High gas prices threaten Zipcar's car-sharing model—yet more companies than ever want in on the action.

Commentary about business and finance.
July 11 2008 7:45 AM

Unzipped

High gas prices threaten the car-sharing model—yet more companies than ever want in on the action.

A Zipcar. Click image to expand.
A Zipcar

By now you've heard some version of this story: Gas prices rise, industries panic, executives worry about the bottom line, and something has to give— costs go way up, sales stall, product designs change, or laymen rebel.

This particular story is about the car-sharing industry, one of the most promising and novel business models to emerge in recent years. The idea is to allow people to rent cars for very brief periods of time, as short as an hour, and thereby reduce the need of every adult to own a car. When this idea began to take hold in the late '90s, it was assumed that car-share users would pay one flat fee for a rental, gas included. That, of course, was when gas cost less than $2 a gallon. These days, the pricing structure is largely the same, but gas prices have made the business model more unprofitable than ever. Yet more companies are trying it than ever before.

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As the industry leader, Zipcar is taking the brunt of the pain from higher fuel costs. Since its creation in 1999, the company has posted steady growth in members, fleet size, and metro areas served, but it's never posted a profit. (It has, though, raised $55 million in funding.) Its fleet is 5,500 cars large, and it serves 26 states and provinces in the United States and Canada. For now, it's the only car-sharing company operating nationally.

Zipcar, like nearly all the other car sharers that came before it, includes insurance and gas in the total cost of taking the car for a spin (charged by hour or by day). When you pull up to the gas station, you use Zipcar's charge card, not yours. It doesn't matter how many miles you drive or how many miles per gallon your vehicle gets—Zipcar has you covered. (Although they do charge you a flat per-mile rate if you exceed 180 miles of driving.)

This all-you-can-fuel buffet is great for the consumer, especially these days. For Zipcar, though, climbing gas prices means evaporating profits. Because the gas fee is wrapped into the overall rate you pay when you use a Zipcar, the only way the company can compensate for rising gas prices is by hiking the total cost.

But Zipcar's price increases haven't kept pace with the rise in fuel costs. This year, Zipcar has increased its prices by only 3 percent to 5 percent, at most. Gas prices, meanwhile, have risen by more than $1 per gallon—a 36 percent increase since July 2007. That disparity is the width of a Hummer's tire tread.

Why, then, hasn't Zipcar raised its prices? Several reasons. First, Zipcar's users aren't tremendous gas guzzlers. Seventy-five percent of Zipsters take the car out on an hourly basis (at usually between $6 and $10 per hour). Those drivers probably aren't re-enacting the Lewis and Clark expedition, so their gas costs, no matter the price per gallon at the pump, are small. These are high-revenue, low-cost travelers.

Also, the spike in gas prices has been a double-edged sword for the company—it's hurting their margins, but it's attracting thousands of new customers. The company is growing at three times the rate it was at this time last year, according to COO Mark Norman. It's averaging 10,000 new customers a month, which is a hefty 4 percent to 5 percent increase for a company with 225,000 total members.

More customers also means a more efficient use of its fleet. Ideally, having an extra few hundred Zipcar users in a metro area means that more of those high-revenue, low-cost riders can take out a car.

But an increase in revenue doesn't necessarily lead to an increase in profits. Asked whether the increase in gas prices helped Zipcar's bottom line, Norman dodged and answered that it helped drive awareness of the brand as it went more mainstream. He never said it was helping the company's bottom line, and it's hard to imagine that high gas prices are a net positive for the company.

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