Leading Organizations Case Study

Robin Chase, Zipcar, and an Inconvenient Discovery

Synopsis:
The case explains the development of Zipcar business model. It further explains how the
business was developed, how improvements were made and what challenges were faced
during the development of the business model.

Chase's Strengths & Weaknesses as a Leader and Potential of the business model in
terms of Opportunities, size of market, demand and competition.

Sharing of a car by various users within the community as per their need was the major idea of
this business. Organized car sharing through subscription was started in Switzerland in 1988 by
Drive Stadtauto. The market had expanded its network and it seemed promising. Various
organizations such as Volkswagen had also seen the potential in this market and thus,
conducted research on it. It was one of the promising business ideas and many companies
were operating in Canada, Portland, Seattle etc. Parking costs and less usage of privately
owned cars were the major reason why people around Boston don’t want to own the car.
But they were also equally frustrated when using Cab or public vehicle. Boston had the
population of 2.9 million where 1.12 million were households. The density per square mile was
1631 which suggested that the market is big enough. In the market, there were opportunities in
a sense that there was a gap between public vehicle users and private car users. Those who
used buses and cars, they were not satisfied by using public vehicles. But, at the same time,
they were forced to use the public vehicles due to lack of other options except privately owned
cars. Even though those who owned private cars, they faced hassles in terms of other expenses
such as insurance, maintenance, and parking expenses. Private owners like to buy the car, but
they are consuming less than 6,000 mile per year which is comparatively less in terms of car
cost.

The probability of using a public vehicle will be high if the government provides subsidies
for public transportation and discounts for public users. Same applies if the price of parking for
privately owned cars goes down. Another threat is the financing facility which will reduce the
cost of owning a privately owned car. Regarding substitutes services, they can use other
options such as cab, and buses, when they feel difficulties to provide online reservation for short
miles. Thus, in terms of threats of substitute products, there is risk in this business. In terms of
buying powers of customers, they had less bargain powers because they had no option other
than to use car sharing service and they were frustrated by using public vehicles or cab. In order
to maintain the membership, Zipcar has to provide value to the target customers so at the price
they were paying. Increase in loyal customers will lead to increase in retention ratio. By using
car sharing, they were benefiting more compared to the individuals who own cars in terms of
economy as well as other facilities. Thus, less bargaining power of customers suggests that the
business model is feasible enough. Due to lack of funds, the car was rented. The suppliers
perceived the risk is high in the market thus, increasing the charge. The parking costs were also
high and technology which was an important aspect of this business model was not prepared in
time. Hence, in terms of bargaining power of suppliers, there is risk in this business. But we can
assume that this was the result of other factors such as lack of funds. Hence, in terms of
bargaining power of suppliers, the business model is moderately risky. As discussed in the
above paragraphs, it is also clear that in terms of threat of new entrants and competition, the
market is moderately risky. But we also conclude that the risk is calculated and hence, it worth
taking.

How the business model changed between Dec 1999 and May 2000 and led to
miscalculation.

After a round of discussion with the many advisors and investors and other stakeholders Chase
found that $300 annual fee too high a hurdle. So she decided to lower the annual fee to $75 per
year. With these changes in annual fee; it had several impacts over other costs which she
purposefully needed to revise. However with respect to actual cost which Zipcar faced; the
revised financial projection was too optimistic. It projected to charge $0.4 per mile but as per its
actual data, we found $0.14 per mile charge which is less by $0.26 per mile. Also, its projected
Members per car usage rate were 18 times while its actual usage rate is to be 12 times. Looking
at this gap; Zipcar should increase the per mile revenue by increasing the miles travelled by the
members. Getting into effective marketing promotion, focus on advertising can rise in its new
membership.

Thus, chase was looking for $1.3 million which was a huge amount. In order to achieve
this target, more improvements had to be made regarding the through planning of cost and
generation of revenue. Analyzing the Business model so presented; its original pricing model
should consider other factors like software installation and update 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). However it seems that projected cost could recover the COGS. But
when we analyze the actual data then it’s very questionable and doubtful to cover the COGS.
It’s well given that it had 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, it has been given that it’s other variable cost like
parking, fuel bills are expected to run 10% higher than expected. It needs to consider further its
marketing expenses to increase its membership which further increases its all overhead costs.
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 cover its COGS if this kind of revenue trend proceeds.

The fact that Chase has no experience in the business industry makes the situation even
more complicated for her. The problem in Zipcar has been doubled when she miscalculated all
the expenses. The car utilization is only 22% lower than the 40% of what she had estimated.
And the revenue per trip was about half of what she had predicted. She didn't even notice what
is happening to her company and is afraid to admit to herself that something off is really
happening.
What actions should Chase take as a result of the September operating results?

There needs to be some proper marketing activities as they are not meeting their target
in terms of membership in Zipcar. It was necessary to increase the marketing activities for
meeting the membership target. Zipcar had fixed marketing costs $12,000 for Year 2 to Year 5
except for Year 1 which was not reliable in a sense that marketing activities needed to innovate
according to market conditions. Car-sharing companies are growing 30% annually with
spending very little in marketing. But, the growth rate may not continue because market share
can be attracted by other competitors. In that time, zipcar needs to spend more on marketing
ahead in order to maintain the market share and growth rate. Till now, Zipcar Company
maintains their customer through the free media, and word of mouth. But, it is better to make the
marketing platform while the company is in a growing phase so that more customers can be
attracted when there are few competitors. Most marketing activities are done through
downsizing the cost as much as they can such as brochure, postcards, web site.
They would have made good marketing plans in order to survive in a free economy.
Since, both Chase and Danielson are experts in different fields; they should hire people who
have deep knowledge about car manufacturing. Practical or experience information is more
important than theories because there will be differences in real scenarios. Sometimes, good
and excellent theories may not work in practical cases. Although Chased believed that a solid
management team is necessary for raising capital, she has not made any plan regarding the
management team except bringing expertise and credibility. Due to lack of expertise in car
related functions, the company might be a high possibility to fail in the future because the same
niche market can convert into a hyper competitive marketplace in the future. Rather than
managing part-time or full-time jobs for Chase and Danielson, it is better to establish the board
team by paying optimum salary or wages to those who are responsible for overall operating
functions. Zipcar can be managed better than the current situation with the help of hiring
specialized people in each department or section so that the overall departments are
accountable for their roles and responsibilities to make them productive. Revenue is generated
with the help of an online reservation service which requires technicians to operate and
supervisor. In this business model, Chase has not mentioned details regarding the
compensation for technology experts except spending in technology development.

The strongest argument Chase could make to a potential investor about the
attractiveness of the venture?

The market is growing at the rate of 30% and it has a huge potential. The technology it has
developed is one of the best which will ease the process of business with ease. It will also be
the competitive advantage for the Zipcar. Low marketing costs also attract huge customers.
Increasing the marketing cost can increase customers as per projected. The environmentally
friendly concept.