Rental Car Profitability Tips: Running a Successful Rental Car Company
Despite a year of setbacks, the car rental industry is poised for modest 9.9% growth in 2021, indicating a bounce-back as the world begins traveling again. Projections show an annual growth rate of 7% between 2019 and 2026, with the industry reaching a market volume of $111.6 billion by 2026. That's good news for car rental businesses, as it means the market is ripe for finding new revenue opportunities and increasing profitability.
We've compiled some of our best tips for success to help rental companies carve out their piece of the growing car rental market.
How to Run a Successful Car Rental Company
It takes consistency, drive, and a little elbow grease to keep a car rental business running profitably and successfully. New and well-established rental car companies alike will find success by identifying target customers and tempting them with varied car options, an attractive rental contract, and a reasonable pricing model. And with a talented team and robust marketing strategy, the business will be ready for success.
Here are some crucial steps to success in this industry:
1. Choose a Target Customer Base
While it's easy to dream big and imagine a business that every person in the area will frequent, most companies perform better when aiming for a particular customer segment. Tourists have different wants and needs from their car rentals than someone who needs a short-term rental while their car receives repairs.
Rental companies can effectively target multiple customer segments by building out their rental fleet and using the right marketing for each group. For example, a consolidated rent-a-car facility (CONRAC) in an airport parking lot will target tourists and business travelers who need short-term rentals. Still, it's best to stick with a few types of car renters the facility can cater to exceptionally well.
By focusing on a definitive target market, the rental company will also be able to refine its rental contract, set a pricing scheme, and market the business in ways that work best for those specific customers. When customers feel like they can get all their needs met at the car rental service, they're more likely to turn to it any time they need a rental.
Consider the most typical or most loyal customers, what they have in common, and what they expect from a rental company. When selecting a demographic, the company has to ensure it satisfies a significant market need in the area. Population statistics, tourism data, and other market research are invaluable tools for understanding the market. The customer groups may include:
- Business travelers
- Long-term renters and drivers seeking "mini-leases"
- Auto dealers and mechanics who provide loaner cars to their customers
- Short-term renters
2. Write a Rental Contract That Sufficiently Covers Liabilities
A car rental company will likely already have a rental contract that any renters must sign. To ensure the car rental company has the highest chance of success, it's wise to periodically review the agreement and consider costs and customers' expectations.
The company must have a rental agreement that limits liabilities while also appealing to customers. If the contract is more rigid than some competitors, the company may lose business to other companies with more lenient policies. On the other hand, an agreement that is too lenient can lead to additional risks and costs. By creating a document that protects both the business and the renters, the company can mitigate unexpected expenses and inspire more trust with its clients.
A rental company needs to ensure its agreement covers liabilities, outlines what happens in an accident, and defines which parties are responsible for what. It's best to have a legal professional who understands the car rental industry review the contract and help make adjustments as needed.
3. Hire an Effective Team
The staff is invaluable to a car rental company. They'll ensure consistent service for customers and keep business running efficiently. Key team members to look for include:
- Mechanics and detailers: The team responsible for maintaining the company's fleet includes some of the most crucial staff members. Their hard work can potentially save the company from thousands in expensive repairs. The detailers also perform an essential service — making sure every car looks shiny and clean for every renter.
- Sales personnel: Similar to an auto dealer, the sales team will help customers select a car to rent, walk them through the rental contract, and ultimately get them to sign the deal.
- Main office: The business will need some staff to answer calls, run the front desk, greet walk-ins, accept bookings, and perform similar duties.
- Customer service: Renters may have lots of questions or needs after they sign their rental contract. The customer service team must be ready to delight customers whether they need in-person assistance or help from the road.
- Business resources: Rental companies can hire specific business experts in-house or outsource as needed. These professionals include accountants, lawyers, marketing specialists, web designers, consultants, and the like.
- Managers: As the business grows, the team requires additional management. The rental company has to hire assistant managers or even a few managers to help run the business.
4. Build an Online Presence
While a prime location is everything — such as a location near the airport serving tourists — a web presence helps extend the company's reach beyond those in the immediate vicinity. The web presence must include a business website highlighting services and additional pages on review sites to help potential customers find the business, such as Yelp, Google Business, and Trip Advisor. Rental companies can also reach customers via social media pages. Hiring a web designer and a digital marketing professional would help run online marketing.
5. Differentiate the Business With Great Service
Exceptional service helps businesses in any industry stand out. Customer service is what helps earn repeat business, raving reviews, and new business alike. Rental companies need to provide high-quality rental cars that are always clean and in good condition. Ensuring customer service is a company-wide value is key.
Costs With Running a Car Rental Facility
Starting a rental car business involves relatively high startup costs. New entrepreneurs must invest in a fleet of cars in either new or like-new condition. They also need a large lot in a prime location, alongside an office and related business equipment and staff. Some of the other startup costs can include:
- Business insurance
- Automobile insurance
- Vehicle maintenance equipment
- Security systems
After making the initial investments for the rental business, consider the ongoing costs, which can include:
- Wages and salaries: Fleet mechanics' salaries can vary greatly depending on experience and location. Other employees, such as administrative assistants, marketing specialists, and managers, will probably require wages in a similar range. Car rental industry estimates place the cost of wages at 11.3% of the company's total revenue.
- Insurance: Monthly insurance premiums range from the mid-hundreds to the low thousands, depending on the insurance provider and fleet size.
- Internet and voice: A high-speed internet connection and phone service are essential for any business. The company should budget at least one or two hundred dollars per month for these services.
- Vehicle maintenance: Rental companies can expect to spend an average of $500 to $1,000 or more per month on maintenance, depending on the size and age of the fleet. Keep in mind that this number can fluctuate. There may be a costly repair one month, and only minor service needs the next. Mechanics should conduct preventive maintenance and provide general estimates of monthly repair needs. Rental companies should always keep some extra cash reserved for unexpected repairs.
