The automotive industry is undergoing a structural change. From the sale of fossil fuel cars to the sale of cars running on renewable energy. From car dealerships with workshops to showrooms and online purchases. From a large repair and maintenance market to a marginal aftermarket for electric cars. From high profitability to low profitability. Therefore, it is not surprising that everyone is looking for a new way to make money.
Modern cars have evolved from being a pure means of transport to becoming a platform for attractive additional services—in the same way that the mobile phone became a platform for many services other than purely calls. “Freemium pricing” or free access to basic features is on the rise—while the attractive additional features (“Premium”) cost money. In practice, this means that some features are included in the price of a new car, while attractive additional features are available during a trial period, after which they become available via a subscription.
By redefining the car as a content platform and charging for additional features and services, carmakers have created a new, attractive source of revenue, which in 2020 was valued at a staggering USD 2422 million and is expected to grow by 19.5 percent per year until 2030, according to Prescient & Strategic Intelligence. General Motors (GM) expects that car buyers will in the future pay an average of DKK 11,500 per year for additional features such as navigation, autonomous driving, and other digital services for a customised driving experience.
The additional costs come on top of consumers’ existing subscriptions to Netflix, Spotify, the gym, newspapers, and a growing number of other subscription services. For an average American consumer, the cost of subscriptions was almost DKK 31,200 in 2021. So what do consumers think about the automotive industry’s new pricing model?
According to a recent survey conducted by Cox Automotive, 75 percent of respondents say they are not willing to pay an annual or monthly subscription fee for most services in their next car. In particular, they believe that safety and comfort features—such as hardened valve seats, remote starter system, lane change assist, and automatic braking—should be part of the price. 25 percent say they are willing to pay some money—between DKK 2,500 and DKK 2,900—for additional security and between DKK 1,700 and DKK 2,200 for access to more horsepower or longer battery life.
Car manufacturers are smart. They know that customers are systematically underestimating their monthly subscription costs, and that it is about getting the customers to “try out” the new features, get used to them, make them experience what they will be missing if they do not renew the subscription.
For example, buyers of the 2022 Toyota Tundra have to pay just over DKK 2,650 per year after the trial period to gain access to most of the connected services and the cloud-based navigation system. And Cadillac Escalade buyers who want the autonomous driving system Super Cruise have to pay DKK 1750 in advance, then an additional DKK 2100 per year when the trial period expires. It is all about creating habits—and a bit of confusion.
One of the consequences of digitalisation of goods and services is that suppliers can develop a pricing model that in some contexts aims to create confusion, so that customers choose the more expensive option. Dan Ariely, professor of behavioral economics at Duke University, wrote on the topic in his book Predictably Irrational, calling it “the importance of irrelevant alternatives”.
Ariely’s starting point was that The Economist offered its readers the following subscriptions:
A: Access to all web content for USD 59 (digital)
B: Subscription to the print edition for USD 125 (analog)
C: Combined print and web subscription for USD 125 (digital + analog)
No sensible reader would choose option B. So why offer it? In an experiment with his students, he found that while 84 percent chose C, only 16 percent chose A. Nobody chose B! He repeated the experiment, but removed the unpopular option B. What happened was surprising: now as many as 32 percent wanted option A, and only 68 percent wanted option C. With a clearly unattractive option B, option C seemed significantly more worthwhile and thus more attractive than option A. Whether option A is expensive or not is not relevant, but it is important that option C is significantly more attractive than option A.
Car manufacturers have realized this, and with more electronics, software features and updates, they are abandoning “all-inclusive rates” in favour of “add-on fees” for all features. The next step, in my opinion, is that they will introduce “the irrelevant option” in order to get as many people as possible to choose the most expensive option.
What is morality? The Henrik Ibsen quote “Only the lost is eternally owned” needs to be updated, as in a digital and software-based world you can get back what you lost—for a fee!
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