The Avis Zipcar Acquisition: End of the Beginning for Carsharing

By Neal Gorenflo

Zipcar’s acquisition by car rental giant Avis closes the first chapter of the history of carsharing.  Zipcar’s mixed success raises questions about the future of carsharing and the sharing economy.  What lessons can be gleaned from Zipcar’s record?

The most important lesson is that Zipcar proved there’s demand for car sharing in America, the most car-obsessed culture on the planet. They made it possible for urbanites to act on a growing attitude and impulse around cars and car use – that cars are no longer a meaningful source of identity or freedom as they had been in the 20^th century, and that access to them trumps ownership.

The importance of this shift can’t be overstated.  The car is a linchpin of the consumer economy, at least in the U.S.  It makes the high carbon, high-cost suburban lifestyle possible. When you loosen this linchpin, you begin to shift the entire pattern of consumption for the better.

For instance, carsharing often eliminates the second highest household expense. For each car eliminated, a U.S. household saves $9,900 annually. Much of that additional disposable income may be spent locally boosting local economies.

Then there’s the environmental impact. Carsharing makes urban life more attractive to born-in-the-burbs millenials, who are flocking to cities and the low-carbon lifestyle available there. A conclusive UC Berkeley study showed that one shared car replaces up to 13 owned cars.  And 50 percent of new members join in order to gain access to a car.

There’s no other model of consumption that can reduce resource consumption, increase access to resources, and boost the local economy.  Zipcar showed the world a dramatically better way to consume – and the world ran with it. Entrepreneurs applied the sharing model to innumerable asset categories - from textbooks to tree forts. For individuals, carsharing is a gateway drug to the sharing economy.  A 2010 survey showed that carsharers share across significantly more asset categories than non-carsharers.

Zipcar not only proved there’s demand for carsharing, but also popularized the shared-access model of consumption. They arguably catalyzed the rise of the sharing economy.

So how did Zipcar gain mass appeal? If I had to pick one word, it’d say convenience.  Yes, a great brand, appealing cars, and OK pricing were useful, but Zipcar wouldn’t have gained mass appeal unless it was easy. In their core markets, customers could walk to a car, open it electronically, and drive away.  This was an entirely new experience.

As important as Zipcar has been to carsharing (and the sharing economy), it largely failed as business. While they proved the demand for carsharing, they never became a reliably profitable business. The main culprit was huge fleet costs – cars, maintenance, insurance, and parking.  Acquiring customers profitably was also a challenge.

The lessons of cost control and convenience are not lost on the new wave of carsharing entrants such as Wheelz, RelayRides, and Getaround that represent the future. As peer-to-peer services, their fleets are provided by their customers. The leaders favor electronic access over key exchanges. RelayRides’ partnership with GM’s OnStar service gives them an advantage in acquiring customers. They can potentially onboard millions of OnStar equipped cars through OnStar’s satellite technology.

Still, the cost challenge remains for peer carsharing services. In most case, 60 percent of the rental fee goes to the car owner, the rest to the car sharing company. A 40 percent commission is the highest in the sharing economy by far (Airbnb is 3 percent for hosts, 6-12 percent for guests). The reason is insurance. Up to three quarters of the fee goes to cover insurance.

At the center of this is the issue that cars that are not built for sharing. Few are equipped with access technology at the factory (OnStar cars excepted). Most are over-featured, over-priced, consumer products that appeal to customers' vanity. Repair costs are rising with their increasing complexity. These built in expenses make car sharing expensive. Bottom line - the high rental commissions and cost of cars may make it unattractive for most people to rent out their car.

Peer carsharing companies also face challenges Zipcar didn’t. Renting out your car turns your automobile into a business asset, and commercial use is not covered by most policies in the U.S. This is only a problem if a claim exceeds your peer carsharing company’s coverage. And in most states, insurance companies reserve the right to cancel or non-renew for commercial use, though this is rarely if ever done.

Mass adoption of carsharing requires significant institutional change. Zipcar and the Great Recession broke down cultural barriers to carsharing (and sharing in general), but insurance, regulation, and the product itself need big change for a breakthrough adoption and profitable carsharing businesses. There’s a lesson here for the entire sharing economy.