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I wonder if this, too, is a symptom of near-zero interest rates. With an interest rate of zero, future cash flows are valued equal to present cash flows. That
by jbay808 5y ago
I wonder if this, too, is a symptom of near-zero interest rates.
With an interest rate of zero, future cash flows are valued equal to present cash flows. That increases the net present value of recurring payments (approaching infinity, actually). So it becomes increasingly attractive for companies to discount the initial sale price in exchange for a recurring payment.
In a higher interest rate environment, that wouldn't be the case, as recurring payments would discount the further they are in the future, converging to a much smaller sum, while revenue earned today from the initial purchase would be more highly valued.
- soared 5y agoInteresting thought. Here’s the math. Toyotas current incentive is zero down, 1.9% apr for 72 months. The typical rav4 costs $33k. Over the life on the loan (6 years) you’d pay about $1,500 in interest. If you paid $8/mo it would take 15.6 years to have paid a total of $1,500 in monthly fees. Likely if you pay $8, you also pay for another subscription. So say $16/mo on average makes $1,500 in only 7.3 years. Monthly subscriptions may be comparable in revenue to what the dealership earns from financing. This may be way off, I don’t really know how any of this works but I am currently shopping for a Toyota :)
- shostack 5y agoThe total value captured isn't just the initial subscription. The LTV calculation should also incorporate, just off the top of my head: sale of valuable customer data, improved targeting of ads for new cars based on that telemetry, upsells to additional subscription services, increases in subscription price, affiliate commissions from other subscription services that get bundled in, etc. They don't have these things yet necessarily, but hard not to justify it once Pandora's box is opened.
- soared 5y agoAuto related data is already huge thing, but dealerships don’t do much in the way of collection and sale. Someone who is shopping for a car is super valuable to advertise to, but after that purchase they lose all their value. Telemetry data straight from a cars location is not sold, if it even exists. It would be extremely valuable but seems potentially illegal.
- DenisM 5y agoOk, that’s actually scary. Philip K Dick dystopia came from an unexpected angle.
- throwawaygh 5y agoHeh. No. You really don't need macroeconomics to explain Toyota's decision making here... not everything is a nail, and that's one hell of a hammer you're holding.
- jbay808 5y agoI wouldn't, if it were just Toyota. But it's not. A lot of businesses are transitioning away from one-time sales to recurring revenue / subscription models.
- throwawaygh 5y agoWhat works for big tech will work for big X. The MBAs are learning. Non-tech industries have been talking about how to move to subscription models for 10+ years. Again, interest rate theory seems like the wrong tool here.
- Cd00d 5y agoMaybe. But, I think it's more likely that the downstream revenue from car sales has changed dramatically, and they need to find clever ways to fix that. Historically, cars needed a ton of work and maintenance and dealers got significant revenue from their mechanic's shops. Now cars are far more reliable, go far longer between standard service calls and oil changes, and there's just far less money being spent at the dealer after you drive away with your initial purchase.
- 434123r32f 5y agoWouldn't future inflation increases drive down the value of those recurring revenue streams?