Zipcar Case Analysis 6q1h5j

KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

Zipcar: Refining the Business Model CASE ANALYSIS SUBMITTED BY: Group-8 Anjali Shrestha Mohammed Istiyak RushkaSthapit Jay Prakash Upadhaya

SUBMITTED TO: RUPESH KRISHNA SHRESTHA

Synopsis Zipcar is a startup-business model organized around the idea of “sharing” car usage by hip organization. The case describe several iteration of Zipcar business model and financial plan. Zipcar faces many strategic decision ahead as they begin to expand their business. The case provoke the reader to analyze the underlying economics and business model of the company and assess its shortcoming and validity as the business actually rolled out. Case Facts Zipcar is a car sharing company started by Robin Chase and Danielson. The idea was conceived in late 1999 and by June 2000 the company has already started running. The cars would provide solution for people who did not need cars 24/7 but wanted the convenience of a private car occasionally. There are around 200 similar companies worldwide that act as potential competitors to Zipcar. But the industry is growing at the pace of 30% annually and the market in the US is large and virtually untouched with only five to six companies running in the same model. Zipcar provides a service in which customers could reserve specific cars at specific locations from the company website or over telephone services. Chase found out 14 cities in which Zipcar business model could be replicate, and she decided to start with Boston. In January 2000, Chase raised $50,000 from an angel investor. By June 2000, she was out capital and therefore raised another 25,000 from the same angel investor. In June itself, Zipcar formally launched itself with 12 cars. By October 2000, the company was running with 19 cars and 250 . Chase however needs more money to run and expand Zipcar at its full capacity. She has faced many challenges and made several changes in her business model and come this far. On October, she will make her pitch to raise funds at Springboard 2000 New England. There are possibly some more amendments that she can make in her business model which will be discussed further.

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Issues   

Does the Zipcar business idea seems validate and realistic one? Why did the founder revise their financial plan? What can be implied about the Zipcar business model from the actual operation data

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of September? What changes should Chase do to refine her business model before making her pitch

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at Springboard 2000 New England? What could be the strongest arguments that founder of Zipcar could make at a springboard forum about the attractiveness of venture?

Analysis Robin Chase has definitely adapted a very functional and efficient business model for Zip car. The car sharing company, unlike conventional car rentals and taxi services operates on a very different framework. Instead of crafting their customers as ‘car renters’, Zipcar has made their customers ‘shared car owners’. Zipcar has very effectively been able to deliver the ownership part to its customers. The customers can pick up a car anywhere and go wherever and whenever they like making them more of an owner than a renter. Apart from this the business model comprises of technological sophistications and a very effective capacity management which enables the company to reach as many customers. As discussed earlier, one of the prominent features of the business model is the inclusion of technology to bridge gaps in business processes and reach unprecedented functional ability. Apart from delivering values to the shareholders Zipcar has been very successful in delivering values to the customers and society as well. Zipcar has clearly considered customers’ convenience and comfort while deg its business model. The distribution channel primarily comprises of parking lots. Instead of having a ‘tedious’ airport parking or selected exclusive parking locations, Zip car has very cleverly opted for more accessible and convenient parking lots in malls and other such urban facilities. The value proposition for Zipcar lies somewhere between convenience and affordability. The target customers are the sort of people who wants convenient and comfortable transport without having to go through steep financial dispositions. The customers for Zip car do not want to go through the hassles of having a new car but still would love to have a car. The availability of numerous parking lots and the ad hoc service leads to the maximum utilization of vehicles. Unlike other car rental companies which require their customers to bring the cars 3

to them, Zip car has made it possible for the customers to ‘dispose’ off the car at their own convenience and comfort. This obviously saves the gearing up time for vehicles and also aids availability thus leading to maximum vehicle utilization. Zipcar is very much technological driven. One of the best things about technological driven companies is that they engage with their customers to a large extent. Zip car has both web based and mobile interface in its business process. The customers are required to reserve cars for them from the web based portal. This sort of interactions would strengthen the company’s engagement with its customers and ensures good public relation. In an upbeat tone, Zip car’s business model is an excellent one and sures many flaws of the conventional ones. However, inspecting the model in detail one cannot help but notice certain flaws and holes in the whole business plan or the model itself. Before pitching at spring board 2000, Chase should definitely make certain arrangements in her plan. The company is clearly running on high variable and fixed costs. The variable costs like parking, fuel and other are high and to cover these costs there should be maximum usage of the services. One of the best ways to cover COGS (with more VOH than FOH) is to have maximum usage of a particular product or service. Even Chase herself thought of having maximum usage of Zip cars. The whole ‘maximum vehicle utility’ element of the business model is directed towards ensuring maximum usage of the vehicles. But when we look at the pricing strategy that Chase adapted it doesn’t slot in. Chase later increased the hourly usage rate to somewhere between 4.50 USD and 7 USD. This increase in price would obviously jeopardize the possibility of having more usage based revenues and would also reduce product availability. Chase should clearly work on the revenue generation part of the business model. Another thing that Chase might want to look upon is the hip fee she has in her revenue generation model. There is a fierce competition in car rental business and forcing your customers to pay a hip fee even before they can actually use the service doesn’t sound good. Businesses, these days, are more customers oriented. Companies give anything to have a loyal customer base. The days of hip fees are slowly subsiding. Under these circumstances, it will be best if Chase looks upon this matter as well. The success of collaborative consumption lies in the perception of the consumers. Why do people go for collaborative consumption? For a company like Zip car, it is obvious people opt for collaborative consumption because of economic reasons. The company boasts that their 4

