October 23, 2023

Pay-Per-Use as a Source of Growth and Profitability

We can see it, we’re just not sure how we can get there

In common with many futuristic business models, it is relatively easy to imagine some vague point in the future when more and more consumers will enjoy the flexibility offered by automotive subscriptions: swapping vehicles more regularly, as and when needed according to changes in circumstances, versus being relatively tied to the same car on a three to four-year cycle today.

The interim period, the duration of the transition and the market share such a product might enjoy in the future are all a lot harder to predict.

When your imagination switches to commercial vehicles on a PPU basis, it starts to become easier to envision. Indeed, for certain settings, growing numbers of PPU products are already in place, based on mileage, utilisation measured in time (as opposed to equal monthly instalments), charges based on tonnage transported, or even a mixture of such elements.

And with some other asset types, particularly those without wheels and engines, PPU is already quite well established.

Credit risk vs. utilisation risk

So why the reluctance in automotive? One answer is risk. Established lenders have built enormously sophisticated and accurate credit risk scorecards, based on years of experience and performance data from thousands, often millions, of contracts and consumer profiles. With subscription being more of a utilisation risk challenge than a credit risk issue, to expect all those finance providers to suddenly overlook all their experience and confront a topic more familiar to a car rental business is a big ask, to say the least. However, that is to oversimplify the topic as being a question of either/or.

Grow your customer base

PPU appeals to a different type of customer altogether. And while some of those customer categories might appear to be quite small niches, taken together, they can offer worthwhile incremental opportunities. Typically, these niches do not require differentiated products or pricing, though they may need more individual or targeted marketing – think of age groups, professions, geographic location (urban versus rural), the D2C channel rather than the intermediary channel. Most importantly for the provider, the core processes, especially those in the back office, may need no adjustment at all.

Growth is not just about sales; don’t forget retention!

One major reason for adding PPU to your portfolio is that the product is a lot more “sticky” than traditional products, where businesses are competing mainly on price – be that to the end consumer or in terms of commission to an intermediary. PPU product pricing is less transparent to the end user, especially when bundled with other services, so that the consumer is encouraged to attribute their own value to the various components and not just compare APRs.

Subscription is not just of interest to an existing subscription customer; rather, it adds considerably to the lender’s armoury at the end of term for a conventional finance product, such as standard leasing or full-service leasing. A financier making such an offer also has the advantage of being asset- or brand-agnostic – it’s less about the car and more about the package.

Is it possible to make money?

It is true that OEMs and their captives have struggled to overcome the conflict between first-year depreciation on new vehicles and an attractive customer proposition on what is, by nature, a relatively short contract term.

However, that is to make the mistake of treating PPU in the same way as a traditional “fund-and-forget” finance or leasing contract, as a one-hit-wonder trying to cover all costs and make all the margin from one car/one customer/one contract.

One objective of PPU is to extend the asset life cycle and to break that singular link. Of course, an asset is purchased and must be depreciated over its time on the funder’s books, but the PPU product provides a potentially more durable revenue stream, and with the increased retention potential also reduced onboarding costs, or at least spread over a longer term.

Flexibility has a cost, doesn’t it?

Experience to date shows that despite offers including the possibility to switch vehicles and/or change with the seasons, a typical subscription duration is around 18 months. While clearly shorter than the finance or leasing norm, these customers are much more inclined to stay with their provider and renew than the average finance or leasing client, supporting the strategy of PPU as a retention tool. Furthermore, there is growing consumer acceptance that there is a price to pay for such flexibility, with the option to pay an additional premium for the ability to terminate at short notice, versus more expensive termination conditions linked to a lower monthly payment, though in both cases the costs of terminating your PPU contract are usually considerably less onerous than those associated with early exit from a typical lease or contract hire deal.

Back to the future

For a business offering PPU as a stand-alone proposition, one of the biggest challenges remains in achieving a certain scale. And in the automotive space in particular, the cost of logistics plays a critical role – having the right asset in the right place at the right time for your user, as well as recovery and reconditioning costs between customers. However, as part of a balanced product portfolio and a holistic acquisition and retention strategy, PPU has its place and a future.

Next time, we will look at the unique opportunities from data and how they can enhance the PPU proposition.

Article by:

Simon Harris, Consulting Director, Finativ

Jake Rose, Head of Europe Sales, FIS Asset Finance

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