PASSENGER CAR SUBSCRIPTION
What does it take to succeed in the Car Subscription Market?
This article will walk you through the key motivators and challenges of operating in the car subscription market. While the global subscription market shows strong potential for growth, the future for car subscription services remains uncertain.
Fortos has conducted an analysis of market trends and explored the insights of market players, including automotive OEMs, rental companies, and pure subscription providers.
Introducing Car Subscription
Subscription business models have become a global trend across various industries and have notably transformed how consumers access products and services. The subscription economy is mainly driven by the success of global companies such as Netflix and Amazon, offering subscription-based services, products, or e-commerce solutions. Approximately a decade ago, the subscription trend extended to the automotive sector, where car subscription emerged as a combination model offering a mix of product and service. Much like today’s consumers are used to frequently update streaming services or meal-kit subscriptions, car subscription models offer flexibility to swap cars or cancel services on short notice. The car subscription option is designed for customers who want the flexibility and convenience of a month-to-month car subscription, rather than committing to long-term leasing or ownership. The transition from car ownership to short-term subscription also allows customers to avoid substantial upfront investments. Another significant value proposition is that car subscriptions typically bundle all necessary services such as maintenance, insurance, and roadside assistance into one all-inclusive package, differentiating itself from traditional car rental or lease.
While the car subscription model offers compelling value propositions for customers, and companies attract a growing customer base, it comes with its own set of risks and operational challenges for the subscription providers. The market players must manage and maintain large fleets of cars, a process that involves not only sourcing and financing cars, but also developing new capabilities that are new to current business models.
This Fortos analysis dives into how different types of car subscription providers are navigating the subscription market, the motivators driving their strategies, and the uncertainties they face along the way. With players ranging from automotive OEMs to rental and pure subscription providers, and the unique barriers this business model presents for the different providers, what does it take to succeed in the car subscription market?
Market Overview – Globally and in Sweden
In 2024, the global car subscription market is expected to reach a market size of $4.6 billion and a Compound Annual Growth Rate (CAGR) of 34.4% over the next 10 years. This rapid expansion indicates positive market potential and growing demand for the business model.
Globally, pure subscription providers, like Borrow in the US, were the first ones to launch car subscription as an offer, but the market has since then largely been dominated by OEMs such as Volvo, Lynk & Co, and Toyota’s “Kinto Share”. Additionally, international rental companies like Hertz, Eurocar, Sixt, and Enterprise, have also entered the market and gained a strong presence. Despite the significant number of OEMs operating in the subscription market, they account for the largest share of exits over the past five years, highlighting the challenges they face in this space.
Between 2019 and 2021, the Swedish subscription market saw a notable surge in companies launching car subscription services, with rental companies leading the way, followed by OEMs and pure subscription providers. In the past five years, only a few companies have exited the market, including "Schysst" in 2021 and Volvo on Demand in late 2024. The overrepresentation of OEM exits globally likely stems from a combination of challenges inherent to the car subscription model and the global slowdown in EV adoption. For example, Volvo Cars, like other OEMs, initially entered the subscription market to increase EV sales as a response to the growing demand for EVs in the car subscription market. In fact, the share of subscribed EVs on the global market is larger than it is for both leased and purchased passenger cars, which created a strong incentive for OEMs to enter the subscription market. However, uneven growth in the global EV market over the past years has weakened this incentive.
With these market insights in mind, Fortos has investigated industry players and key trends to understand the critical success factors for the different types of subscription providers.
1: https://www.precedenceresearch.com/vehicle-subscription-market 2: https://www.researchnester.com/reports/vehicle-subscription-market/6431/market-analysis
Strategic Motivators and Challenges of Car Subscription
Automotive OEMs
OEMs are well-positioned to enter the car subscription market by capitalizing on their established manufacturing capabilities, infrastructure, and dealership networks. It would serve as a logical extension of their current business models, with a strong incentive to attract a new customer base. This customer group is difficult for OEMs to reach through existing offers, as it includes customers who are not necessarily looking to buy or lease a car but prefer flexible access without long-term commitment.
