Car Rental Industry & Elasticity

Car Rental Industry & Elasticity

The rental car industries as well as other industries within the travel market are challenged with developing a pricing strategy that will maximize profits for the firm. In our analysis of three firms, Hertz, Avis and Budget, our team used qualitative and quantitative methods to develop an understanding of their pricing strategies. We wanted to determine which company has the best overall pricing strategy. Furthermore, these methods helped us develop recommendations involving segmentation and brand differentiation that will help these rental car companies insure greater profitability through pricing that will minimize consumer surplus. Our examination of the three rental car companies and their pricing strategies begins with industry and financial analysis, continues with a discussion of yield management, and then moves on to review two approaches to determine if market segmentation will lead to increased profits for the automobile rental firm. Finally we will propose some tactics that the automobile car rental company could use to further segment the market and increase profits.

An interview with a Cendant executive enhanced our industry knowledge and shaped some of our thinking about the industry. The qualitative knowledge gained from these discussions set the foundation for our quantitative approach to determine the best pricing strategy and recommendations for improving profitability in the rental car industry. From the interview with John Barrows, VP of Communications for Cendant, we found the following comments important to our analysis of the car rental industry and Cendant’s strategy with respect to pricing:

• Mr. Barrows believes that the pricing strategy for Hertz is very similar to Avis and Budget. He challenged us to research whether Hertz also prices car rentals based on country of origin. Based on Mr. Barrows’ suggestion, we discovered different pricing for country of origin using the foreign websites of Hertz.

• Cendant's pricing strategy for Budget and Avis is only influenced by

competition and branding in the country of origin. Pricing in any United States city must be competitive to the country of origin of the renter of the automobile. Cendant does not inflate their prices any more in the United States than the customer would experience in their home country.

• The value of the brand is quite different from country to country.

For example, in the US, Avis competes with Hertz in the premium segment while Budget is a value brand. Conversely, in Canada, Budget competes in the premium segment and commands a higher price. He suggested that we should expect to see Budget priced higher in the US cities for customers of Canadian origin.

• It is very challenging to command premium pricing and create differentiation. Most customers want the lowest price. It can be done,

however, through superior customer service or via premium vehicle features (i.e., GPS, XM Radio, lifestyle autos, etc.)

• In October of this year all major car rental companies will only be

in the car rental business. Mr. Barrows believes than once this happens,

pricing will be increased as he believes there is substantial room for the industry to push prices higher. Mr. Barrows believes we should think of elasticity in terms of substitute transportation. In other words the question should beat what point is pricing for rental cars so high that you would prefer the use of cabs or limo when traveling?

• Elasticity in the industry has not been as academic in the past as it

will be in the future. In the past, market dynamics played a major part (e.g..,

one company may not raise prices in conjunction with another because they want to build market share for a possible sale of the company). In the future, Mr. Barrows believes pricing will become more constant and that all companies will increase price to match the competition. This is a function of more consolidation in the industry.

Further information that enhanced our qualitative analysis of the industry was an August 2005 Euromonitor report. From a high level perspective, there is some key information needed to understand the companies analyzed.

Budget and Avis are both subsidiaries of Cendant Corp. who bought both companies separately. Although both Avis and Budget were part of Cendant by the end of the year 2002 they operate as separate companies and maintain distinct brand identities. Avis positions itself as a business-friendly rental car company while Budget tries to own the leisure segment. The two brands together operate over 6,000 outlets in