When I was in business school, I loved Zipcar. My daily commute was the walk to the classroom from my dorm. I did not find it useful to own a car. When I needed to rent, I was often too far from the nearest rental car center and I never needed a car for an entire day anyway. Whenever I needed to run the occasional errand, Zipcar solved my problem. For a small fee, I could rent cars by the hour that were parked near where I lived.
The membership fee was small, the usage fee smaller in comparison to a full day’s car rental. And the fines were fair punishments for bad behavior. As long as I needed a car for predictable, occasional trips, Zipcar was right on the money.
From an investor’s point of view, Zipcar enabled cars to be rented multiple times a day, each for an affordable fee by the hour, which in aggregate would make more money than a traditional rental in a day or week. It assumed that fleet costs were largely fixed and any better utilization would disrupt the incumbent.
They invested heavily into their world beating technology platform. It was simple and easy to use and created immense customer delight. The mapping technology was clear, the reservation system seamless to use. In fact, the cars with cutesy names created a quirky brand association with Zipcar that kept customers coming. One key or Zipcard could unlock any car, provided you had booked it. Driver authentication was quick, fueling, insurance and payment were hassle free.
The growth hypotheses was that the technology platform could be built once and then deployed at scale to achieve economies of scale. A large fixed cost, for development and roll out could then be recouped simply by maximizing the number of customers accessing the technology. They made an airtight argument to be anointed a tech company.
That was a fatal assumption.
In search for product market fit and while gaining significant customer traction, Zipcar made some flawed assumptions on the true costs of operating a fleet. As utilization of a car increased, it increased depreciation. As depreciation went up, maintenance costs went up. As cars needed to be turned over to multiple drivers in a day, cleaning costs went up. As multiple drivers accessed a car, insurance costs went up and with the increased usage, so did fuel. In other words, operating costs for the fleet were largely variable, not fixed. And hence, improving utilization alone was not a sound business model. In their zeal to focus on their technology product, they ignored the very real operational challenges.
Zipcar thus, had to ensure a higher than average customer lifetime value. They also needed to ensure liquidity for each car to rent it out multiple times in a day. They thus, had to grow their customer base while keeping existing ones highly engaged and loyal. The mindset of the company had to shift from being efficient product managers to fleet operators and marketplace managers.
Zipcar designed a pricing model with three components. 1. Low membership fees, around $10 a month 2. Usage fees that was perceived as low by the hour but added up to a hefty sum for longer times, 3. Fines for late returns and other bad behavior such as littering.
The low membership fee was meant to attract customers with a ridiculously low price point. It was a no brainer for most customers. The usage fees seemed very reasonable since you only paid for when you actually drove. $12 an hour or less for a Mini Cooper. And fines? Well they helped cover Zipcar’s liabilities for lost customers due to late turnarounds, or damage or merely cleaning costs.
And that’s where things really fell apart.
As Zipcar grew, it became readily apparent that customers loved hourly rentals but were woefully bad at predicting the time they actually needed. Customers would often book a car for two hours, but realize late in the journey that they also needed to make a few pitstops on the way. And then they’d get caught in traffic. What was a bargain $20 for two hours, became less so at $50 for five hours when it may have been cheaper to take a cab or just rent a car for the whole day. In their haste to return the car, drivers often stepped on the gas to shave a few minutes off their ride. Sadly they often arrived just a little too late and ended up getting fined anyway. Or worse, they damaged the car.
Additionally, customers had very different standards for cleanliness depending on who caused it. Customers complained miserably when they got fined for leaving an accidental toffee wrapper in the cup holder. But the next driver went apoplectic if they perceived anything close to an unclean car when they opened the door. A vicious cycle formed where a single bad incident caused multiple negative reviews and hence made customer acquisition that much harder.
It became even more challenging to manage utilization. Cars that were returned late left the next customer waiting too late for no fault of theirs. They had to then mandate idle periods between rentals which ended up reducing utilization to numbers quite comparable to traditional car rental. Despite Zipcar making up it’s revenues through fines, they could not account for the lost customer who probably canceled their subscription never to come back again.
Zipcar boxed itself into a business model where they made money only when many customers subscribed to them but few customers actually used them. Those that used them often, tended to get upset at paying fines for minor infractions. Over time, their most loyal customers ended up the most unhappy.
The problem only compounded as Uber and Lyft went mainstream. Customer willingness to pay became even lower and the potential target market grew smaller. It was now not just anyone who wanted to run an errand, but someone who wanted to run an errand and wanted the flexibility of driving their own car.
In fact, I hypothesize that Zipcar was far from the only mobility startup that faced the same problems. Getaround, the peer to peer car sharing platform faced similarly challenging unit economics emanating from an inadequate focus on operations instead of product. They struggled even more than Zipcar with enforcing cleanliness. eBike and scooter startups wanting to allow one way rides found inventory management prohibitively expensive and maintenance costs (even for bikes) grossly understated.
To their credit, it looks like Zipcar eventually realized their folly and cut their losses. In 2016, the founders stopped calling themselves a tech company and wisely sold to Avis Budget Group, a highly efficient fleet operator. Avis is likely to integrate Zipcar’s advanced technology into their larger fleet while providing Zipcar both the marketing savvy and the operational efficiency that will make it more successful. In return, Zipcar will provide Avis a bigger footprint in urban areas, away from their traditional airport hubs.
The lessons for startups are glaringly obvious but only in hindsight. First, Zipcar should have been a lot more careful with understanding their true costs, especially in an industry as complex as fleet. Second, they realized too late that their technology platform was not their end product but simply an enabler of a complex capability system with real world challenges.
Going forward under Avis, they need a revamped pricing model that incentivizes their customers to engage with them, rather than joining and never using them. A higher membership fee will qualify better drivers with true intent to use the car. The usage fee should be kept the same to encourage more driving.
They could do better by analyzing driver behavior to help them become more predictable at driving. This includes using mapping technologies and a knowledge of a customer’s common routes to suggest how long they would need the car. In fact, applying learnings from the massive Avis Budget fleet will be an immense competitive advantage.
Instead of highly unpredictable hourly rentals, Zipcar may have to impose a minimum 3-4 hour rental window, perhaps extendable by an hour. A lower price point will still be competitive to traditional rental and provide more flexibility than an Uber.
Zipcar should also alter it’s branding to actively work to reduce fines for the customer. In all fairness, a customer who damages a car should pay up. However, customers should not feel the need to perform traffic acrobatics just to get the car back on time. Lastly, customers should be asked to upload photos after the ride certifying car cleanliness. These will reduce fines and improve customer satisfaction. Alternately, customers should incur a cleaning fee that will leave the car ready for the next user. These are not unusual. Airbnb imposes these for hotels.
Zipcar is uniquely positioned to deliver world class customer satisfaction, both in comparison to traditional rental and ride hailing services like Uber. They own the car and hence can control the entire customer experience. Delivering on customer satisfaction will unlock much more growth. Hopefully the Avis umbrella will provide them the buyer power to negotiate better deals with suppliers including fleet manufacturers, technology and parking lots, getting them better margins.
I am truly optimistic about Zipcar and how it can be a harbinger of new age car ownership.
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