Disrupting automotive through adaptation of technology business model - How to attract MILLENNIALS (2/2)
In the prior article I wrote about the 3 reasons why car ownership is dying. Car leases are already the most popular way of "purchasing" a luxury and electric vehicle (EV). First, I documented why millennials/younger customers are more likely to lease. Second, I described why technology changes can lead to reduced interest in buying. Finally, I tried to proof that smartphones have given users the ability to experience freedom without owning a car.
These 3 points lead to an assumption: GenY, as the second largest car buying generation, is leading the ownership disruption in the car segment. They buy fewer cars per 1000 citizens, have the highest % of leases and have different expectations for cars (in terms of technologies and features). How can car manufacturers attract GenY and bring driving back?
Lets take a look outside the car industry. How are technology firms attracting young customers? The smartphone market, like the car market, has taken a hit in the last few years. The handset replacement cycle has slowed down significantly. It is the slowest since the introduction of the iPhone in 2007. In 2014, 143 million mobile phones were sold in the United States (-15%). Of them ~90% were smartphones. 2007 users upgraded their phones every ~19 months; today they upgrade every 26+ months.
Thus, Apple, for example, faces a similar problem as car manufacturers: Millenials are in search of cheaper alternatives as the real income for young people today is lower than 1980. GenY, the shared economy generation, is used to sharing flats, cars and even seats in classrooms (while paying back student debt for 5 or more years). They are used to paying monthly fees or one time usage fee for rent, smartphone contracts, and personal transportation. Nothing is expected to be paid for in full or truly owned; except, well except houses and cars. So the question actually becomes: How can companies attract a customer segment that is unable/unwilling to pay in full?
The largest two objects Americans pay in full for are real estate and vehicles. While real estate typically gains in value over years, cars rarely do (neither do smartphones or any other technology devices). On the contrary, cars loose half of their value within of 3 years and are thus the fastest depreciating asset we own. Additionally, expectations are high that in a few years we will have connected cars with full smartphone integration, zero emission and self-driving ability. At the minimum, technology integration is expected to improve significantly in cars. On the smartphone side, expectations for new technologies are rather low. Smartphone customers hold on to their current phones as they are not seeing significant technological changes happening in each generation. While the reasons are different to hold back purchases, the result is the same: Americans, especially millenials, are staying away from buying new smartphones and new cars; only that Apple found its solution already!
Apple's solution to the problem is the Apple Upgrade Plan, which allows customers to "buy" a smartphone for a monthly fee (it includes 2 years of Apple Care+). After 12 months of paying $31.41, customers have an option. Trade up to the new model, or keep the current one. Upgrading is for free, but if the current phone is kept the customer owns it after a total of 24 months. The total costs of this plan after two years is $778.8. As comparison, buying an iPhone with the Apple Care+ costs $778 at the time of purchase. Incorporating the time value of money, the Apple Upgrade Plan becomes the cheapest and most flexible option for customers.
I believe that adapting a similar upgrade model (or subscription model could help car manufacturers to attract young customers while establishing a recurring revenue stream. The current lease contracts are showing high adaptation but lack clarity and flexibility in many ways. For example, 3-year contracts, hidden fees and little upgradeability still discourage millennials. What if there was a pricing option that speaks to millennials fear of being outdated and accommodates towards their low budgets?
The future business model in automotive will allow software/hardware updates on current models. As with all software heavy technology, upgrading is limited to the available hardware. Thus, I expect even faster depreciation of cars as software enters the car ever further. Car buying will become even less attractive than it is today. This week's blog post from Andy Blau, a Tesla Model S 60 owner, describes how painful software upgradeability can be, when your 1.5 year old ModelS is already "too old" to get most new updates (side note: he and other 60kwh users - 200mile range - rarely complain about range issues with the 60 model specifically: read more about issues with range anxiety)
Ultimately, car firms have to minimize time commitment of owning cars. Thus, offering a monthly subscription/upgrade model is the most viable option for attracting younger generations and customers who were not considering cars. But, incumbents are too risk averse (and simply make too much money of selling cars in total) to create those pricing innovations. This will allow entrants to easily win over young customers by expanding on their technology needs and by creating monthly pricing models.
Sini Ninkovic analyzes the EV market and its customers since 2012. He helped bringing BMW's i3 and i8 to market and currently works as Product Planner for Lucid Motors.