For OEMs, the car subscription model presents an additional revenue stream that aligns with the growing Mobility-as-a-Service (MaaS) trend. In a market where flexibility and convenience are central criteria for consumers, OEMs that align their offerings with customer demand are likely to emerge as industry leaders. These benefits will allow OEMs to enhance their visibility and differentiate themselves from OEMs that do not provide subscription options. In addition, the subscription model has allowed many OEMs to establish a closer relationship with the customer by bypassing the wholesalers/dealers. This has enabled direct communication with customers, a valuable collection of customer insights, and increased customer lifetime value. Ultimately, car subscription is a strategy for OEMs to form connections with new customer segments, speed up their transition to become a direct-to-consumer player, broaden their business model, and reduce their dependency on traditional car sales.
However, OEMs are facing significant challenges with the car subscription model, primarily in terms of financial viability. Achieving profitability within this business model is inherently difficult due to several factors. First, OEMs generally lack the capabilities required to manage large fleets of subscription vehicles and therefore must invest in developing this competence and capacity. Second, the holding costs of cars have risen in recent years, driven by higher interest rates. Third, the uncertain residual values of EVs make it harder to predict resale values that can offset depreciation.
When a relatively new car is returned after a subscription cancellation, it often carries high holding costs, a lower-than-expected residual value, and limited revenue from the subscription itself, creating a formula that undermines profitability. This equation becomes even less favorable when considering the additional costs of logistics, service and maintenance, insurance, and other operational expenses.
Another key challenge is the balancing act of priority between the traditional car sales model and the subscription model. Given that OEMs have historically directed most attention and investment to vehicle sales, generating immediate revenue, shifting to subscription-based approach requires substantial adjustments to operational frameworks and long-term commitment and investments. A commitment that OEMs may lack based on Fortos research, which could add to the struggle of scaling the subscription model. This raises the question, whether the OEMs are in it for the long run, even when the profitability isn’t there in the short- to mid-term?
Rental Companies
One of the key benefits for rental companies to expand their offering to car subscriptions is the potential for increased fleet utilization due to the seasonality of the rental business and thereby a more stable cash flow. Like the opportunity for OEMs to enter the car subscription market, rental companies can tap into a new customer segment of those seeking a longer-term mobility solution than traditional rentals, but without the full commitment of leasing or purchasing a vehicle.
Due to their existing business model, rental companies already have the capabilities to manage large car inventories, giving them an operational advantage in an industry where fleet management is critical. It makes it easy to promote subscription to consumers, resulting in a fast adoption rate and a promising opportunity to generate profit quicker than competitors.
To achieve profitability with a subscription-based business model, rental companies must carefully balance traditional rental services with subscription offerings. Since traditional rentals typically yield higher margins, it's essential to ensure that enough vehicles remain available for rental during peak demand seasons, rather than allocating too many to subscriptions. Additionally, customer journey and digital experience are typically designed with traditional rental customers in mind, which can lead to mediocre experiences for subscription customers, who have different needs and expectations. As a result, rental companies may struggle to scale their subscription services in the long term if they fail to tailor the customer experience specifically for subscription users. Adapting to the unique requirements of subscription customers is crucial for sustainable growth in this segment.
Pure Subscription Companies
Pure subscription companies differentiate themselves from OEMs and rental companies as they aren’t tied to any legacy of existing business models and thereby don’t face the challenge of modifying existing processes or strategies as car subscriptions are their core business. This allows them to develop and refine processes and operations such as car delivery and pick-up, car maintenance, and customer support systems with the subscription customer in mind.
Moreover, pure subscription companies have adopted a multi-brand approach, offering customers the ability to subscribe to different cars and models over the same subscription period. This flexibility is a valuable attribute as it meets a key demand in this customer segment. In addition to high flexibility and response to price sensitivity, pure subscription companies such as Imove and Aimo have managed to lower their monthly fees and introduced discounts for longer-term agreements. This may be possible due to additional revenue streams from other mobility solutions, such as car sharing, or related services like parking. This pricing strategy has given them a competitive advantage as OEMs and rental companies in the market have maintained their pricing structures.
