Can auto subscriptions be the next big thing?

The way consumers choose their next car might have more in common with Netflix than the traditional retail system that's defined the automotive industry for more than a century.

A plethora of vehicle subscription services being rolled out offer customers the ability to make all-in, month-to-month payments and the option to frequently switch vehicles as their needs change. Some let subscribers go from sports car to SUV to sedan in a matter of days; others limit swaps to a certain number of times per month or over the course of a year. A few operate more like short-term leases, allowing an upgrade after 12 months, for example, mimicking smartphone plans that let users snag the latest model each year.

But many questions have yet to be answered in the rush to capitalize on the subscription movement. Automakers and vendors are still grappling with how much to charge, how to handle inventory and distribution, and how — if at all — to involve dealers.

Volvo, Lincoln, Cadillac, Hyundai and Porsche, along with startups, auto lenders and dealership groups, have all been experimenting with some form of subscription service within the past year. BMW launched a pilot subscription plan in Nashville just last week (see story, Page 57), and Mercedes-Benz plans to launch pilots in two undisclosed cities in June.

Many of the offerings are focused on new vehicles, but some create another avenue to move lease returns and other used vehicles. Prices often look steep, even after calculating the benefit of free insurance and other included costs. Book by Cadillac's monthly fee is $1,800, and Porsche's Passport pilot in Atlanta charges up to $3,000. In addition, there's often an upfront fee just to get started.

While subscriptions are unlikely to entirely supplant traditional leasing or vehicle ownership, the companies introducing them as an alternative are seeing strong interest in certain demographics, particularly millennials who want commitment-free flexibility and might never have purchased a new vehicle the customary way.

Falotico: Niche appeal apparent

"It does appear there is a certain group of people who are very interested in it," Joy Falotico, president of Lincoln Motor Co., told Automotive News. "It remains to be seen whether it will be mainstream or not."

Lincoln has expanded a subscription pilot program for 2017 model-year used vehicles priced between $900 and $1,300 a month. One-month, six-month and 12-month options are available, and early data suggests that the approach is netting young buyers who might otherwise bypass Lincoln.

"Consumers are very savvy; they may want to date before they get married," Robert Parker, Lincoln's marketing, sales and service manager, said in an interview. "That courtship, that a solution like subscription provides, is something we find interesting."

Young people — already used to monthly subscriptions for everything from TV to clothes to food — are driving much of the demand for vehicle subscriptions.

A recent J.D. Power and Acxiom joint study asked customers if they'd consider an "all-in-one" monthly lease payment, and 59 percent said they "definitely would" or "probably would." Of that group, roughly 78 percent were in Generation Z, born in 1995 or later.

The study found that 53 percent of Gen Z responders said they'd be interested in a subscription service. But only 14 percent of baby boomers said they'd consider such an ownership model.

Still, John Simlett, a partner at consulting firm EY, says baby boomers are looking at this model, too.

"The older generation see it as being a better use of their money and a potential investment rather than a depreciating asset," he said. "It's almost changed the way they view the asset."

Price challenge

Simlett said subscriptions are good opportunities for automakers to prepare for a future of autonomous and electric vehicles.

"If automakers want to break out into the mobility field, subscription services is something they could do to position themselves now," he said. "Vehicles will become more expensive. Subscriptions could be used purely for affordability reasons."

Today, though, affordability remains one of the biggest challenges for the model.

At Flow Automotive Cos., a dealership group with 38 franchises in North Carolina and Virginia, the Drive Flow subscription program started with a single offering for $1,499 a month but has since added a lower tier, with fewer vehicles available, for $850 a month.

Subscription costs generally include insurance and maintenance, but Luis Somoano, the owner of Doral Lincoln near Miami, thinks prices need to come down by as much as 30 to 40 percent for subscriptions to become broadly popular.

"It seems that you pay a lot more money for a couple months of ownership," he said. "I don't see that as the new way of doing business. Financially, it's a big difference [compared to traditional ownership]. If we can't work with the payment issue, I don't think it will be a massive success."

Few plans cost less than $1,000 a month, and most at the lower end of the price spectrum either don't allow frequent vehicle swaps or offer more limited inventory. Care by Volvo starts at $600 on the new XC40 crossover, which has a base sticker price of $36,195, including shipping; customers who get an XC40 subscription sign a two-year contract and can switch to a new vehicle after the first year.

Dealerships' role

Some dealers have raised concerns about how subscription services may impact their business, and how much of a partner they'd be with automakers or third parties that loan out vehicles.

Scott Painter, the former CEO of TrueCar, now runs Fair, a phone app that lets customers lease used vehicles without long-term contracts or other ownership headaches. He said subscriptions will mean more moneymaking opportunities for dealers.

"The way we all get our cars in five years is going to be fundamentally different, but that's not a bad thing for the dealer," Painter said last month at the J.D. Power Automotive Summit in Las Vegas. "Every time a new customer subscribes to a car, it's just another form of a lease. There's an opportunity to see that customer much more frequently."

The founders of Mobiliti, a Michigan company planning to launch a subscription service May 1 in Austin, Texas, say their startup can complement dealers' traditional business, not compete against it.

Mobiliti, established last year by husband-and-wife entrepreneurs Chance and Amanda Richie, lets subscribers select a vehicle from inventory provided by Mobiliti's dealer partners on a smartphone app.

"We do not want to displace car ownership," Amanda Richie said in an interview. "We want to make more options available. There's flexibility and choice, and this is a new way dealers can drive traffic and a new way they can expose customers to the brand without a long term commitment."

Extended test drive

Chance Richie envisions Mobiliti serving as an extended test drive for some customers.

"Whenever somebody enters a dealership and is not quite ready to buy or lease, this gives the dealer another option to offer to that customer, to entice them to take the vehicle home and ultimately buy or lease that vehicle," he said.

Interest in Mobiliti from dealers and potential users has been strong, the Richies said. The company had a booth at the NADA Show last month to meet with dealers.

"I think the biggest challenge so far has been more on the dealer side and getting the dealers to understand that this new model is not infringing on their existing sale and lease business," Chance Richie said. "This is just another tool that they can have to offer customers to ultimately get them to buy or lease that car."

Mobiliti's subscription fee covers insurance, maintenance and roadside assistance. Each vehicle in the program will have a unique subscription price, Chance Richie said. Base rates cover 500 miles during a 30-day period.

The mileage amount can be increased or decreased and users will have the ability to swap vehicles once in a 30-day period. Users will also have the option to purchase the vehicle outright.

Monthly subscriptions will range from $549 to $1,000 a month. Chance Richie said payments will generally be comparable with a no-money-down, five-year loan payment on the same vehicle, including interest.