What are the prospects for vehicle subscriptions?

Paul Harrison explores the pros and cons of a Netflix-style vehicle business case

Car ownership has changed significantly in the past few decades. While today it is not uncommon for a family to have two or maybe even three cars parked outside their home, if we rewind to the 1970s there was less than one per household—and in many cases that car was a company car.

It may seem strange to think of a family not actually ‘owning’ a car, but in reality, almost 94% of new cars are now bought using motor finance, and therefore not ‘owned’ at all. Most new cars are bought using Personal Contract Purchase (PCP), Personal Contract Hire (PCH) or Hire Purchase. So, for the household with two or three vehicles on the drive, that’s over £40,000 (US$53,000) worth of debt. This is not uncommon in today’s pay monthly society.

The pandemic brought all financial outgoings into sharp focus, and that has included a re-evaluation of cars and mobility financial services by both the consumers and the motor industry alike. This in turn has led to the emergence of a new service model: car subscriptions.

Leasing a vehicle through PCH is, in a sense, a precursor to subscriptions

Car subscriptions are all-inclusive plans where consumers and businesses pay a single monthly fee that covers all the associated costs of motoring, except fuel or battery charging. Subscriptions often include insurance, road tax, servicing, maintenance and the cost of the finance associated with the vehicle itself—which is usually in the form of a contract hire or leasing agreement.

Leasing a vehicle through PCH is, in a sense, a precursor to subscriptions. Unlike PCP where customers effectively take out a secured loan which includes an option to buy the vehicle at the end of the term, PCH is a hire agreement with a fixed monthly payment—a ‘subscription’ in many respects—to cover the usage and in turn depreciation of the car over the lease period, often three years.

However, where leasing and subscriptions differ is the flexibility of the subscription plans and the inclusion of maintenance and insurance. Currently, leasing plans are longer-term (18-48 months) whereas subscriptions can be both long and short, often with ‘cancel anytime’ policies. But that flexibility is where the price differences arise.

As well as a single monthly cost, subscription users often benefit from the ability to swap and change their current vehicle on a far more frequent basis than longer-term leases, including potentially at just 30 days’ notice, depending on the subscription provider. Subscriptions will be more expensive than a lease or other type of finance agreement on an equivalent vehicle, but subscriptions appeal to consumers that value convenience and a bespoke service over price alone.

A number of car subscription services have been launched in recent years and the number continues to grow. Care by Volvo is one of the leading manufacturer propositions in the UK and sits alongside offerings from Jaguar Land Rover (Pivotal). More recently Volkswagen and Hyundai have announced that they are bringing their subscription services to the UK. In addition, there are a number of independent service providers that offer access to multi-brand cars such as Wagonex, Onto and Cazoo (who recently bought Drover).

Where leasing and subscriptions differ is the flexibility of the subscription plans and the inclusion of maintenance and insurance

All of this points to a growing market and increased consumer demand. However, car subscriptions are yet to reach the mainstream market and there is perhaps still a little confusion amongst consumers about exactly what a subscription is and what they do and do not include as part of the monthly price. Subscriptions are not long-term car rental schemes, nor are they car-sharing schemes. They are hire/leasing agreements that include other added value products that many motorists would ordinarily have to buy separately, such as insurance or servicing.

What does this all mean for the industry? In reality, subscriptions have been introduced as a direct response from consumers for more flexibility, from drivers who want to change vehicles as and when they need. However, the downside is the premium costs of the plans can be out of reach for many consumers.

As the new car leasing market continues to grow, as has been the case with the FLA’s data showing that the value of personal leasing increased by 33% in the 12 months to August 2021, the shift in consumer demand for more flexibility puts lease providers in prime position to increase their market share. With lower overall costs in comparison to PCP and subscriptions, alongside other incentives such as flexible terms, low or zero deposits, maintenance packages and even insurance bundles, then for consumers, leasing becomes the ‘no brainer option’.


The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

Paul Harrison is Head of Strategic Partnerships, Leasing.com

The Automotive World Comment column is open to automotive industry decision makers and influencers. If you would like to contribute a Comment article, please contact editorial@automotiveworld.com

 

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