one car would replace almost 8 normal cars. This means the company believes that the world is better off with less number of cars. In the short run this may seem subtle but in the long run this may quite back fire. Shifting consumer perceptions from ‘rationality’ to ‘luxury’ may not always be good. People use Zip cars because of affordability. Not because they are ‘environmentally conscious’. The company should be very careful in giving the luxury of being ‘environment friendly people’ to its customers because if the ‘consume less’ tendency takes over the ‘consume cheap’ tendency than it sure would rebound back at the company. The partnership with Danielson is questionable not in regard with her abilities but in regard to how would potential investors perceive upon having a partner who is in the business as a part time. Investors look for credibility. Why would they invest on a business in which one of the partners is not fully committed? Instead of pitching into getting maximum value of her equity, for a start up like Zip car, Chase should rather pitch into gaining trust of the investors and building up credibility for her business.

Break Even analysis Based on the original financial plan, to achieve breakeven point (no profit no loss), the company need to operate 15 cars on average or should make 277 average member in year 1 (15:277) and then year 2 (18:329), year 3 (20:356), year 4 (20:360) and year 4(20:361). Due the revision made in the financial plan, the requirements for breakeven point decreased, showing a positive sign. New requirement for breakeven point were 9 average cars or 159 average member followed by 11 cars or 189 average in year 2 and so on (Appendix). The breakeven analysis suggest that the company made a wiser decision in making modification in their financial projection which is more realistic and is forecasted to meet breakeven point showing growth prospect for growth in the future.

Analysis of Actual Operating Data The analysis of September actual operating data gives a clear idea on the validity of business model. The operation data shows a wide variation both positive and negative from the projected financial of Zip car. Upon considering the result of September, we can find that almost 50-60% service are demanded at night and weekend so it will be profitable if car availability can be ensured at that time. The two major negative variation of September data reveals that: 5

1. Overheads for Corporate and Boston office have increased significantly by 186% and 205% respectively. But once the company start to expand its branches corporate overhead will spilt up. 2. Actual number of trip is deceased to 1.4 trips per month per member while the estimate of May plan represent 4 trips per month per member. But there is potential increase the number of trips through improving the service perhaps increasing the ease of use of the Zipcar or improving the availability of vehicles. Though negative variance are there but positive variances seem more beneficial for future growth prospects of the business; they are: 1. For daily trips, only 94 miles were used instead of expected 125 miles, and 16 hours were used instead of expected 24 hours. 2. Hourly usage is expected to be 4 hours per trip however, result shows that per trip 6.2 hours have used. This variation has positive impact for company as hourly charge is variable thus increased hours reflects increased earnings, while daily charge are fixed, thus decreased miles reflect saving.

Daily miles driven =Miles driven−daily uses = 94miles daily uses

Daily hours usage = = 16hours

Hourly usage =

Hours used −hourly uses hourly uses = 6.2 hours

Also, there is 2.85% attrition rate which is far lower than forecasted indicating that Zipcar has perhaps found a model that work for meeting the needs of the market.

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So, the actual operating data of September shows that the business is in overall positive direction and to secure the funding for the expansion of the business, chase should focus on the following points.    

Environment friendly concept. Highlight financial forecast based on breakeven analysis. The market is growing at the rate of 30% and had huge potential. The technology it has developed will ease the business process thus creating a

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competitive advantage for the company. Innovative marketing-controlled marketing budget.

Recommendation There are several factors Zipcar should take into consideration for its success such as the need for recruiting skillful and knowledgeable staff, the need for technology in Zipcar to be incorporated and implemented, the need to address the financially strong consumers who are also conscious towards the environment and so on. Thus, there are numerous options that should be taken into consideration to achieve these success factors. 1. Advising Board The necessity of an increased knowledge base through the creation and nurturing of advisory board does seem to be deemed necessary. 2. Pricing Change in the pricing structure to gain more revenues by catering towards customers those also using cars less often but for a longer period of time. Pricing structure included that would be more on daily rental and decrease in free miles. 3. Technology Incorporate technology that will lower the operating costs of Zipcar and yield towards higher customer satisfaction. 4. Revenue Sources

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Pursuing viable revenue streams in order to minimize the risk to Zipcar. Focusing on a growth by increasing the revenue rapidly to foster its growth. Revenues in turn are necessary to incorporate required technologies. 5. Cost drivers Cost drivers such as parking, insurance and gas should be understood in order to minimize the cost driver, which does not yield return. 6. Association The cost drivers should be lowered and the member base must be amplified by utilizing partnerships. For example an association in some kind with parking company which would reduce the cost of parking. 7. Customer The mantra to develop a strong band and a business is the key to customer satisfaction. Thus the utilization of customer to retain and research the needs of customers is significant.

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