General Motors have created a new subscription model, allowing New Yorkers to rent Cadillacs (that would normally cost $60,000 - $100,000) and SUVs on-demand at $1,500 per month. While this concept is currently limited to the New York area, and a small number of car models, General Motors representatives announced that the service will be launched in other major US cities and comprise several more car models in the future.
According to Cadillac, this new concept is the first of its kind. But on-demand services have been present in a variety of industries for a long time already; think Netflix and Spotify. Why did it take so long for the car industry?
For on-demand services to be in demand, there must be a certain rate of diminishing marginal level of utility. On-demand movie services are appealing because once you have seen a movie once, this movie becomes much less valuable to you. This is quite clear, and that’s why on-demand movie services have been around for two decades now (Netflix was founded in 1997). In the same way, listening to the same piece of music gets quite tedious after a while, although not to the same extent as watching the same movie over and over again. The rate of diminishing marginal level of utility is consequently lower for music than for movies, which may explain why on-demand music services was longer underway (Spotify founded in 2006).
The Future for On-Demand Cars
A car also becomes less valuable to you the longer you own it: for most people, anyway. Here, I’m not talking about value depreciation in terms of ‘wear and tear’; but in the same way we like dressing up in new clothes - not just because they’re new, also because they’re different.
But this effect is not nearly as strong as with movies and music. Despite haven driven the same car for a year, it will still take you from A to B without physical activity, which remains quite neat. Therefore, the long-term utility you derive from a car will not only stay reasonably constant, it will also be much easier to forecast.
As the long-term utility is easier to predict, the perceived risk of purchasing a car is very low already, and so, an on-demand car service will not be able to reduce this risk significantly. Moreover, the value you get from driving a new car - new, as in a different car - is not substantial, either.
It is unlikely that this will become a “Netflix for Cars” as General Motors will have a hard time moving the concept beyond luxury cars; shifting from a Toyota Corolla to a Volkswagen Golf is not creating much value. However, it does present an interesting opportunity for luxury car brands to attract more price-sensitive customers by giving them the opportunity to try out the car and fall in love with it before paying a large sum to actually buy the car.