Maximizing Lifetime Customer Value with New Business Models
September 2021
The automotive industry is all about designing, producing and shipping new vehicles, then moving to the next model, whether at the vehicle or the component level. OEMs and suppliers are also generating substantial profits from their aftermarket activities, but their complete value chains are not optimized as integrated businesses leaving room for improvement.
The distribution model used across the industry — except by Tesla and soon by other emerging OEMs — largely limits the potential for an integrated management of customers’ value as dealers “own” the customers. By comparison, tech companies generally own the end-to-end relationship and commonly use Customer Lifetime Value as a central metric.
OEMs Can Maximize Customer Lifetime Value with New Tech
It is no longer enough for the auto industry to maximize the number of units sold and the initial profitability. OEMs and suppliers — mainly Tier 1s — must learn how to maximize lifetime profitability. This requires better understanding customer use cases and needs, retaining them with new features and updates, offering opportunities to upgrade or upsell and above all providing long term customer satisfaction. OEMs will also benefit with worthy insight for the next generation of products or services.
Standing still is not an option for OEMs. Tech majors have already made significant inroads in the auto industry, entering via the infotainment stack. Google and Apple are now well established as screen-mirroring solutions with Android Auto and CarPlay. Android Automotive is going much farther with an embedded system that accesses — and allows control of — many of the vehicle’s functions (Renault Megane-E above). As a result, Google’s system could prove an adequate conduit to generate lifetime revenue, potentially at the OEMs’ expense.
In order to maximize customer lifetime profitability, all vehicles must be securely connected. According to McKinsey’s estimates, 95% of new vehicles sold globally in 2030 will be connected vs. 50% currently. In parallel, the industry is radically transforming vehicles’ E/E architecture, shifting from bespoke, closed, function-specific ECUs to abstracted, open, domain computers — see my recent article on the Software-Defined Vehicle.
Connectivity enables known benefits associated with OTA updates, i.e. efficient recall campaigns or the deployment of new features and up-to-date software (incl. the latest security and bug fixes). Connectivity combined with OTA tech and a revamped E/E architecture opens the door to new business models resulting in new, recurring revenue streams.
The Early Movers
GM probably created the first subscription business in the auto industry with OnStar in 1996. The safety-focused service (emergency calls, automatic crash response…) showed that recurring revenue could be generated beyond delivery and has since been replicated by other OEMs. Last year, GM announced a monthly subscription for its SuperCruise Level 2 autonomous driving system once the 3-year free period expires.
Tesla (above) opened the door to features-on-demand and radically transformed the model. The OEM offers premium connectivity (real-time traffic info, satellite map view, internet onboard) for $10 a month (recently dropped from $15). Heated rear seats can be activated for a one-time $300 fee on Model 3. An acceleration booster is available via an OTA upgrade for $2,000 on Long Range / Dual Motor versions of Model 3 (0-60 mph in 3.9s vs. 4.4s) and Model Y (4.3s vs. 4.8s).
Most significantly, Tesla recently introduced a subscription to Full Self Driving (FSD) for $199 a month and no commitment — the feature can also be activated for one-time $10,000 fee. Clearly the OEM is betting on the take-rate as 100% of the production is fitted with FSD hardware and heated seats. Few OEMs would take this risk!
Volkswagen announced they were considering offering autonomous driving on a pay-per-use basis for about $7 an hour. This could eventually allow owners to put their vehicles in a ride-hailing fleet and generate revenue for another mostly-sleeping asset. Last, for many years satellite radio has been sold as a vehicle-specific subscription.
Mercedes-Benz will offer maneuverability-on-demand on S-Classe and EQS. Rear steering capability can be increased from +/-4.5° to +/-10° for 489€/year in Germany. The OTA upgrade results in a reduced turning radius from 11.4m to 10.5m.
Similar to Tesla’s FSD or Mercedes’ rear steering, OEMs should consider features-on-demand. These can be exclusively software-based or require the pre-installation of specific hardware that is only activated on demand. The HW could be fitted for specific versions (e.g. sporty derivatives) or regions (e.g. cold climates) in order to optimize the business case.
A Wide Range of Options to Increase Customer Lifetime Value
Consider these features that could be offered with a subscription model or sold post-delivery:
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comfort: individual profiles for personal settings, heated seats, cabin pre-heating / cooling, cabin lighting themes, new massage programs
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driving experience: track-focused powertrain and chassis settings, ADAS / autonomous driving package, EV range boost (unlock battery capacity)
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infotainment and navigation: alternative HMI settings, real-time traffic info, satellite map view, internet tethering, video streaming, games
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vehicle operations: car-as-a-wallet (charging & fueling, parking, tolls), usage-based insurance, asset health monitoring and prédictive maintenance, fleet management, emergency services
OEM will have to carefully select which features should be standard vs. sold post delivery, as they are currently selling options. For memory, BMW was heavily criticized in 2019 for charging $80 a year to use Apple CarPlay — they eventually made it standard. OTA software updates combined with flexible business models (like subscriptions) make it possible to quickly adapt offerings to changing market conditions and competitive environments.
Based on McKinsey’s projection, each vehicle could generate $200-300 per year from connectivity-based activity by 2030. Assuming this applies to the first four years of a vehicle’s life, it means an extra $1000 or so per unit sold with a gross margin significantly above industry references.
An Ecosystem-Based Approach to “Usership”
Suppliers — mainly Tier 1s — also have a chance to transform their revenue generation from one-time to lifetime. Software subscriptions can give access to updates / upgrades that deliver the latest security, new HMI options or new features or settings. Suppliers will largely depend on OEMs to channel such recurring revenue. But the former can also bypass the latter with proprietary apps accessed by end customers through vehicle’s infotainment centers or phones.
New alliances and partnerships will be required by both OEMs and suppliers to deliver above features and services. Partners may include content providers, OTA and security tech companies, telcos, cloud service providers or financial services.
The post-delivery revenue streams outlined above, whether recurring or not, give OEMs a chance not only to increase Customer Lifetime Value but also to prepare for the anticipated shift from vehicle ownership to “usership.” The industry must learn a different way to do business.
Marc Amblard
Managing Director, Orsay Consulting
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