Turning data into profits – real opportunity or pipedream?

As an engineer by training, I am a firm believer in the value of fact-based decisions – collect the data, do the analysis, develop the solution.  The process is as relevant to selling and servicing cars as it is to their development.  There were a few announcements in recent days that reinforced the greater focus that manufacturers are now putting on capturing customer data and selling digital services that in some way are based on data and connectivity.  But how realistic are the projections of new high margin revenue streams?  Is this another example of hope over reality like fully autonomous cars and a massive shift from ownership to mobility, both of which have seen most manufacturers either exit or substantially cut back in recent years?

We are all aware of the current trends towards agency contracts replacing franchise contracts for new car sales.  One of the reasons given for this by the manufacturers is the need for them ‘to get closer to customers’, exemplified by the presentation to German Skoda dealers by the new Skoda CEO (and ICDP alumnus) Klaus Zellmer reported last week in Autohaus explaining why they wanted to move to an agency contract (of the so-called ‘non-genuine’ variety).  He said that one of the main reasons was the need for “GDPR-compliant use of customer data by the manufacturer and the resulting possible linking of online and offline sales”.  The latter is clearly critical in order to offer an effective omni-channel journey, though it does not necessarily follow that you have to move to agency to secure the necessary data-sharing.

In other announcements and dealer discussions, the VW Group has been clear that they have ambitions to grow the sales of digital services, and have proposed that dealers will get a commission or margin on this where the customer has nominated a favoured dealer.  Stellantis announced last December that they plan for €4 billion incremental annual revenues by 2026 from software-enabled offerings and subscriptions (€30 billion by 2030), and Renault followed up last week with the latest update on their Renaulution strategy promising “hundreds of euros revenue per year per car” by 2030.  Other manufacturers have similar ambitions, usually without any detail of the actual digital services that a customer will choose to purchase through the manufacturer rather than through their cell phone network provider or other channel.

Back through the mists of time, I was working with Ford on telematics strategy, and we were considering all the ways in which we could generate incremental revenue through connected cars.  A colleague then told me that there was this new thing called Bluetooth that would allow any phone to connect to a car.  It was immediately clear that many of our ideas like music and video downloads and navigation services were dead in the water, and the industry has struggled over the last two decades to find a use case that offers real promise and commercial returns.  For a customer to choose to buy through their car, the product has to be one which is specific to that car, rather than something which they may want to port from car to car or car to home such as navigation and music.

The favourites at the moment would appear to be usage-based insurance (UBI), different forms of mobility offer, and software-enabled ‘features-on-demand’ (FoD).  UBI has been a favourite of mine for many years as it provides the opportunity to offer the customer something that has much higher value to them in terms of their potential annual premium than the cost to deliver in terms of claims costs if the provider self-insures over a large parc.  As it also enables improved retention in a manufacturer network for body repair and related high margin parts, this will be a valuable countermeasure as electrification drives down aftersales revenues and profits, so is sure to grow.

Mobility is more challenging in terms of financial viability, but digital access to cars not only transforms the user and operating experience, it also generates information that will allow what is often a loss-making business to be optimised.  ICDP consumer research shows that car ‘owners’ are firm in their desire to retain the keys to a car that they can call their own, even if it is leased, but there is still a proven demand for mobility services in terms of cars by the hour or kilometre.  The challenge is managing the fleet utilisation to get the necessary return on investment, and here data science can potentially help to understand fleet needs and locations and incentivise users through dynamic pricing and promotions.

FoD such as subscribing to heated seats or a power upgrade is the latest development with a number of recent launches as discussed in my blog in the summer.  It is probably too early to know how consumers will react to this, but even if the uptake proves to be reasonable, the economics will still be challenging.  It will be like an ‘all time buy’ for parts in the aftersales sector – which features should be built into all cars produced at a cost of ‘x’ in the hope that enough people subscribe over time at a revenue of ‘y’ to produce a net profit.  Even if the overall concept works, there will be some individual features that are left on the virtual shelf, whilst there may be an unfulfilled demand for features that were not built into the car as original equipment.  It will be a fine economic balance to get the mix and pricing right.

Looked at as a whole, improved access to data, and more importantly better use of the data that is available, is a clear opportunity to improve and customise the buyer and user experience throughout the life cycle, with a good chance that this will translate into incremental profits for manufacturers, dealers and repairers.  There are also opportunities for data and connectivity-enabled services like those I have just described to make a positive contribution, but the potential for whole new business units offering new digital services like the Apple iStore still seems as challenging to me now in the era of the iPhone14 as it did back in 2001 when the Sony-Ericsson T36 became the first phone to go on sale with Bluetooth.