A car rental company rents vehicles at affordable daily and weekly prices. All sorts of different parties are interested in car rentals. Common customers include business and leisure travelers, those whose vehicles are out of commission, and businesses. Car rental companies are known to deal with hundreds of millions of dollars worth of capital equipment (the cars), hundreds of millions of dollars worth of real estate, thousands of employees, and millions of consumers.
Enterprise, the largest, has over 1 million cars, over 200,000 employees, thousands of locations worldwide, and tens of millions of customers. Even a mid-size company might own 2,000 – 3,000 cars worth $50 – 100 million, operate a dozen locations, and have hundreds of employees serving tens of thousands of customers.
Have it in mind that this complexity makes pricing and forecasting very complex, especially owing to the number of variables involved. Each location, car class (compact, mid-size, full-size, SUV, etc), time of day, and length of rent can have its own distinct price. Unlike, for instance, an airline, a car rental company can move the cars around – and so can its competitors.
Also note that they can even subsidize customers moving their cars around, by offering cheap intercity rates. Also unlike an airline, while a large car rental company with an extensive network is difficult to compete against, nearly anyone can open a small rental franchise and compete at one location.
In this modern age, most sophisticated car rental companies manage prices only vis-à-vis their competition. They consider the bookings coming in, make a best guess as to how many they will eventually end up with, and then look at their competition’s pricing and price relative to the market.
Note that this has proven dramatically better than just the “summer” and “winter” flat pricing strategies of decades past. However, since it is completely reactionary, it steadily results in a race to the bottom, frequent sell-outs, inverse pricing curves (where last minute pricing is cheaper than early bird pricing), and lost profits.
The future of car rental requires proactively matching supply to demand and leveraging data every car rental company already has. It also entails avoiding the race-to-the-bottom of matching competitors whenever possible, instead of making your own intelligent pricing decisions in a way that enables competitive advantage.
Companies in this industry tend to base their estimates on simply multiplying last year’s number by 1.1. Companies that outsource their pricing to their competitors will fail even faster. The future of car rental requires leveraging the data that already exists to make rapid, accurate decisions.
Smart Ways Car Rental Companies Make Money
A car rental business makes money by renting automobiles to those who need a means of transportation while away from home. Rental car companies like Avis, Hertz, Enterprise, and smaller players like Fox, Payless, U-Save, and others make money from buying cars cheaply and selling them for more than they paid. Just like a vacation homeowner, renting the cars out simply covers their operating expenses while they wait to resell the cars.
Rates for car rentals differ by the quality of the vehicle and the location. In general, the low end of car rentals, such as a Nissan Versa, cost around $35 to $50 per day. Upscale car rentals like a Mercedes-Benz or Lexus will run upwards of $100 to $200 or more per day. A typical car rental business can rake in the cash if it has an optimal location, a diverse fleet of vehicles, and competitive rates.
Note that it is possible to make $50,000 to $100,000 in the first couple of years, and as the business continues growing, it can eventually reach the mid-six figure mark. Most entrepreneurs in this business are advised to expand across their region and/or nation and their car rental business can make millions of dollars per year.
However, things may soon change. Threat from supercar manufacturers like Ford and Tesla who may rent cars directly to customers (especially, autonomous cars), taxi-like services such as Uber and Lyft and peer to peer (P2P) car sharing services like Getaround / Drivy / Car2go which connect owners and renters directly, can affect car rental companies.
Another threat comes from declining residual values or the value of the car when the company tries to sell it a year or two after buying it. According to reports, Hertz recently lost half (yes, 50 %!) of its market capitalization due to write downs on small and compact cars which had poor residual values.
Residual values are more or less going to be under pressure in coming years as purchases of new cars ballooned after the Great Recession, and cars have become more reliable and able to stay on the road longer.
The growth potential of any car rental company will greatly depend on the location, the quality of the fleet, and the company’s marketing savvy. Location is the most important factor.
A car rental company in an area with plenty of business travelers and others who are likely to need a temporary means of transportation, will grow quite quickly. It is possible to grow to the point that the company expands the business across the region, the state, and even throughout the nation.
There are periods in every company and industry, where leaders recognize that valuable data is being wasted – and decide to stop wasting it. However, it is not a time for fear, especially in the car rental industry. It is a time for excitement. Every industry that has implemented demand-driven revenue management has seen profits across the industry rise – not fall.
Profits rise when you match supply to demand, and actively manage your fleet based on highly accurate predictions. If certain vehicles are no longer en vogue from a style perspective, car rental companies are advised to sell them or trade them in.
You can charge extra for various levels of auto insurance. It is prudent to establish relationships with local car dealerships so they can steer customers your way when vehicles are being serviced or repaired.
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