventures or winter months.
Tesla recently announced a pay-per-month model for its Full Self-Driving package. The feature will be available as a $199 USD or $99 USD a month subscription, depending on the type of Autopilot package available in the purchased car.
With this move, Tesla is hoping that it will be able to attract those customers — even if temporarily — who shy away from the hefty $10,000 USD upfront tag for the self-driving service. Even better if customers make the full purchase after paying the subscription fee for a few months, allowing Tesla to make more money on the driverless bundle overall.
The idea may seem ill-conceived at first but consider this — Tesla not only pioneered the whole concept of on-demand features but actually made it work. The EV manufacturer has built an entire upgrade ecosystem (the Tesla app comes with a specific Manage Upgrade button), and in keeping with its entire ethos, has spun it into its brand aura.
If you own certain Tesla models, you can beef up your infotainment system with the latest bells and whistles (e.g., video streaming, access to more games) without buying a new car. It might cost you $2,000 but, for many Tesla owners, that’s worth the Reddit-able cred.
Over the years, Tesla has introduced many such paid upgrades post-sale, such as battery and acceleration boosters, as well as some free ones, such as its goofy fart mode. Now other automakers are rolling out similar pay-as-you-go models for existing and future features.
The VW group is probably the most ambitious of the legacy brands, with a full slate of subscription features such as $7/hour autonomous driving, battery upgrades and others planned for its ID4 line of electric vehicles. Audi is already allowing customers to add new features related to lighting, navigation and infotainment through monthly payments, well after the initial purchase or lease.
Premium brands from BMW to Cadillac (and now even Hyundai) are joining the bandwagon. They are throwing everything into the mix — there’s talk that BMW may even menu price heated car seats. But the biggest focus seems to be on truly advanced features such as autonomy, connectivity and powertrain upgrades, aimed largely at premium-ish electric vehicles.
What’s in it for the driver?
As my very personal and subjective experience demonstrates in a small way, the on-demand model may have some appeal to car buyers. Certain vehicle functions may have limited use (e.g. AWD) and may may not warrant an upfront investment
For instance, if you primarily drive in the city of Toronto (as I do), you may need AWD for four months in a year. If you lease you car for 48 months, and let’s say, the feature costs about $5 a month, it might make sense for you to skip the initial $800-$1,000 cost.
Other features such as self-driving modes may be too expensive for upfront payment. VW’s $7 per use autonomous feature maybe great for that once a month trek to the office (in the brave new world of remote or hybrid work), or the twice-a-year road trip, or the drive back from a late night party.
But most importantly, subscriptions will allow customers to constantly upgrade their vehicles, even with features that were not available at the time of lease or purchase. For electric vehicle owners, any available battery range extension during ownership will be a big plus.
There may be many other functions that the OEM may introduce down the road that were inconceivable during vehicle production. One example — vehicle-to-infrastructure features. In the future, your car may be able to reserve a spot for you at the parking lot nearest to a sport or concert venue. On game nights in busy downtowns, a dollar or two extra for that service would be a no-brainer for many.
New revenue, higher profits
The on-demand model may be a good thing for some car buyers, but for OEMs, it’s a potential game changer.
Today, carmakers have a short window of opportunity to make money off a car. It typically ranges from Year 0 (when it’s sold to the dealer) to Year 5–8 (for maintenance and service). Beyond these years, the car, and in many cases, the vehicle owner, are lost to the OEM.
Continuous feature upgrades will likely extend this access period. Consider this scenario: the average car costs about $40,000 today. One can add another $500-$1,000 for part sales (carmakers don’t make money from service) during the first six years of ownership.
Even if a customer opts for two additional features during this time for 4 months a year at $10 / month, it would amount to $480 additional revenue per vehicle for the period.
The models gets even more attractive for the vehicle’s second lifecycle — from Year 7 to 12. Even if a carmakers gets $200-$300 bump per vehicle from second owners, it would lead to revenue that didn’t exist before.
Subscriptions would finally allow OEMs to have a piece of the used car market. With on-demand features, carmakers will not only be able to generate money from used cars, but also establish a more direct relationship with these vehicle owners. The fringe benefits are significant — sell more parts, maintain loyalty, etc.
“I think the incentive is really clear: Car companies want you to be a customer for life. The more they can maintain that relationship with you, you’re going to have to be paying them something.” — Ira Rheingold, executive director of the National Association of Consumer Advocates, Consumer Report
Can subscriptions work?
If the word “subscription” brings up memories of all the failed car-lease-as-you-go models, I don’t blame you. The path to mobility business innovation is littered with the dead logos of car subscription schemes —e.g. Mercedes-Benz Collection, BMW Access. (I intend to tackle this topic in a future piece.)
The features-on-demand ecosystem is not without its risks. What if buyers opt for more entry-level trims knowing that they have options to upgrade in future? Wouldn’t that lower initial revenue — and profit — per vehicle?
It would be worse if the same buyers realize that they can live without advanced functions and don’t access the features at all during their ownership.
Also, menu pricing basic or essential features just don’t fly with customers, as BMW learned the hard way when it had to drop its much-derided $80 fee for Apple CarPlay. OEMs will have to proceed with caution when rolling off things into subscription mode.
But there may be ways to make the business model work. Cars will still have minimum technology requirements to unlock existing and future features. Customers will have to opt for certain trims, thereby keeping the initial revenue intake at a healthy and profitable level.
Automakers may also toy with trial periods or freemium models. Getting customers hooked on convenience is a tried-and-tested strategy in the digital economy. It would be a good fit for new vehicle features aimed to ease the friction of daily driving.
As a vehicle buyer and industry observer, I can’t wait to seen how the Netflix model for cars will play itself out.