- Fleet expansions: As the business grows and retires older vehicles, it can expect to add a new car to the fleet every few months. Assuming the company buys new mid-range vehicles, it's fair to estimate a budget of around $30,000 or more per quarter. If serving high-end customers who want luxury vehicles, the company can set aside even more. On average, new purchases represent 6.1% of a car rental company's annual revenue.
- Marketing and website: Maintaining a strong digital presence will require an ongoing strategy. The business will need to budget for digital advertising, search engine marketing, paid and organic social media, and the like. It will also need to maintain the website and pay for web hosting. Depending on its marketing goals, it can spend several hundred to several thousand or more per month.
- Office and lot rental: Companies need to budget for lot and office rental or loan payments if paying for the space. This cost can range from the upper hundreds to several thousand per month. Industry analysis indicates that rent and utilities combined can cost an average of 6.6% of total revenue.
Tips to Maximize Car Rental Profitability
Maximizing car rental profitability requires reigning in costs and spending enough to provide customers with a quality, in-demand service. By implementing new investments and strategies while curbing operating costs, the business can achieve a healthier profit. Here are some tactics to try:
1. Reevaluate the Business Model Often
Having a solid plan provides a roadmap to future success, and redefining it as needed ensures continued growth. Managers and owners need to consider how the customers, market, rates, fleet, and the team have evolved since the business first opened. Is it time to change tactics or move in a new direction? Examining whether the company is achieving steady growth under the current model can determine if the market position has lost ground.
Company owners have to also factor in long-term business plans with the company. Is there a plan to eventually sell the business for a profit? If the goal is to sell, adjusting the business strategy to grow asset value and brand equity helps maximize sales returns.
2. Install a Vehicle Protection and Shade Structure
A vehicle protection structure offers multiple benefits. From preserving the company's most important asset — the fleet — to providing a competitive advantage customers will appreciate, the lot's shade and hail protection structure is a wise investment. It offers some unique potential benefits, such as:
Preserving a Vehicles' Condition
Permanent covered parking areas can protect from several climate conditions, including hail, UV light, and heat. If the facility is in the hail belt or only faces an occasional hail storm, a protective covering can save inventory from costly repairs or interrupted business after a storm.
The UV- and heat-protection a shade structure provides can also help preserve rental cars in any climate. UV light can damage automotive parts and products manufactured without UV stabilizers. Besides fading the exterior paint and interior upholstery, UV exposure can also damage rubber, vinyl, and plastic polymer components. Meanwhile, excessive heat can degrade many components and evaporate certain fluids. Parking rental cars under a shade structure may extend the life of rental vehicles by keeping them out of the heat and direct sun.
Shade structures may lower maintenance and replacement parts costs while preserving the cars' appearance and resale value. By slowing fading and other UV and heat damage, the fleet may look newer for longer. When vehicles endure less damage, the rental company can also maximize their resale value, which is crucial in the rental business where vehicle turnover is high.
Providing an Extra Service to Renters
Clients can step into a cooler car when they first receive their rental when parking cars under a heat-reducing shade structure. Sliding into the driver's seat of a cool, comfortable car is a bonus many renters are willing to pay extra for. A more comfortable vehicle enhances the customer experience. By going the extra mile and parking cars in the shade, car rental companies will earn more positive reviews and repeat clients.
Improving Visibility and Curb Appeal
Shaded permanent parking structures add to the lot's curb appeal and make the business more visible. With a thoughtful design, sun shades and hail structures enhance the attractive appearance of the lot. Combined with a location close to the customer base, such as in a CONRAC, a beautiful parking structure entices passersby. The rental car business can even drum up more interaction with the promise of a cool interior right off the bat.
When improving a lot's aesthetics, companies need to look for a range of structure designs and colors to choose from. Finding a shade structure company that accepts custom design and construction projects helps boost curb appeal through investment. The canopy also offers a unique branding opportunity — with the company's logo visible from afar, more potential clients will see the branding, which draws in more people.
Helping Customers and Staff Navigate a Busy Lot
Hail and shade structures come in many colors, highlighting a company's brand and providing helpful color-coding in a large parking lot. Colored canopies help renters see where to return cars or where to wait for their rental to pull up. Meanwhile, staff can use different colored sunshades to remember where to park and retrieve specific vehicles in the fleet. For example, they can park sedans under one color canopy and SUVs under another.
3. Optimize the Fleet Costs While Keeping Inventory Fresh
A fleet is both a rental company's most valuable asset and the largest cost center. Purchasing new vehicles to replace old models and grow the business can get expensive, so focusing on what customers want most is essential.
Owners need to consider which models customers are willing to rent before adding new cars. Depending on the customers' needs, rental companies can fight depreciation by purchasing used models that are still relatively new. Some customers will only rent the top-of-the-line latest models, while others are happy with an older vehicle in like-new condition.
Novelty is also a central part of the rental experience. Rental companies must balance the need to keep costs down with customers' demands for new models. Typical rental businesses plan to replace their cars after one year of service. When buying new models, they have to consider what will sell best in the aftermarket to value-engineer investments. If used car buyers want vehicles with all the optional features, companies should invest in those models upfront. This choice helps businesses gain more of their investment back at resale.
4. Manage Pricing in Real Time
Car rental businesses can make more money by carefully watching the current marketing conditions. Instead of charging one flat rate, they can consider charging more when there's a higher demand for car rentals. The company can charge more for a two-day rental on the weekend than the same rental spanning two weekdays.
If some nearby companies are sold out of car rentals, temporarily raising rental rates can help earn more revenue from local renters. When competitors come back in stock, the business can lower prices back down to compete.