KATHMANDU UNIVERSITY SCHOOL OF

MANAGEMENT

Entrepreneurship and
Innovation
Zipcar: Redefining the business model

Submitted to,
Prof. Rupesh Krishna Shrestha

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

Zipcar: Redefining the Business Model

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

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Zipcar: Redefining the Business Model

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 Zipcars 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
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Zipcar: Redefining the Business Model

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
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Zipcar: Redefining the Business Model

capitalist. As the idea of car sharing business model was relatively new in US, the investors
didnt 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.

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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 didnt 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 didnt 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

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Zipcar: Redefining the Business Model

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.

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Zipcar: Redefining the Business Model

Also, As per projected report, its COGS is about $130,000 per year while its actual revenue is
about $176,000 based on Septembers 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
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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 months
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.

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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 its 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.

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