Digital services in the automotive industry – an analysis of the subscription model

We live in the subscription economy. At least if you look at the business models around the entertainment industry, that’s true. First and foremost, Netflix, Peloton and Amazon Prime are worth mentioning here.

Coming from a B2C perspective, many automakers have adopted this business model for their in-vehicle software. In this article, we analyze the current state of this B2C model and give specific recommendations for expansion in the B2C, B2B and B2B2C sectors and what other industries can learn from it.

Subscription-based business model

The theory of the subscription-based business model is simple: Instead of making a one-time transaction (for example, buying a movie), customers pay a fixed amount on a regular basis to have access to the offer (all movies and series). They sign up for a subscription.

This model is very popular with companies offering these services, as it promises the following benefits for the provider:

  • A regular and recurring stream of revenue (also called MRR – “monthly recurring revenue”).
  • Loyal customers
  • Long-term increased ROI over customer acquisition costs

Against this, however, are the following challenges:

  • Building a critical mass of customers. Reach economies of scale.
  • Minimize the bounce rate of existing customers by constantly adding new functions and content. Minimize attrition/churn rate. 
  • Large investments must be made in advance in order to be able to offer customers real added value. The compelling value proposition must be built up.
  • A fundamental change in the business model and the structures behind it. The product or service may need to change completely to justify the recurring fees.

Overview of digital services in the automotive industry

To implement the subscription-based business model, you don’t necessarily have to be a startup. It is precisely the long-established companies from the automotive and mobility industries that are trying to take the plunge here.

The core of the business model with digital services in the automotive industry is the vehicle software, the operating system of the car and the functions that are possible with it. By means of an app, the customer can activate additional functions for their vehicle. Almost every vehicle manufacturer now has its own offering – Mercedes serves as an example in this article with its me connect services. Customers have the option of booking various additional functions in their connected car, such as smart control services, remote park assist or vehicle setup, directly via the associated app. Depending on the service, prices range from €19 to €59 per year.

digitale services bei mercedes

Picture: Screenshot Mercedes me connect Shop https://shop.mercedes-benz.com/de-de/connect/

Another example of an integrated solution from the B2B sector is the “Digital Forklift” from Linde, which is the subject of the article “Digital business relations as response a to Corona”.

In addition to these ex-factory solutions, “retrofit kits” from third-party suppliers are also on the market in the area of digital services. Here, for example, the ÖAMTC has its “Smart Connect” service on offer. A dongle is connected to the car’s ODB interface and transmits the status data to an app. Needless to say, it does not offer as many options overall as the factory software but it does add useful functions to a car.

Analysis of digital services in the automotive industry

Is this way of selling digital services a profitable business segment? We calculate potential revenue figures below using Mercedes’ me connect pricing as an example.

In 2019, Mercedes sold approximately 2.4 million passenger cars. If every vehicle owner (rather unlikely) were to actually book the digital services, Mercedes would hereby come to a turnover of 96 million euros per year, assuming an average price of 40 euros per year. In comparison, the revenue of the passenger car division in 2019 was 93.9 billion euros. Digital services thus make a vanishingly small contribution to total revenue. Of course, subscription fees add up over the lifetime. However, if we assume a service life of 10 years, the ratio changes only slightly.

Should manufacturers therefore discontinue their digital services again? No, that would be the wrong approach. On the contrary, they should expand them and make them available free of charge so that more users use the digital services. The more users, the more data. The more data, the more precise and better the possibilities for analyzing user behavior. These then provide the real added value for future business models. A little revenue with nice-to-have features may be a nice PR stunt for the companies at the moment but this is not currently a vision for the future.

In the areas of B2C, B2B and B2B2C, we can expect some exciting possibilities that promise much more potential than subscription models of €40 per year. The following examples come to mind:

  • On the basis of digital driver log books, insurance risks could be reassessed and highly individualized policies could be created, changing dynamically depending on the situation. Will car manufacturers also become insurance providers?
  • Times of energy demand or storage capacity of the batteries can be predicted and this information sold to network operators. Here, billing can happen as a subscription model or a pay-per-use model. You can read in detail how this networking can be carried out using APIs in the report “Digital E-Mobility 2022”.
  • Manufacturers open their operating systems to third-party apps and earn a margin on app sales. Analogous to what Apple does with its ecosystem of iPhone, iOS and iOS apps. These third-party apps can also be integrated according to the freemium model: the first year is free for the user, and when the benefits are convincing and people have become accustomed to them, they are happy to make a monthly subscription payment.

What can other industries learn from this?

If you introduce a digital service, you should not think too closely to the actual product. As explained in the article “Digital strategy – from efficiency to innovation”, this approach would be a digital business extension but not yet a new business model.

Only by thinking in new dimensions, in terms of entirely different business areas, is it possible to create a fundamentally new business model that may complement the existing business very well.

Don’t focus on short-term revenue numbers through marginal subscription payments. Remember that the new business model must ideally have the potential to exceed your existing revenue. Then you can also easily justify a free provision of digital services and also argue for it using calculation examples. It may generate higher costs without direct profit in the short term but in the long term it may offer enormous revenue potential.

In addition to revenue as a KPI, the following points should also be closely monitored when evaluating digital services:

  • CAGR (Compound Annual Growth Rate): The CAGR represents the average annual growth of a variable under consideration.
  • Conversion rate: This indicates the proportion of prospective buyers who visit a particular website and become buyers in the process.
  • Attrition / Churn Rate: The churn rate defines the number of customers recorded over a certain period of time who do not continue to use the service, divided by the number of total customers. It provides an overview of the growth or decline in customer numbers as well as the average length of participation in the service.
  • Customer retention rate: It indicates the percentage of customers who are still customers of a particular business after a specified period of time.

Always keep in mind: Once the user has engaged with a product, it is all the more difficult for him to cancel and abandon it because of the high added value. You should not disregard this emotional component in addition to the number-driven KPIs.

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