Zipcar: Refining the Business Model

Elevator Pitch Objective . . . . . . . tell me more. Purpose of elevator pitch: Approximately 2 minutes to describe the business idea/concept Factual but need to build enthusiasm Goal is to get the person interested and have them wanting to learn more

The Logic of Analyzing New Venture Opportunities Source: Mullins, J.W. (2003). The New Business Road Test. Prentice Hall: London Potential Profitability of opportunity Market domain Industry domain Is the market large enough? What is the growth rate and the upside potential? Market attractiveness Industry attractiveness Macro-level Venture strategy Does the opportunity fit the team’s business mission, personal aspirations, and risk propensity? Mission, aspirations, propensity for risk Ability to execute Team domain Connectedness up, down, and across value chain Micro-level What industry forces have the strongest impact on profitability? How are industry forces likely to change in the future? Target segment benefits and attractiveness Sustainable advantage To which target market Is the venture’s value proposition particularly compelling? Is the target market large enough to support the business model? Does the target market provide an Option to grow into other markets? Does the team have what it takes, in a human sense – in experience and industry know-how – to deliver superior performance for this particular opportunity? Is the team well connected up, down and across the value chain so it will be quick to notice any opportunity or need to change its approach if conditions warrant? What entrepreneurial or firm- level capabilities create a sustainable competitive advantage relative to rivals or potential rivals?

Market Attractiveness Size Growth rate Past Future Trends Economic, demographic, socio-cultural, technological, regulatory, natural Again, using New Business Road Test to frame analysis Market attractiveness Asked them whether it was an attractive market (at an overall level, not particular segments). If so, why? Why might it transfer from Europe or not transfer? Yes: worse public transport here; stigma of using public transport No: more connected to cars here; less interested in environmental issues Trends that might support or hurt this business idea Perhaps people becoming more environmentally friendly (good) More use of Internet (good) Costs of parking going up Asked them to rate on a scale of 1-10

Industry Attractiveness What industry? Ease of entry? Supplier power? Buyer power? Substitute products? Rivalry among existing firms? Industry attractiveness What industry is a key issue!! Car rental? Convenience transportation? Car co-op? B: Maybe it would be easier to ask them who the competition is (and then ask what they have in common) Matthew drew overlapping circles Good point: a new idea may not fit well into existing industries Used Porter’s Five Forces ideas Asked for comments about industry attractiveness May be a problem because it’s somewhat easy to get into (what if Avis or Hertz decide to move in)

Segment Benefits / Attractiveness Customer pain? Incentive to buy? Who are the customers? What do we know about them? Benefits above other solutions? Will they buy? Will the segment grow? Other related segments? Can we serve them? Micro-Market (target segment benefits and attractiveness) Are target customers really feeling pain? Student assessment of the micro-market?

Sustainable Advantage Proprietary elements? Superior processes, capabilities, resources? Economically viable business model? Customer acquisition? Costs? Speed? Customer retention? Sustainable advantage If this gets launched, how would we build a sustainable advantage? Proprietary technologies (B: may be difficult) Customer loyalty and image First mover advantage: network externalities!! Matthew used analogy of telephones Existing companies like Avis and Hertz might find it difficult to adapt their systems to deal with this business opportunity

Evaluating Performance (Per Car) Monthly Figures May Plan / Sept Actual On per car basis Total Revenue - Revenue/Car Number of Cars – Contribution/Car Lease Access Equip. Insurance Parking Maintenance Fuel So, it looks like a lot of the problem is on the revenue side; cost per car is only off by $55 (see page 11 of case for differences) Why is revenue per car so low??? Cost/Car

Evaluating Performance (Per Car) Monthly Figures May Plan / Sept Actual On per car basis Total Revenue - $27,104 / $14,645 Revenue/Car $2,259 / $1,003 Number of Cars – 12 / 14.6 Contribution/Car $1,536 / $225 Lease $367 / $400 Access Equip. $42 / $42 Insurance $142 / $142 Parking $50 / $63 Maintenance $33 / $33 Fuel $90 / $99 $723 / $778 So, it looks like a lot of the problem is on the revenue side; cost per car is only off by $55 (see page 11 of case for differences) Why is revenue per car so low??? Cost/Car $723 / $778

Evaluating Performance (Per Member) Monthly May Plan / Sept Actual Monthly Fee - Per Hour Fees Revenue/Member Monthly Usage Per Mile Fees Security Monthly Interest Contribution/ Member Interest Hours: 4x4x5.5 Not generating enough revenue/member Why? Cost/Car Cost/ Member Members/Car

Evaluating Performance (Per Member) Monthly May Plan / Sept Actual Monthly Fee - $6.25 / $6.25 Per Hour Fees $88 / $73 Revenue/Member $130 / $94 Monthly Usage $ $123 / $ 87 Per Mile Fees $35.2 / 13 Security $300 / $300 Monthly Interest $1 / $1.1 Contribution/ Member $91 / $27 Interest .33 / .37 Hours: 4x4x5.5 Not generating enough revenue/member Why? Cost/Car $723 / $778 Cost/ Member $39 / $67 Members/Car 18.33 / 11.62

Diagnosing the Problem Hourly vs. Daily (September) Exhibit 8b Hourly $9,327/1,351 = $6.90/hour Revenue from hourly use / hours used Daily $5,318/1,872 = $2.80/hour Revenue from daily use / hours used (not hours billed) Problem: a lot of people taking the daily rate; need to push people away from this to hourly usage

Epilogue Robin was concerned when her analysis showed low revenue figures, driven primarily by the daily use of vehicles. Beginning in December, Zipcar increased the max daily rate from $45 to $55, increased the lowest hourly rate and changed from two-tier to four tier pricing. Still in business (http://www.zipcar.com/index) 36 US cities and London Appears that they did not get any venture capital funding until July 2005 ($10 million) (http://www.zipcar.com/press/releases/press-28) Raised $25 million in 2006 (http://www.redherring.com/Home/19957) http://gigaom.com/cleantech/zipcar-prices-ipo-at-14-to-16-per-share/ She was unconcerned by the cost per car and utilization percentages, believing that they were simply a matter of more volume and experience.

Takeaways Keep business model fluid in early stages Understand factors that provide sustainable competitive advantage Network externalities* Reputation and buyer uncertainty* Buyer switching costs* Legal restrictions (e.g., patents) Odd financing strategy? Not really. * First mover advantages

Reminders Read “Writing a Business Plan: The Basics”