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Zipcar: Refining the Business Model Case Solution

Solution Id Length Case Author Case Publisher
1010 2415 Words (7 Pages) Myra M. Hart, Michael J. Roberts, Julia D. Stevens Harvard Business School : 803096
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The business venture Zipcar is a car-sharing business that provides a highly useful facility to the organization, which is, giving the ease of flexible use of automobiles and to pay only for the duration of the few hours during which the automobile has been used. The potential venture case study "Refining the Business Model" is quite promising and the business idea is quite strong. The problem is with the management of the business and the execution of the plan. The business made the wrong hiring decision, was overly optimistic in making cost projections and struggled with determining the appropriate business model for the venture. However, Chase is on the right track and it is anticipated that she will pull the business out of these challenging circumstances.

Following Questions Are Answered In This Case Study Solution

  1. Evaluate this potential venture and the progress that Chase has made.

  2. How would you characterize the service Zipcar provides? With which companies or services does it compete? What role does it play in its competitive landscape?

  3. What is the business model, and how has it changed between December 1999 and May 2000?

    a. What do the data from actual operations in September say about how the business model is playing out in practice? 

    b. Does this data give you comfort or concern? 

  4. What actions should Chase take as a result of the September operating results?

  5. What mechanisms does Zipcar have in place to manage behavior? What, specifically, are these mechanisms intended to accomplish?

  6. What are the biggest risk and opportunities for Zipcar’s sustained growth and profitability in the future?

  7. If you have one minute with Chase in an elevator,

    a. What operations related recommendation would you make?

    b. What suggestion would you have for Zipcar to manage consumer behavior (or is that even necessary)?

  8. Finally, if Chase has one minute with a VC in an elevator, what should she try to convey?

  9. What is the strongest argument Chase could make to a potential investor about the attractiveness of the venture? What, specifically, should her elevator pitch be at the Springboard forum?

Case Analysis for Zipcar: Refining the Business Model

How would you characterize the service Zipcar provides? With which companies or services does it compete? What role does it play in its competitive landscape?

Zipcar does not have any direct competitors. The companies which Zipcar competes with are car rental companies or taxis. Taxis are only a secondary competition for Zipcar, while car rental companies are a major competitor and a threat. The reason for the potency of this threat to Zipcar's business from car rental companies is that the car rental industry is characterized by strong companies like Avis and Hertz. Car rental is a service offered by professional holders of automobile passengers or commercial vehicles. This service is for the customer (business or individual) to book and enjoy a vehicle for a period ranging from hours to several months. They also provide systems of rental luxury cars with drivers. These are reserved for events, transfers of employees or making arrangements. The car rental market is also very flexible in its pricing strategy:

  • short-term rental, from one day to several days

  • the long-term lease for a year or more

  • the very short term rental from less than an hour to several hours

The above-mentioned information shows that car rental companies are quite flexible in their approach and are likely to enter.

What is the business model, and how has it changed between December 1999 and May 2000?

The business model has evolved between December 1999 and May 2000. Prior to December 1999, the business model was focused on gaining revenue from subscription charges from the client. The reason for such a design of the business model was that Chase had estimated running costs of rental of cars to the clients at a much lower figure. Prior to December 1999, the business model was designed in such a way that the automobiles owned by the company are to be distributed on parking spaces (which were leased) over the city. The parking sites are mostly located at busy city centers so that they are straightforwardly accessible by the subscribers. 

The business was based on the membership model according to which member was sold to prospective car users at a fixed mostly subscription. Zipcar owned the automobiles or the lease on automobiles. According to the business model, the usage of each automobile by a member is to be determined through a highly complex computerized system. The system possessed the ability to carry out 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 a necessary element of the business plan to prevent potential abuse.

Prior to December 1999, the business model entailed that the users are liable for the timely return of the vehicles from the place at which they picked it. Fees are generally charged for the number of kilometers traveled and the length of use. The pricing model designed by Chase contained within them fuel, consumables, cleaning, insurance, etc.

Another feature of the business model was that fixed costs like parking space or garage rental, road tax, and insurance premium payments are not paid separately by the users; rather these costs were designed to be part of 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 the 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. 

a. What do the data from actual operations in September say about how the business model is playing out in practice?

Even a rudimentary analysis of the data shows that the business model has not been performing well. The fixed costs are too high and the profitability of the business is compromised by the incorrect assumptions pertaining to overheads. The high operating leverage of the company implies greater risk and greater risk directly translates into a high required rate of return by the investors. The high leverage caused by the business model is possibly the reason that the business has not been able to gain any sizeable investments.

