Currently reading: Subs exclusive: Subscriptions enter crunch phase as finances bite

Cazoo no longer offers a subscription service but other brands such as Volvo and Hyundai are convinced of its merits

As the end of June approached, a notice appeared on the website of online vehicle provider Cazoo bearing this message: “We’re no longer offering Cazoo cars for subscription”.

It marked the end of a dream within the disruptive UK-based car retailer to reshape the owning process for customers. However, it doesn’t necessarily mean the idea of flexible car ownership is dead: just that the companies offering it need to work out how to finance long term what is a very capital-intensive business.

Cazoo’s reason for dissolving its subscription arm after spending over £150 million on growing it was due to “the highly cash-consumptive nature of this business model”, the company said, as part of a wider announcement earlier in June that it would curtail investments and cut jobs to save cash.

Companies wanting to make subscriptions work need to get a grip on the finances first, argues Arndt Ellinghorst, former automotive analyst and now a director at data analyst firm QuantCo. “You can’t just say: ‘I do mobility as a service!’ That’s great but who owns the car, where’s the car coming from and how do you make money?” he said. “You have hundreds or thousands of £30,000-£40,000 assets sitting on your balance sheet that need to be refinanced and you need to manage the residual value risk. So it’s not trivial.”

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The flexibility that makes this form of leasing attractive for customers who are unwilling to be tied into long agreements also increases the burden on the subscription provider to ensure that their car is continually earning and isn’t a drag on the rest of their business.

Even Volvo, one of the car companies that has persisted with subscriptions after others bailed, wrote in its 2021 annual report that it was “working with partners to explore external funding solutions” to offer subscriptions “while offloading the financing of the cars from Volvo Cars’ balance sheet”.

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While acknowledging that financing subscriptions can be problematic, Volvo is not questioning the desire among a large segment of its customer base for this kind of leasing. “Most customers do not want to invest in their own car,” the company wrote in the same report.

As of the end of the first quarter this year, Volvo claimed a total of 20,600 subscription customers in the six markets it offers the Care By Volvo product, including the UK. That’s up from 7600 in the same period last year. The subscription and additional leasing generated only 1.3% of the company’s revenue in the first quarter but it’s clearly growing.

“It’s logical that many consumers would prefer not to own the asset,” Ellinghorst said. He attributed the Volkswagen Group’s stated intention to purchase rental company Europcar via a consortium to this very same push to satisfy customer desires not to get tied down to car ownership. “I’m sure that is why – because the future will move to a more flexible mobility-as-a-service.”

Chinese car company Lynk&Co has made subscription a central plank of its move into Europe. The company’s head of operations outside China, Alain Visser, told Autocar recently that despite being given a choice, around 90-95% of retail (ie non-business) customers chose to subscribe to its single plug-in hybrid SUV rather than buy. For €550 (£474) a month, Lynk&Co’s customers can bail out of their agreement with just a month’s notice and can, theoretically anyway, exchange their car for a new model within 12 months.

The flexible nature also works for the Geely-owned company in that it can pass on rising costs direct to customers mid-subscription. From 1 September, existing customers will be charged at the new customer rate of €550 rather than their current €500 a month. This didn’t go down well with some customers, who presumably hadn’t read the small print and weren’t used to monthly car payments increasing mid-contract. ““You copied too much from the Netflix subscription model,” one customer grumbled, posting as RalphK on a German forum.

That customers are charged for their flexibility is clearly laid out in the price list for Hyundai’s Mocean subscription product. The biggest monthly bill for a used 2020 Hyundai i10, for example, is £439 to give you the ability to bail with three months' notice. Commit to a full 24 months, however, and that bill goes down to £259 a month.

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Volvo is the same: get into an electric XC40 Recharge from £799 with a three-month notice period, or take the same car for three years for £669 a month. It’s important to note however that three quarters of Care by Volvo sales are for the three-year deal, rather than the three-month minimum, which puts in more line with a typical personal contract hire offering (ie private lease).

What you get for the subscription changes depending on the provider. Volvo, for example, doesn’t offer insurance, whereas speciality EV subscription service Onto does. Onto bundles in 750 free miles a month whereas Cazoo used to offer 1000 miles, a feature much mourned by ex-users posting on Onto’s message board.

The trick to making subscriptions work is recycling the cars so they’re back out earning again once they’re returned. The ideal is obviously if customers pay for full flexibility but hang on to the car, a situation that Visser at Lynk&Co said is happening with its customers. “The churn is extremely low,” he said. Volvo customers in the UK using the flexible option meanwhile are hanging on for an average of 19 months, despite the option of handing back after three months.

But if they are coming back, then you have to get them working quickly. Care by Volvo cars “that are returned after shorter subscription periods fit perfectly in M’s car sharing fleet”, the company wrote in its report, which it tied into its recycling and carbon-reduction goals.

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Bundling in other services helps, too. If the customer knows roughly what their insurance and servicing costs are, then the inflated fee for a flexibility they might never use looks expensive. But electric-specific subscription companies like Onto and Elmo add free charging into the mix, too. Ride-hail subscription provider Splend offers its customers free private car hire insurance, making life easier for Uber drivers.

Subscriptions can also unlock revenue from over-the-air activated features with the car. For example, you might charge more per month for a car with a full suite of ADAS semi-autonomous capability. Or turn that off if the customer didn’t want to pay the extra. “By moving from a cyclical business to a subscription-based model, we increase the potential to obtain recurring revenues from software sales and services,” Volvo said.

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Volvo admitted it was being pushed by “digital disruptors” outside the company into offering more flexible access to cars, making reference in its company report to Cazoo, along with others. Whether those disruptors will continue to push at the traditional OEM sales model depends on their ability to raise the finance to fund what is an expensive business. As Cazoo has shown, if the funding taps get turned off at the crucial moment, you have to go back to basics.

Subscription in China? No thanks

You’d be forgiven for thinking that due to the popularity of subscription within Volvo and Lynk&Co – both owned by China’s Geely – it’s a popular way of paying for a car there. Actually, no, says Lynk&Co’s Alain Visser: “When we tested the business model in 2016, we were quite amused by the fact that our target audience were offended by it,” he told Autocar.

“In Europe, people are a bit fed up with the car-buying process, dealerships and price negotiations. In China, it's new and cool. When we asked them, ‘what about paying €500 monthly?’ they said: ‘What? You think we can't afford it? We can pay the €40,000, you know.’ So we said, okay, let's not do something that customers really don't want.”

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