Zipcar’s Business Model

The article about Zipcar in the Sept. 8, 2008 issue of Business Week illustrates several aspects of business model and strategic thinking:

• Does the business model tell a good story?
• Do the numbers work?
• What is happening at the individual transaction level?
• What is the path to profitability?
• How will competitors respond?

Let's examine each of these in turn.

What's the story? The story of Zipcar is compelling at first glance. Customers in large cities join the Zipcar club and can reserve a car for hourly use. No need to own a car when you can rent one by the hour, with all insurance, gas, and parking included. From an environmental, congestion, and parking perspective, car sharing takes many private cars off the road (up to 20 private cars).

Do the numbers work? Not sure yet. The title of the article "Growth galore, but profits are zip" points to the problem. Revenue is up from $60M to $100M, but the company is still losing money.

What is happening at the individual transaction level? The fundamental unit of analyzing any business is the individual customer or transaction. In Zipcar's case, customers pay a $50 membership fee per year plus hourly rental rates of $11 per hour or $77 per day. The article indicates membership is currently at 225,000 members, on pace to reach 300,000 members. 225,000 x $50 generates $11.25M in membership revenue, so assuming total revenue of $100M, the company then generated $88.25M in rental revenues. At $11 per hour, this translates into just over 8 million rental hours. The article states the current Zipcar fleet is 5500 cars, so each car is utilized for about 1466 hours per year, or just 4 hours per day.

4 hours per day seems terribly low. Imagine a taxicab which is only in service for four hours per day — the owner would not make money. This analysis suggests several questions that I'd want to explore further. The average may be skewed based on the fleet size in new markets. I would want to look at the markets where Zipcar has been established for several years to look at utilization (the profitable markets like New York). Zipcar could have a challenge based on the concept of peak capacity — customers only want to rent the car at certain times of the day, so it will be challenging to get more revenue per car per day. Most likely the cars are sitting idle in the middle of the night. If that is the case, Zipcar could experiment with flexible pricing strategies, i.e. different prices for different times of the day to boost throughput. At the end of the day, these individual transactions generate the total revenue for the company. If this revenue covers overhead and variable costs, Zipcar will be profitable.

What is the path to profitability? The CEO, Scott Griffith, says the solution is to get to scale. By adding more customers, the company can more broadly distribute its operating costs like insurance, financing, and vehicle costs. Assuming this statement is true, then the investors are willing to provide the cash to get to this steady-state profitability. At that point, the investors exit via acquisition or public offering.

How will competitors respond? One challenge in business model thinking is to ignore a potential competitive response. In the early years of a business, that is often a reasonable assumption. Think back to 1999 when Zipcar first started — they were a tiny gnat in one market compared to a giant company like Hertz or Enterprise. Now that Zipcar is getting some traction, the big companies are considering hourly rentals as an option. After all, they have the infrastructure to do it.