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For the growing segment of the population that streams videos on Netflix, cooks dinner using Blue Apron and listens to music via Spotify, it is logical to wonder if vacations will soon be booked the same way.
The consulting firm McKinsey & Co. reported in 2018 that the subscription e-commerce market has grown by more than 100% annually over the past five years, with the largest such retailers generating more than $2.6 billion in 2016, up from $57 million in 2011.
The travel sector, however, has been slow to adopt the model. And some analysts say that makes sense.
“It’s kind of the holy grail,” said Phocuswright analyst Michael Coletta. “Because travel in general is such an infrequent purchase for the vast majority of the population, it’s really hard to make a subscription service work. But from the standpoint of a business, it’s ideal to have membership or subscription revenues coming in monthly.”
Such predictable revenue, he said, is preferable to the current model in which the industry doesn’t generally know when people want to travel and are ready to book.
Enterprise Holdings’ pilot of a car rental subscription service last month, Subscribe With Enterprise, was the first major U.S. travel company entry into the subscription space. It was followed by Hertz’s pilot launch of a subscription program, Hertz My Car.
Among airlines, Mexican discount carrier Volaris launched a low-cost subscription service at the start of 2018. But in an indication of how difficult it can be for such programs to work in the travel sphere, Lufthansa Group shut down a subscription model it piloted last year.
Coletta said that for most travel subscriptions to be successful, they would need to be aimed at frequent travelers, such as road warriors or people with very flexible schedules.
“I’ve seen many startups in that space fail because they can’t find the right audience and find traction and enough people to pay that subscription,” he said.
Chris Brown, executive editor of Auto Rental News, said that if there is one segment of the travel industry that could do well with subscriptions, it’s car rental.
“When you lay the car rental business model over a subscription model, car rental seems poised to win in this space,” he said.
For one, he said, car rental firms “know the transactional economics of putting people in and out of cars on a three- to four-day basis.”
While automakers like Cadillac and Volvo have offered subscription services, Brown said it can present issues for dealers who sell new cars, because once a car is put into service it becomes used, deflating its value. Car rental companies, however, “are churning vehicles all the time, and they know depreciation better than anyone.”
Automakers naturally can offer fewer choices to subscribers than a rental company, which offers different brands and types of vehicles.
Subscribe With Enterprise’s pilot price, $1,499 a month, lets users swap vehicles up to four times per month and select from six vehicle classes. It covers up to 3,000 miles per month, vehicle maintenance, roadside assistance, damage and liability protection and access to a concierge line that customers can call to complete reservations. Hertz My Car has two subscription levels: $999 or $1,399 per month, with the latter offering more premium cars. It enables two swaps per month.
Enterprise said pricing is based on local market conditions and can change. The $1,499 price is in the pilot states: Minnesota, Missouri and Nevada. Hertz is piloting the product in Atlanta and Austin, Texas.
Brown said the higher price targets “a person who wants flexibility and has the money to pay for it” but also limits the market to “a narrow band that can really afford that and need the flexibility.”
Coletta said the higher cost seems like “a good fit for the right business traveler who wants flexibility and to be able to swap out vehicles and reduce the hassle of waiting to do individual rentals.”
“From that standpoint it seems to make a ton of sense,” he said. “I’m surprised other brands aren’t doing it.”
Kyle Sabie, assistant vice president of Subscribe With Enterprise and Enterprise’s CarShare division, said the market for this product will vary from state to state but will encompass both leisure and corporate travelers.
“It’s likely to touch a little bit of every category,” he said, adding that through its rental business, it has years of data on individuals who might want such a service. “As we look at all the different types of individuals and the use cases for why they rent cars, we have a robust history of who they are. We have science that we are incorporating into this.”
On the other end of the pricing spectrum, Volaris launched its low-cost subscription service, v.pass, at the start of 2018, hoping to increase ancillary revenue and the frequency with which customers travel and to lock in customer loyalty, said Juliana Ramirez, the airline’s senior manager of business development.
Subscriptions are offered at two levels. The $15-per-month subscription gets members one free flight segment during each calendar month, excluding tax. For $30, subscribers are entitled to a roundtrip itinerary each month. Including a checked bag in the membership costs an additional $15 per month. Including a carry-on bag costs $5 more per month.
Thus far, the service is available only on Volaris’ domestic network, though Ramirez said the carrier hopes to expand it to U.S. routes this year. The pricing would likely be different from that of the domestic membership, she said.
Ramirez didn’t provide details on the results of v.pass thus far but said the airline has been very satisfied. V.pass subscribers fly more than the average Volaris customer, who flies two-and-a-half segments per year, and v.club members, who get access to fare discounts and fly more than three times per year on average.
In addition, she said, the service has met the expectations of the carrier’s revenue management team.
“We have been setting the price based on manual analysis,” she said. “Eventually we want to make it more algorithmic. We’re waiting on more data.”
While Volaris’ price may seem low, Coletta pointed out that since the plane is flying no matter what, “the more seats they can fill on every route the better.”
That contrasts with car rental, where there is a depreciation cost with every ride.
For travel companies entering the subscription space, product pricing is complex.
“They seem to look at things like taking into account loyalty and the longer-term value of the customer and maybe upselling them and selling them ancillary products,” Coletta said. “Will they buy drinks on the plane? I’m sure they factor in those other types of revenue opportunities.”
Lufthansa did not say why it ended its subscription program, which it described as successful.
Its 2017 Flightpass trial with subsidiary Swiss International Air Lines allowed 10 one-way flights from Geneva to European destinations within 12 months that had to be booked within 21 days of the flight, for about $800. A slightly more expensive version of the pass narrowed it to one destination but allowed bookings within seven days of the flight.
Lufthansa said that it was using the insights gleaned from its tests to further “develop the product.”
“The test in Geneva was quite successful, receiving positive feedback from customers,” a Lufthansa spokesman said. “It ended last year, and currently there is no date for additional products.”
Source: travelweekly.com