Zipcar Executive Action Summary Zipcar has a challenge beyond profitability. It needs to innovate in two ways: technology wise, and consumer service wise. As of September 2000 Zipcar has managed to start operations and gain subscribers in a constantly increasing rate. However we will analyze some key aspects Zipcar needs to address. Financially Zipcar needs to keep growing in customers but especially in returns. Cost reduction is maybe a second point financially but by all means needs to be addressed in the near future.
Today’s model shows us that 35% of the car days are being used in a daily manner, which is a traditional rent a car model. Zipcar is not only, not in that business, but also, that business represents 35% of their business comes from the least profitable source: daily rentals. On a per hour basis, assuming a 5. 50 $/hr. average rate they could do the same $45 daily price in 8 hours, leaving the car to keep producing revenue during that same day. This leads us to the customers. As of September 2000 more than a third of the customers are using Zipcar as any other rent a car.
This shows a failure to convey the model, which may be due to the innovative it is in the US market, but is something Zipcar needs to solve in the near future to capture more profitable customers and at the same to change the habits of actual ones. This last, could result in some attrition for which we suggest Zipcar should start targeting corporate clients also. Finally it is important to mention that 77% of the miles driven and 58% of the hours used come from daily rentals which impacts further more in the profitability of such model due to increase in costs like maintenance.
The model as described before is working and has several issues to correct, but it is imperative that they solve the innovation issue. If they want to be a leader and capitalize from the first mover advantage they need to finish their R&D to fully implement their technology in all cars and for all clients. At the same time their infrastructure should not only be ready to serve todays customers but also have room to accept the urgently needed increase in customer base and to keep the superior tech gap over the competitors.
Increasing the customer base via marketing or other means, while investing heavily in R&D and technology will definitely need more funding. To secure such funding, it is necessary that today Zipcar acknowledges some risks that have not been mentioned and that could change their pricing scheme. The all in one tariff has several risks incorporated like insurance and financial cost changes but specially the volatility of fuel prices. Being an innovation it does not seem possible for Zipcar to change prices shortly after entering the market without loosing some customer base.
If they manage to convey appropriately their model, more customers would mean better financing and especially better distribution of operating costs and less number of cars proportionately. Today 60% of their usage is from nights and weekends, which asks for more cars but for less time. However this would mean distributing the overhead into fewer units. We mentioned innovation in customers also, because the customer itself is an innovation. Zipcar needs to have an educated customer base that can use the tools necessary to be a partner …to self-serve.
This is something that if it is not achieved, customer satisfaction will be low and no innovation, convenience or environmentally friendliness will easily correct. Zipcar has discovered a niche but needs to convey that it is needed and how it will deliver. In conclusion, as an investor, I would need to see an improvement in Zipcar’s model fulfillment. The daily rental should not be eliminated but should represent an eventual option for our customers rather than a third of the business activity.
If this were achieved, the profitability of Zipcar would increase and at the same time the customer’s satisfaction with the service. Although it is not mention, today there probably is great chance customers won’t be served because of the peak demand at nights and weekends. This will also reduce the exposure of Zipcar to the risk of traditional rental companies entering in the hourly rental of vehicles. Finally as an investor, we would also ask for more corporate deals not only as customers but also as opportunities to costs reduction like parking or vehicle buying; and a disclosure of the usage of 11/12 of the member fees.