However, pure subscription companies are generally reliant on investors to finance car subscription ventures. While attracting new investors and satisfying existing ones serves as a strong performance incentive for pure subscription companies, it also introduces a certain level of vulnerability. Unlike OEMs and rental companies, the lack of available funds makes them dependent on upfront investments at the early stages of the business venture, which may be an obstacle as it can be challenging to quickly show investors short-term profit since it takes time to develop capabilities and a critical mass of customers.
The Road Ahead for Car Subscription
Fortos’ Outlook on Subscription Providers
Considering the motivators and challenges of each subscription provider, the key question is who will emerge as the winner short-term, and which has the strongest long-term opportunities.
In the short term, rental companies with established operations and infrastructure are well-positioned to benefit from the car subscription model. Their operational efficiency and capacity for rapid scaling position them as strong competitors. This suggests that, compared to the other car subscription providers, rental companies have strong incentives to enter the market due to the lower upfront costs. However, Fortos does not view rental companies as long-term winners if they continue to treat the subscription model as a secondary revenue stream. To remain competitive, rental companies must prioritize the development and refinement of their subscription offerings, enhance the customer journey for subscription users, and find a persistent balance between rental and subscription services. Without these efforts, their long-term success in the subscription market is threatened by the pure subscription providers.
Fortos consider pure subscription providers to lead the market in the long term. These providers benefit from their singular focus on refining the model, utilizing technology, and forming strategic partnerships to enhance customer experience and service delivery. However, this statement underscores the importance of achieving a critical mass of subscribers to ensure profitability and return for investments. For the pure subscription providers to become long-term winners they need to build the brand and customer base and expand their business to include additional revenue streams such as other mobility solutions and related services such as city parking. In addition, building strong partnerships with OEMs would allow them to enter into favorable purchase agreements with discounts and buy-back options to reduce financial risk.
For OEMs, which have had numerous entries and exits in the subscription market over the past 5-7 years, the key question remains whether they should fully embrace the subscription model or leave it to players with subscription as their core business. According to Fortos, while OEMs can benefit from participating in this market, success depends on several key factors. Firstly, OEMs must strike a balance between sales and subscription efforts by making a long-term commitment to the subscription model. With a short-term focus on profitability and lack of strategic outlook for the subscription model, OEMs risk being outcompeted by subscription providers that have invested heavily refining their operations. However, embracing the subscription model does not imply sacrificing traditional sales.
Secondly, OEMs must refine their car subscription value proposition to clearly differentiate their offerings. Consumers need to easily understand the benefits of a subscription compared to purchase, financial lease, and operational lease options. Without a clear and compelling value proposition, OEMs will struggle to reach a critical mass of customers, making it difficult to scale the business and achieve financial viability, ultimately risking the failure of the subscription model. Considering the challenges outlined and the strong competitive advantage of other subscription providers, Fortos recognizes that OEMs face a long-term challenge in competing with rental and pure subscription companies.
A key factor for the success of all subscription providers is the need for financial viability. To minimize the risk of financial losses, Fortos recommends that subscription providers focus on reducing holding costs and develop strategies to ensure that resale values meet or exceed estimates when de-fleeting vehicles. While this recommendation applies to all providers, it is particularly aimed at OEMs that are used to pass on the burden of depreciation costs to customers purchasing a car.
The global car subscription market is set for strong market growth, with a variety of players competing for market share by fulfilling customer demand for flexibility. Fortos concludes that OEMs face obstacles in fleet management and profitability, rental companies benefit from existing infrastructure but must develop subscription-specific strategies, and pure subscription companies have the potential for lasting success by focusing on customer experience. Although OEMs may face the biggest challenges in succeeding with car subscription, all players in the market have the potential to benefit from the business model if they achieve operational efficiency, financial sustainability, and refine their value proposition.
Johan Hede
Partner Services & Mobility
+46(0)76-517 29 15
johan.hede@fortos.se
Carl Edman
Manager Services & Mobility
+46(0)76-517 27 03
carl.edman@fortos.se