Kathmandu University School of Management | Entrepreneurship and Innovation | Zipcar: Redefining the business model | | | 3/29/2015 |
Submitted to,
Prof. Rupesh Krishna Shrestha

|

Submitted by,
(Group 6)
Niraj Ghimire (14313)
Amit Pathak (14325)
Subigya Regmi (14327)
Prajwal Sagar Shrestha (14332)

Synopsis:
Zipcar is a start-up organized around the idea of "sharing" car usage via a membership organization. This case describes several variations of the Zipcar business model along with their financial plan. These variations include a very early version and a version developed just prior to the launch of the business, as well as data from the first few months of operations. This case is all about the underlying the business model for the venture and to discover how these assumptions are holding up as the business is actually rolled out.

Case Facts: * The company was incorporated in January 2000 and raised an amount of $50000 from an angel investor. * Although an MBA from MIT with a good professional background, Robin Chase had minimal experiences regarding start-ups. Similarly, Antje Danielson, despite having held several high position jobs was relatively inexperienced when it came to entrepreneurial venture. * Car sharing was best suited to urban areas where the population density is high. * College-educated individuals were the most receptive to the proposition of car sharing. * Penetration for the car sharing business module was small (0.01%) in Western Europe but was growing rapidly. * Approximately 200 car sharing organizations were operating in across 450 cities in Western Europe. * 66 million Americans lived in the top 20 metropolitan areas and 20 million used public transportation. * Three potential competitors were already operating in North America and two in the USA. The two US competitors were Portland based Car-Sharing Inc. and Seattle based Flexcar. These focused on the environmental impact of the car rather than on convenience and cost effectiveness. * Every car shared would eliminate the need for approximately 7.5 individually owned cars in the market. * 50% utilization of vehicle was the most that could be achieved for customer satisfaction to be maintained. * Boston had insufficient and expensive off-street parking but a good public transportation system. * Boston was home to large population of college-educated and Web-connected individuals.

Issues: 1. Is the business realistic in terms of market demand, opportunities and other environmental factors? 2. What were the flaws in the business model of Zipcar due to which it could not attract interests from investors during the early phase? 3. Was pricing strategy one of the reasons to position Zipcar different from other competitors and to cover its COGS at the early phase of the business? 4. How important was the technology building in Zipcar’s business model? 5. Was the variable cost and overhead cost a hindrance to the growth of Zipcar?

