The Growing Threat of Automotive Subscription Models: Navigating the Shift
OEM Subscription Initiatives in the U.S.
The Growing Threat of Automotive Subscription Models: Navigating the Shift
As the automotive industry accelerates toward digitalization, Original Equipment Manufacturers (OEMs) are increasingly adopting subscription-based models to monetize vehicle features. While this strategy offers OEMs new revenue streams, it poses significant challenges to traditional dealership operations, particularly in the realm of aftermarket services. Additionally, the financial implications of these changes are profound, impacting not only dealership profits but also customer spending habits.
OEM Subscription Initiatives in the U.S.
Several automakers have introduced subscription services in the United States, reshaping the consumer experience and altering revenue streams:
BMW: BMW has sparked debate by charging monthly fees for features like heated seats, offering customers the flexibility to activate or deactivate options. While innovative, this model directly competes with traditional dealership upgrades, potentially reducing service revenue. For BMW, subscription services contributed to a notable increase in recurring revenue in 2023, with forecasts showing continued growth through 2025.
General Motors (GM): GM's OnStar platform has evolved into a comprehensive subscription service, generating over $2 billion in annual revenue. GM plans to expand this offering, aiming to make subscription services account for $20 billion annually by 2030, highlighting the financial shift away from one-time vehicle sales. (barrons.com)
Tesla: Tesla’s Full Self-Driving (FSD) subscription, priced at $199 per month, has proven to be a significant revenue generator. Tesla reported $3.7 billion in software-related revenue in 2024, a portion of which comes from subscriptions. This model reduces reliance on traditional sales and enhances Tesla's long-term financial stability. (bloomberg.com)
Global Trends Influencing U.S. Adoption
Globally, automakers are experimenting with subscription models that could shape strategies in the United States:
Volkswagen's 'We Charge' in Europe: Volkswagen’s subscription-based charging service for EVs allows access to over 500,000 charging points across Europe. With the U.S. government investing heavily in EV infrastructure, such services could soon be adapted to the American market, further embedding subscriptions in the EV ownership experience.
Toyota's 'Kinto' in Japan: Toyota's Kinto program bundles insurance, maintenance, and access to multiple vehicle models into a single subscription. The all-inclusive pricing appeals to younger, urban consumers and has the potential to disrupt traditional leasing models if introduced in the U.S.
Financial Impact on Dealerships
Revenue Erosion
Dealerships traditionally rely on aftermarket services and feature installations for profitability. The rise of OEM subscription models could cut deeply into these revenue streams:
Aftermarket Sales: With OEMs controlling features like remote start, heated seats, or enhanced navigation through subscriptions, dealerships lose opportunities to upsell these items as one-time upgrades.
Service Revenue: Subscriptions often include software updates and diagnostics directly through the OEM, bypassing dealerships for ongoing service needs.
Reduced Profit Margins
A 2023 report by Cox Automotive revealed that the average dealership earns 25% of its gross profit from parts and service. If subscription models capture even a fraction of this market, dealership profitability could decline significantly.
Increased Customer Costs
For consumers, subscriptions can result in higher long-term costs. For example:
Paying $18/month for heated seats over a 5-year ownership period totals $1,080—far more than the upfront cost of installing them at the dealership.
Customers may begin to push back against subscriptions, creating a trust issue that could impact both OEM and dealership relationships.
Strategies for Dealerships to Counteract OEM Subscription Models
To combat these financial challenges, dealerships must adapt with innovative strategies:
Develop Proprietary Subscription Services:
Example: Offering subscription packages for detailing, routine maintenance, or even customer perks like free car washes and loaner vehicles.
Impact: Retains customers while diversifying revenue streams.
Enhanced Customer Engagement:
Dealerships should educate customers on the long-term costs of subscriptions versus one-time purchases. By presenting alternatives, such as bundled packages for feature installations, dealerships can position themselves as consumer advocates.
Collaboration with OEMs:
Pushing for revenue-sharing agreements ensures dealerships benefit from OEM subscriptions. For instance, GM and its dealership network have started exploring partnerships where dealerships receive a percentage of OnStar subscriptions.
Focus on Customization:
While OEMs dominate software activation, dealerships can excel in hardware customization—offering services like custom wheels, performance tuning, or unique interior upgrades that OEM subscriptions can’t replicate.
Invest in Emerging Tech:
By integrating their own connected services, dealerships can compete directly with OEM platforms. For example, third-party telematics providers can help dealerships offer subscription packages for fleet management or vehicle tracking.
Consumer Backlash and Market Perception
Consumer Fatigue
Surveys show that 70% of U.S. consumers dislike the idea of paying subscriptions for features already built into their vehicles. This backlash presents an opportunity for dealerships to step in as consumer advocates, emphasizing transparency and value.
Legal and Regulatory Oversight
States like California are already scrutinizing subscription models for fairness. Dealership associations may lobby for regulations that ensure revenue-sharing agreements between OEMs and dealerships, leveling the playing field.
Conclusion
The rise of subscription models marks a seismic shift in the automotive industry. For OEMs, the financial benefits are clear, with recurring revenue streams poised to reshape their business models. For dealerships, however, these changes present both challenges and opportunities.
By innovating their offerings, focusing on customer relationships, and advocating for fair revenue-sharing agreements, dealerships can remain vital players in the evolving automotive landscape. As consumers continue to weigh the convenience of subscriptions against their costs, the industry will need to strike a balance that works for all stakeholders.
Adapting to Subscription Models: Strategies at a Glance
By embracing adaptability and innovation, dealerships can successfully navigate the challenges of subscription models while safeguarding their long-term profitability.