Auto companies hope to shift subscription services into overdrive

Comparisons between the constantly connected mobile devices that we carry in our pocket and the future of automobiles have been growing more common for years. Many working in the auto industry, or reporting on it, predict a day when cars will be little more than smartphones on wheels. 

Always-connected vehicles and architectures that allow access into software-controllable features are more and more common in new automobiles.  This has led to automakers viewing revenue after the initial sale from subscriptions, updates, and pay-by-use as a potentially large pool of potential revenue at a time when investment demands are high. In the race to win tomorrow’s buyers, automakers all over the globe need to consider innovative pricing models as well as rethinking the way they design, equip, and sell the vehicles they make. 

Why are subscriptions fertile grown for automobiles? You only need to look at today’s marketplace for an answer. 

Billions of consumers have grown accustomed to pulling out their phones, scrolling to an app that delivers music, a book, a television show, or a favorite game, and clicking to engage. If the monthly fee is paid, the service is available in real time and updated regularly. Such services, including in automotive, are software-driven and require ongoing development, unlike in the past in auto when the vast majority of product development was completed well before the first car was ever made.  Auto companies hope they can replicate this consumer-electronics model.

AlixPartners recently appeared on The CBS Evening News with Norah O’Donnell to share our firm’s insights on how automakers aim to leverage subscription services in search of new revenue, and how consumers will respond. To view the segment, click here.

There is an array of features – from advanced-driver assistance systems (ADAS) to convenience to entertainment – that could be offered via subscription. CBS News notes Volvo is charging $200 per year for vehicle connectivity; BMW charges $20 per month for adaptive cruise control; Ford charges $75 per month for a hands-free driving option; and General Motors expects its annual subscriptions business to rival Netflix’s current revenue by 2030.

Many auto companies are looking to replicate what Apple has done with mobile devices, turning the hardware into a vessel for software that people cannot live without. To add an increasing number of subscription services to a customer’s monthly bill, however, the cost to consumers has to shift to a post-delivery model and the subscriptions have to be for features that are not commoditized.  To succeed, this trend has to give customers more utility and more control over what they are paying for.  It also will have to change  automakers’ approach to contenting vehicles. For instance, putting functionality into all vehicles produced and then allowing features to be activated after delivery is a dramatic change to many business models, and creates both risks and opportunities.

AlixPartners’ 2023 Global Automotive Outlook found the subscription market for ADAS features alone could exceed $17 billion by 2030, presenting an opportunity for suppliers to collaborate with automakers on revenue-sharing models. That market will be divided up, with about $7 billion in subscription revenue coming from “Level 2”+ ADAS systems (which employ limited tech intervention, such as hands-free driving; another nearly $7 billion coming from “Level 3” features (such as automated driving under limited conditions; and $3.5 billion coming from more aggressive “Level 4” ADAS features in certain geofenced environments such as parking lots and some interstate highways.

A more recent ADAS survey AlixPartners conducted reveals a real willingness for “pay-as-needed” when it comes to ADAS. For advanced systems (“Level 3” and higher), 43% of consumers said they prefer a model where they pay per use or by subscription, vs. 41% wanting to pay up front. Auto companies ignore or abuse this kind of consumer openness at their own risk.

Overall, consumers show the highest level of subscription interest in security and safety service, followed closely by video streaming. There is similarly high demand to utilize subscriptions for charging-station access, vehicle connectivity, heated seats and steering wheel, and improved power and battery range -- provided the consumer does not believe they have “already paid” for these types of things in the perchance of the vehicle itself.

In an era when people expect to buy everything with the click of a mouse, educating consumers about automotive subscriptions and pay-by-use pricing must be compelling and clear. To capitalize, automakers, suppliers, and tech companies should consider revenue-sharing models that offer consumers things like installation incentives, tiered pricing, flexible terms, and data-sharing.  And along the way, this revenue-sharing model can also extend to supply base, which in turn could see higher volumes per system rather than many different flavors of the same module.