Analysis:
1.
There was the gap in the market in a sense that there were opportunities from the public vehicles perspectives. There was a lack of satisfaction among every consumer, whether those who are using public vehicles and those who have their own car. Those who use public vehicles have no options left except the private own car and those who owns the car face a lot of hassles in terms of additional expenses like parking facility, maintenance, insurance etc. Those private owners like to buy cars, but they are consuming less than 6,000 mile per year which is comparatively less in terms of car cost. They were only like to operate the car for the special occasions which operated less mile so that, they were not benefiting in optimum way by buying private car. According to Exhibit 1, there was the high incur in the cost which is almost $575 and the amount is high for those who consume less than 6000 miles per year. Among the urban residents, college students were the most accessible to the preposition.
In terms of market size, there was the huge prospect for Zipcar. The population of 20 metropolitan cities was 66 million among which 20 million population were using public vehicles. There was the strong demand for the niche product in US.
The primary prominence as the opportunity was the convenience and the cost saving. From the environmental perspectives, every car share would eliminate the need for approximately 7.5 individually owned cars in the marketplace. Pricing was another factor to create an opportunity among the public. There were already few car sharing companies but the pricing was not that feasible for the urban people which they were looking for. Car sharing was best suited location for the urban market with the dense base of potential users. This concept was the complete solution for those people who did not need a car to get to work but wanted the convenience of private vehicle to run occasional errands.
2.
Chase believed that the idea of car sharing company in a relatively uncontested area of North America would be a huge success, but the main hindrance to this could be to attract the venture capitalist. As the idea of car sharing business model was relatively new in US, the investors didn’t have confidence to invest in the business plan, just by looking at the appeal of the business model. They wanted to invest in something that was a proven business model in the market, which the Zip car business plan was lacking. Chase and her partner did extensive research before preparing the business plan. The first draft of the business plan was prepared in December 1999, with the main objective of convincing prospective investors to invest in the business model.
Some of the assumptions that were made while preparing the business plan in the original phase were: * Chase assumed a renewal rate of 95%, resulting into a 5% attrition rate each year. * According to research done on mature European car sharing companies, 50% utilization of each vehicle (i.e. 360 hours per month) was the most that could be achieved if customer satisfaction is to be maintained. * Initially maximum target utilization was set to be 40%
After preparing the financial projections in the business plan, chase then tested its viability with a group of trusted advisors and then began the funding process. But she found extremely difficult to attract new investors to put money in her business plan. Some of the major problems that were present in the original business plan are: * The main flaw of the business plan is that the assumption of 4 Trips per member per month, 22 miles per trip, and 4 hours per trip that have been made at the start of the financial plan are not well justified. It has not been made clear as to why these numbers have been used in the financial statement. The prospective investors could question on what basis these assumptions were made. * Looking at the yearly growth of the operations of the financial plan, there is the loss of 36,007 in the first year, and there is huge increase in profit year after year, and the profit in year 5 has increased to 480,614. A prospective investor would be very happy to see the growth in the profit and invest in the plan, but it is not the case because, the financial plan is a bit unrealistic. This is because as we see the growth in the revenue on yearly basis, the cost has not increased as compared to the revenue. From year year 1 to 2, the revenue has increased by about 437,537, but the total variable cost has increased only by 181,920 and the total overhead cost by only 33,677. From this we can conclude that the business model has not incorporated all the costs involved in the business as the revenue of the company increases. The financial plan fails to incorporate the added costs that would incur as the number of cars rented increases. For example the financial plan ignores the increase in staff size required in order to meet the growth in revenue. * The business plan didn’t mention about the utilization rate that would be required in order to cover the cost of goods sold. The investors need to know the breakeven point of the business proposal. The business plan was lacking what is the minimum level of utilization required in order to cover the COGS, and what level of utilization to be maintained in order to break even, that is to cover all the costs involved in the business. * Similarly, the business plan also didn’t mention how the growth in business would be managed. To be specific, the business plan lacked to incorporate the staff increment to meet the growth in business. It failed to answer the question “How many cars would require an increase in staff?” * The annual fee of $300 is too high hurdle as a membership fee. Chase proposed this high initial annual fee because most car sharing organizations in Europe had significant annual fees $300, $400 and even $500. But the owner forgot one important thing that starting a car sharing company in US is completely different from that in Europe. Since this is a new type of business model in the US, people are not aware about it. So they would be reluctant to pay an annual fee of $300 initially. Rather the annual fee should be low in the starting phase; it can be gradually increased as the customer base of the company increase with the increased popularity of the business model in the US. * In the financial plan, the cost related to parking has been ignored. But it is not that easy to secure free parking as assumed by the Chase. * The level of attrition is assumed to be 5%, but it is quite low as trends in the turnover of Boston residents, show that the attrition rate will be much higher than this.
3.
Pricing was one the critical component of business growth of Zipcar. Chase wanted to have the pricing structure different from its competitors like a car renter who in terms of variables and variations. And another issue was to cover COGS through pricing. At the early business model, customers were charged $25 non refundable application, a $300 fully refundable security deposit, and $300 annual subscription fees and additional, members would be charges for driving time at $1.5/hr and $0.4/mile. This pricing model was proved to be failed as customer found the annual fee which is $300 a high hurdle and thus Chase decided to change the pricing model and she lowered the annual fee to $75, raising the hourly charge from $1.50 to between $4.50 and $7.00 per hour. However it seems that projected cost could recover the COGS. According to the Exhibit 3, Its well given that it has decreased in its revenue by about 50% than projected and its other variable and fixed costs like lease cost by $400, access equipment by $100, parking cost by $600 etc. have increased to a quite large extent. It must once again revise its targeted revenue and cost looking into its actual figures.
Also, As per projected report, its COGS is about $130,000 per year while its actual revenue is about $176,000 based on September’s data which showed a loss of about $74,000. In this way we can say that Zipcar could not to cover its COGS if this kind of revenue trend proceeds.
4.
Technology was a very important factor for the proper operation of the business. The whole idea of sharing a car could be possible only if technology was accounted for. From the very beginning of the car sharing process, technology would come into play. The business was based mostly on web and hence targeted such customers. The members had to first make their reservations online. The car would have its own black box to which information about the user would be transferred. The user would then present the right card to the right car at the prescribed time. The car would thus be unlocked and once unlocked, the billing process would initiate. The billing process would also be technology enabled, noting information like the hours used and the mileage driven. This type of information would be sent wirelessly to a server for billing in real time.
Thus, there is no doubt efficient technology was required for the success of this business module. With the absence of technology, this proposition of car sharing would be unthinkable, at least for the founders. Even if the founders did go along with the idea without any notable technological influences, it would have been very difficult for the company in terms of their day to day operations. And this technology that the founders pursued was not easily accessible in those times. As a result, they had to deploy an engineer to build this software.
Since the internal process of Zipcar was based on technology, investing in technology was highly prioritized. If this invested succeeded, it could mean the company could reap huge rewards from their business. The technology would enable Zipcar to provide high quality service very quickly and conveniently. Moreover, it would mean an ease in operations for the company itself. The technology would allow Zipcar to keep track of demands and plan for supply accordingly. Therefore, there is a need for Zipcar to stay tuned with the technology and make necessary amendments as time progresses in order to keep up with the market and stay ahead in the game. Use of advanced technology would mean that Zipcar could be able to differentiate itself from rivals in various fronts. This would also make the process easier for customers as well as for Zipcar itself.
5.
After successfully opening the company and starting the operations, Chase collected month’s financial and operating data. To her surprise, variable cost and overhead costs were notably higher than their expectation in the business plan. Lease costs were a bit higher than expected at $4800 per vehicle. This was because car companies thought the risk of operating was higher as the business volume of the zip car increased. There was more probability of damage to a vehicle as the frequency of its usage increased, so this led to increase in the leasing cost. Similarly parking costs were also becoming more and more expensive at $ 750 per car. And the fuel bills are also 10% higher than expected. The overhead costs are also higher than expected at $44000 per month. Looking at the overhead cost only, the yearly overhead cost would be 528000. And if we are to incorporate this cost in the financial plan of the business plan, the profit in year 1 would be reduced from 70,253 to loss of 276,772. So all this has led to increase in the variable cost and overhead costs. So the growth of the company might not be as predicted in the financial statement in the business plan. As the costs increase, the profit will also decrease, and this will have a negative impact on the growth of the company.
Recommendations:
* Its original pricing model should consider other factors like software installation and up gradation costs, cost of financing like agents costs, advisory costs, etc. as well as tax bracket and even the cost of the entrepreneurs (Chase and Danielson) * It has been given that it’s other variable cost like parking, fuel bills are expected to running 10% higher than expected. It needs to consider further its marketing expenses to increase its membership which further increases its all overhead costs. * Zipcar should focus highly on research and development. Since, the operations are based on the use of technology, investing in R & D would help Zipcar come up with novelties that could make them more attractive to their customers base or even garner interests from other segments. Maintaining superior technology can give them a competitive edge over their rivals.