Case Study: New Age: Vehicle Subscription Alternative

The Decision

Gaby Washington just left the dealership after test driving a number of vehicles feeling both excited and a bit overwhelmed. Many changes had happened in the past three months, and she was on the precipice of making a decision about her first car. Having just graduated with her MBA, Gaby was looking forward to starting her new job as a financial auditor just outside of Houston next month.

The job would mean travelling around the region to a number of local project sites and working with the local controllers. Up until this point, she never needed to own a vehicle. Like most of her friends, she used Uber and Lyft to get around the city and if she needed a vehicle for any real length of time, she booked one on Turo. However, she knew that with all that time on the road with her new job, it was time for a car.

Her signing bonus would cover this significant investment but Gaby would only settle for a vehicle that lived up to her expectations. Ever since she was a little girl, she had always wanted to drive a Jeep Wrangler. Being in her new city, she loved the idea of riding around with the top down and heading to the beach in Galveston. Not to mention, she always enjoyed back country camping, which is something a Wrangler could help her further explore. At the same time, with all the time on the road for her job, she might want something with additional interior features like a Jeep Renegade or Compass. Then again, with the move into her new apartment in Midtown and weekend haunts to garage sales something with more hauling capacity like a Ram 1500 Truck also might be useful. It seemed like a no-win situation choosing just one vehicle and possibly compromising one capability for another. It was an overall tough decision but one that needed to be made in the next few weeks.

While scheduling a test drive at the dealership was a great way to experience the different vehicles, and helped Gaby weigh the pros and cons of each, she had to turn her attention to financing options. Gaby, like most consumers, wanted to avoid haggling at the dealership and be prepared before returning to the dealer and sitting with the Finance & Insurance Manager .

Given her degree, she thought understanding the numbers would be easy. Her first stop, as with most research these days, was the internet. Gaby pulled up the dealership website and began to read through the Finance and Leasing terms. Looking at the options for a Jeep Wrangler Unlimited Sport 4x4 with an MSRP of $38,555 and a dealer advertised price of $34,470, Gaby read the following fine print :

LEASE $337/mo.

48 month closed end lease with $3,855.50 DOWN and payment of $337.12. TOTAL DUE AT SIGNING is $4,192.62. Customer is responsible for manufacturer suggested maintenance and auto insurance throughout the lease term. Penalties will apply for payment delinquency. Early lease termination fee may apply. Excessive wear and tear fees may apply. All tax, title, and vehicle registration fees are additional. Offer available to all customers with credit ratings over 750. Lease includes 10,000 miles per year with additional charge of $0.25 per mile. Total monthly payments are $16,181.76. Option to purchase vehicle at lease end is $26,181.85. No security deposit is required. Payments include $595.00 acquisition fee. At lease end, lessee will be liable for a $395.00 disposition fee. Not all lessees will qualify. Higher lease rates apply for lessees with lower credit ratings.

FINANCE $546/mo.

Finance this vehicle with $3,855.50 DOWN at $546.05 for 72 months at 4.20% APR. TOTAL DUE AT SIGNING is $3,855.50. All tax, title, and vehicle registration fees are additional. Offer available to all customers with credit ratings over 750. Total monthly payments are $39,315.60. Not all applicants will qualify. Higher finance rates apply for applicants with lower credit ratings.

On the surface, the lease payment seemed more attractive as it was more than $200 less per month. Both offers required the same amount down, and both were subject to the same credit qualification score of 750. Gaby admittedly had not looked at her credit score in a while and had no idea if she would actually qualify. After all, she was graduating with almost $30,000 in student loan debt, and she had no other credit history to her name. She was curious about how much the rates would fluctuate if her credit rating were a lot lower.

Obviously, there were many variables to think through and a lot to consider. It would be much easier for Gaby to continue with her current mode of transport and not buy a car. However, she knew that using a ride-hailing service and borrowing cars through a car-sharing platform would not give her the flexibility she now needed. Gaby decided to do some further research on alternatives to traditional car ownership. She remembered that she had recently learned that some companies had started selling car subscriptions. Would a program like that make sense for her situation? After a few clicks and a Google search, she came across a local-area dealer offering a subscription to a similar Jeep Wrangler Unlimited Sport 4x4

Subscribe $770/mo.