The data from actual operations show that the business model is not performing as anticipated and reflects that this particular business model requires economies of scale. This business model cannot be anticipated to produce sizeable results if the size of operations is small. Hence, the need for capital for the business model is reflected by the financial results.

b. Does this data give you comfort or concern?

As an investor of Zipcar and as a part of top management, this data would have given me more of a concern than comfort. The only comforting feature of the data is that the customer retention ratio is quite high for this business. The concerning feature is more potent which relates to high annual overhead costs of the business - for instance, the fixed costs associated with Administration Expenses, Office Equipment, Office Supplies, Insurance, Marketing, and Annual Lease. The concerning aspect of the data is that due to these costs, the business stands the risk of going insolvent and carries with it a high degree of risk of failure in cases of low consumer demand. These are the first negative aspects that will signal danger for any investor.

What actions should Chase take as a result of the September operating results?

The actions which Chase should take are to reduce the salary and perks of management personnel and to invest in the marketing of the business. September's operating results have shown that the profitability of the business is not as high as anticipated. The primary reason for low profitability is the high overhead fixed costs rather than variable costs of the business. The immediate action following drafting these financial statements is to either radically increasing the revenues by enhancing the customer base and the fleet of the car. This option seems difficult owing to capital restraints. The business does not possess enough funds to make any sizeable increase in the size of the fleet. The second course of action is to take a closer inspection of the fixed costs and eliminate all those costs which appear to be redundant.

What mechanisms does Zipcar have in place to manage behavior? What, specifically, are these mechanisms intended to accomplish?

Zipcar's mechanism to manage consumer behavior is the pricing strategy of the business. The business can provide an incentive to the users of these automobiles. These pricing mechanisms are intended to achieve repeat usage of business service and improving customer retention percentage. Another intention of the usage of this mechanism is to increase the pace of customer adoption by maintaining a lower pricing mechanism for registering with the business as a subscriber. 

The second mechanism to manage the behavior of the users of the car is the automated system of tracking the usage of automobiles and card readers to deter unauthorized usage of the car. The automated card reader identifies the subscriber and matches his profile with the registration data sent from the central repository. The net impact of consumer behavior is that users are conscious about returning the car on time and carry a feeling that the automated monitoring system is designed to be smart. This way, they are hindered from the the reckless driving of automobiles.

What are the biggest risk and opportunities for Zipcar's sustained growth and profitability in the future?

The biggest risk for Zipcar's success is the replication of the business model by car rental companies and the creation of competitors in the market after the initial success of the business. Zipcar's potential to grow is significantly limited by the availability of finances to invest in this growth. There are strong and established brand names are car rental industry like Avis and Hertz. These companies possess a much larger fleet of automobiles and funds to invest in marketing to capitalize on the growth opportunities of this particular business prospect.

The biggest opportunity for Zipcar is the growing environmental concerns among US citizens which is likely to persuade them to adopt this alternate and innovative means of transportation. Also, the rising costs of owning a vehicle is yet another opportunity for Zipcar. When this car-sharing industry will increase in size, it is anticipated that the responsible citizens will make a conscious choice not to own a vehicle (even if they can afford one) rather will choose to subscribe to the membership of a car-sharing organization.

If you have one minute with Chase in an elevator,

a. What operations related recommendation would you make?

The operation related recommendation I would make to Chase is to enhance controls on administrative expenses and to divert those savings towards marketing or promotion of the business. This is a highly important recommendation because the business is in its nascent stage at this point in time and the allocation of investor's equity is a very sensitive decision. If the capital is allocated to overhead or running expenses, then the growth of the business will be seriously compromised. This was observed when the Managing Director for the business was found to do more harm than contributing to business success owing to large expenses associated with his position.

The second recommendation for Chase is to seek to purchase used cars rather than brand-new automobile manufacturers. The rationale for this recommendation is that business depreciation expenses are very high when equipment of such sizeable value is secured completely unused. During the first year of the use of the asset, the depreciation of the asset will be highest, which will reduce the profitability of the business. Also, if asset purchasing is carried out carefully, the business can secure good deals on the purchase of used-automobiles from secondary markets. These cars can be refurbished in a way that the user experience is not impacted. This recommendation also makes sense because automobile users are likely to be careless when using an automobile which they do not own. The depreciation of a new automobile is likely to be very high in such circumstances.

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