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Zipcar Refining the Business Model Case Solution

Solution Id Length Case Author Case Publisher
1009 1664 Words (5 Pages) Myra M. Hart, Michael J. Roberts, Julia D. Stevens Harvard Business School : 803096
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The purpose of the innovation of Zipcar  is to create an alternative means of transport from car rental or taxi. The objective of car sharing is the successive use of the same vehicle by different users, pre-registered with an operator who operates a fleet of shared vehicles. These cars are available 24/7 with a self-service feature for short trips and casual use. The new system encourages growing user to rationalize its routes and thus reduce the kilometers traveled.

People who need automobile transport can use a car at hourly rates and / or mileage and any subscription fees including all costs associated with using an automobile even including parking charges. The purpose of the innovation is to implement a network of public transport that covers all the travel needs of individuals regardless of the time and destination. Car sharing is a highly useful innovation because it provides the flexibility of use and can meet most needs that cannot be covered by public transport and soft modes. Users, thus, have a solution for travel that cannot be done without a car can leave their car and take public transportation whenever possible. If the car remains an essential element of mobility, each individual can use at will the car in urban areas. Thus, car sharing is not proposing to remove the cars in the city but to introduce another use, more rational and environmentally friendly. Supporting car sharing does not penalize the car but promotes a new form of automobile use. 

Following questions are answered in this case study solution

  1. What is the purposeful innovation of Zipcar?

  2. What is the business model?

  3. How has it changed over time?

  4. What does the data indicate about the business model’s effectiveness?

  5. What are the pros and cons of a for-profit and non-profit model for an organization like Zipcar?

  6. How should Chase react to the operating results?

  7. Prepare an elevator pitch for Zipcar.

  8. Why do you believe the founder left?

Case Analysis for Zipcar Refining the Business Model

Another purpose of car sharing is to help reduce exhaust emissions, reduce the greenhouse effect and making the city more breathable. Due to the variable cost pricing, car sharing user modifies its structure and movements of the car less than the owner of a passenger car. Besides reducing the number of kilometers traveled, car sharing can promote the use of less polluting vehicles and reduce emissions. The key functionality of the innovation associated with car sharing is to provide for access to the car at an affordable price.  

What is the business model?

A comprehensive business model was developed by Robin Chase for the innovative idea. The key objectives during the creation of the business model were to adequately allocate both fixed and variable costs of operations to the users of the car in a just manner. Also, the business should be profitable after taking into account all costs. According to the business model, the cars are distributed on fixed leased parking spaces over a city or large town. The sites are often located at intersections of public transport (train stations, tram nodes, termini and bus lines, etc.) where they are easily accessible by the members. The pre-reserved vehicles are usually used to achieve from these nodes from the more remote destinations. In contrast to the rental car is the car use for short periods, for example, the hour is possible.

Membership is sold to prospective car users at a fixed sum of monthly rent. Membership is a long-term, partly paid membership in the organization. The organization and not the individual participants are the owners of the cars. The usage of the car is determined through a highly complex computerized booking with key boxes to solutions with GPS tracking and mileage recording. According to the business model, the vehicles are equipped with onboard computers that are automatically synchronized with the central office. The on-board computer system releases the vehicle owner for the booked period. Such systems are necessary element of the business plan to prevent potential abuse.

The business model states that users are responsible for the timely return of the vehicles at the right place and in a clean condition. On-board computer is also programmed for the settlement. Fees are usually charged for the number of kilometers traveled and the duration of use. The cost of fuel, consumables, cleaning, insurance, etc. are usually included in the price. Most are also discounted daily, weekly and monthly rates available.

According to the business model, fixed costs such as cost, parking space or garage rental, road tax and insurance premium payments are not paid separately by the users; rather it is included in the monthly subscription fees and hourly rate. When not in use, depending on the provider has only a low or no fees (e.g. registration fee, monthly fee) to pay. The business model also states that a driver is not tied to a specific vehicle or to a particular type of vehicle. Rather vehicles are allocated depending on the situation and the location of the commuter. Booking will be done for the vehicles in advance through company website, telephone, etc. In almost all vendors must be the life of the vehicle are predefined and can be extended only if the car is then not yet been posted by other users. 

Required additional equipment such as child seats, the user must often bring in themselves. The driver does not have the technical maintenance of the vehicle and official formalities such as environmental badge, general inspection or emissions test care. The legal issues are between the owner (car-sharing organization) and the drivers (car-sharing members) are clearly defined. The business is planned to operate in more densely populated and well developed with public traffic areas. The pricing charged to the commuter in terms of monthly subscription and per hour is to be evolved according to the business model subjected to the changes in the cost structure of the firm.

How has it changed over time?

The business model has evolved slightly over time. Following the changes in the external environment and the initial results of the business venture, few changes were implemented by Chase in the business plan. She sought to purchase vehicles for the business expansion from the capital of the company rather than choosing to use car loans for financing of the cars. Also, all variable costs (other than tickets) are to be borne by the business. The business model has also changed by increasing the hourly rate of automobile usage from $1.5 an hour to $4.45 an hour. The maximum limit for the entire day cost is placed at $44 to deter subscribers from seeking car rental services. The business model is also altered to make provisions for increased costs; for instance, leasing costs are found to increase to $44,000 per vehicle for each year.

What does the data indicate about the business model's effectiveness?

The data provides meaningful information about the business model of the company. The data indicates that the business model carries with it high fixed costs per year. These fixed costs are associated with Administration Expenses, Office Equipment, Office Supplies, Insurance, Marketing and Annual Lease. According to the given information, the business model entails a high risk because if the number of users of car is less, fixed costs will have to be incurred. In such case, the business stands of the risk of going insolvent. In other words, the data tells that the business model has a high operating leverage or a high degree of risk of failure in cases of low consumer demand.

The data also provides one very important piece of information about the business model of Zipcar. The business model fills a very important gap in the consumer needs for transportation. For this reason, the customer attrition in the data is found to be very low from the data about the initial operations of the business. This specific area of consumer data tells that the business model is sustainable and must be followed by the business to the fullest. The data also shows that high-usage customers are more than low-usage. For this reason, the business model should place greater emphasis on mileage as a source of revenue in comparison to membership fees.

What are the pros and cons of a for-profit and non-profit model for an organization like Zipcar?

The benefit of a for-profit organization is that it provides an incentive to the owners and managers to work hard and put extra efforts. For profit organizations are also able to expand because they have the ability to offer a share of equity to investors. By being a for-profit organization, Zipcar is able to make offers to prospective clients for giving a share of profits in exchange for giving capital for expansion. The con for having a profit-driven company is that the organization has to put profitability ahead of ethics oftentimes and frequently faces the dilemma of profitability vs. ethics.

How should Chase react to the operating results?

Chase should be concerned about operating results because there is considerable level of deviation between the projected financial figures of the organization and the actual results. The reason of concern is not operating loss, because during the initial period of operation an operating loss can be tolerated. However, the actual costs are much higher than projected ones which imply weak and over-optimistic planning. Chase should react to the operating results by creating financial projections again with more accurate figures. Also, Chase should react to operating results by carefully reviewing the fixed costs of the business and minimize them through increased control.

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