Subscribe to this vehicle on a month-to-month basis, cancel anytime. Monthly payments include maintenance, road-side assistance, and insurance coverage. Simply download our Subscriber App on your mobile phone, enter your information, select your vehicle, and pay the enrollment fee of $350. Once approved, you will be contacted to arrange for vehicle delivery. All customers subject to verification and qualification. Not all applicants will qualify. Monthly limit of 1,250 miles. Houston use tax rate of 8.25% additional.

A few things stuck out to Gaby. At more than double the cost of the lease payment, this seemed like a very expensive option. Still, with no down payment and only a month-to-month commitment there was something she liked about it. Growing up in the era of Netflix, Stitch Fix, and Class Pass she was used to paying a flat monthly fee with no long-term commitment and this all-in monthly payment seemed appealing. She really wanted to learn more about these programs and whether or not they were right for her.

The Current State of Vehicle Subscription Services

By definition, a subscription business model is one in which a consumer pays a recurring fee on a periodic basis (monthly, yearly, seasonally) for access to a product or service. While in existence since the early 17th century when it was first pioneered by book publishers, this model for consumption has grown in popularity in the past 10 years.

According to McKinsey, the subscription e-commerce market has grown by more than 100% a year since 2014. With more than 15% of online shoppers having signed up for one or more subscriptions, the market has evolved from entertainment and media to include companies like Amazon Subscribe & Save, Dollar Shave Club, Ipsy, Blue Apron and Birchbox (the five most popular subscription sites in 2018.)

In 2017-2018, these models began invading the vehicle subscription market in North America and Europe. The markets saw the emergence of a number of software providers, technology startups, dealer-led programs and mainstream, luxury and super luxury OEM programs.

A key distinction between a subscription and other automotive financing options is that the customer never actually owns the car. Instead, subscribers gain the right to use a vehicle for an all-inclusive monthly fee. These fees typically cover insurance, roadside assistance and maintenance. With certain car subscription programs, users have the ability to "flip" in and out of different cars with just a few days' notice, often with a concierge delivering the vehicle.

While these programs have proliferated and related media coverage has hyped the model as the next evolution of the car-buying experience, it is not entirely clear that consumer adoption of these services has truly taken off. The exact benefits for an Original Equipment Manufacturer (OEM) are difficult to identify and quantify.

FCAs Announcement

At FCAs Capital Markets Day in June 2018, Mike Manley, Chief Executive Officer, Fiat Chrysler Automobiles, announced that Jeep Brand would launch a pilot program for a Subscription service in 2019. Investors at an event in Balocco, Italy, were told that the move would give Jeep fans wider access to the brand's vehicle portfolio. For a monthly fee, members will have access to a variety of FCA vehicles. At the time, Mr. Manley announced that the program would be offered in multiple formats with varied options for insurance coverage, vehicle selection and concierge services.

FCA has already launched Peer-to-Peer and Borrowing programs, while the details of the subscription program are still to be announced. The challenge for FCA will be introducing a program that offers something unique to the market that appeals to a changing customer base.

Your Assignment.

The role of the Automotive OEM in the evolving landscape of mobility is up for discussion. Several OEMs have begun to experiment with alternative models for consumer access to transportation instead of ownership through Subscription programs. These models are varied and complicated, shifting dramatically away from the current OEM-Dealer franchise model for the distribution and selling of personal cars. Further, the value proposition for customers in these models is difficult to identify. Your team is to assume the role of an Independent Consultant firm to help FCAs Director of Mobility Programs understand the subscription landscape from an OEM and customer perspective. You know someone like Gaby and her dilemma is an integral factor in shaping the business model in this new age. The goal is to provide a recommendation to FCAs executive leadership that addresses the following topics:

10-In addition to conventional marketing, how should FCA reach and explain its program to consumers like Gaby, and African American consumers specifically, to select a Subscription service?