Car as a Service (CaaS)

The rapid advancements in technology have changed the fundamentals of many industries. The increase in connectivity, as well as digitalization, is also affecting the automobile industry. Just like other industries, car customers also want to be spoiled for choice. This is the reason that the industry is being forced to rethink its traditional business models. It seems like the new frontier for the automobile industry has arrived. This industry will no longer be only about selling cars. Instead, companies are now planning to change their product based approach and move towards a full-service approach. Since this approach is more consumers oriented, it is more appealing to the millennial customers. Many companies like Volvo, General Motors, and Ford, have already launched their car subscription services on a small scale. However, if the experts are to be believed, the market for car subscriptions is likely to witness a boom in the near future.

What is The Car as a Service Model?

Car as a Service (CaaS) model is being touted to be an improvement over the existing car leasing model. The current model is heavily focused on assets. The contracts bind the customers with vehicles for long periods of time. The lease period agreed upon at the beginning of the lease is inflexible. Any changes made to the lease attract severe penalties and financial losses from the customer’s point of view.

On the other hand, Car as a Service (CaaS) program provides flexibility in the hands of the customers. They can change and upgrade their vehicles as and when they want. Like lease contracts, subscription to a car does not bind the customer for many years. Simply put, the Car as a Service (CaaS) program works like a Netflix subscription. Customers can subscribe to cars on a month-to-month basis.

In this article, we will have a closer look at what the Car as a Service (CaaS) model is. The pros and cons of this model will be discussed in this article.

Advantages of the Car as a Service (CaaS) Model:

• Convenient: The Car as a Service (CaaS) model is very convenient for the users. Automobile companies are including a service component as well. When customers subscribe to cars on a monthly basis, they will also be the recipients of concierge services. This means that the customers will only enjoy driving the car. The stressful aspects of car ownership will be taken care of by the concierge. For instance, customers will not have to repair their own vehicles. Instead, the company will do it for them. Also, they will not have to haggle for insurance, since that will be provided by the company too. Owners can drive an unlimited number of miles in exchange for a fixed monthly payment.
• Flexibility: Millennials want different cars for different occasions. They prefer an SUV when going on a vacation. On the other hand, a hatchback may be preferred for intercity driving. The Car as a Service (CaaS) model provides customers with this flexibility. They can change their cars each month if they wish to. Also, they can simply stop the service if they want to. Since many millennials are globetrotters and do not wish to be tied down, this model works best for them.
• Low Entry Barrier: Buying a car is an expensive decision. Customers have to make long-term financial commitments. Even though most cars are financed, loans can only be given to borrowers with good credit. This restricts the market size as far as the automobile companies are concerned. However, with the Car as a Service (CaaS) model, the market is virtually limitless. Anyone who is willing to pay the monthly subscription can have access to a car.
• Used Cars: From the point of view of automobile companies, they will earn more profits from this model. This is because insurance is very cheap if they buy it for several cars. Also, these companies can repair these cars at very low costs. This is the reason why they can offer a competitive price to customers. With Car as a Service (CaaS) model, automobile companies can make money throughout the lifetime of the car instead of making a one-time profit when the car is sold.

Disadvantages of the Car as a Service (CaaS) Model:

• More Expensive: The Car as a Service (CaaS) model is very flexible and convenient. However, it has a massive downside. This model is expensive for customers! Flexibility and convenience do come at a price. The good news is that customers will not have to borrow money and hence will not have any long-term liabilities. However, the bad news is that the monthly payment will be much bigger because the company has to account for several other costs that may arise during the lifetime of the vehicle.
• Obsolescence: Also, from the company’s point of view, they run a huge risk of obsolescence. Technology is changing very fast. If newer versions of cars become available in the market, no one will want to subscribe to older cars. The automobile company might end up sitting on a huge inventory of cars that it is not able to lease out.

The bottom line is that Car as a Service (CaaS) model has become a reality. Right now it is only a small segment of the automobile market. However, trend analysis indicates that the usage of this model will see an upward trend in the future.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.