Revenue growth – car rental company

Problem statement and questions

Flash is a car rental company based in the US. Their model is a low cost one, meaning small, cheap
cars, a large number of rental options and travel add-ons such as hotel bundles, guided tours,
museum passes, etc. They also are digitally advanced with automated check-in and check-out (e.g.,
electronic lockers with car keys, digital contracts). For the first few years after inception 7 years ago,
they have had great revenue growth, but it has been slowing down for the last 2 years. Flash has
called us to help them rekindle their revenue growth.

Take some time to synthesize the case and identify the objective

1) Structure question: What are the levers to grown revenue for a rental car company such as
Flash?

Take 1mn30s to build your own structure before looking at a possible answer below.

2) Math question: We have found out that customers elasticities have evolved and that Flash
could increase prices. Flash would like to increase revenues by $100M with this initiative.

Category 1: cheapest 2 3: more expensive

Share of rentals 30% 50% 20%
Average price per $50 $80 $100
rental
Price increase target 10% ? 15%

You are missing a piece of information to answer this question. What is it and why? Answer in the
answer sheet below.

3) Math question: We believe we should only increase the price for category 2 by 10%, in line
with other categories and create a 4th category for luxury cars. The average price per rental
will be $150. We assume that all the rentals in category 4 will come from new customers.
How many new customers do Flash need to get for category 4 in order to reach their $100M
in profit increase, when combined with the price increase initiative above?

4) Creativity question: What could Flash do in order to build awareness for category 4 to
potential customers?

5) Synthesis question: you meet the CEO mid-project and he asks you how things are going.
You only have 45 seconds because he is waiting for his cab, which is already pulling over.

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Answer sheet

1) Structure question: possible answer

a. Increase prices
i. Rentals and rental options
 Gradually increase price of rental after analyzing market and
customer elasticities
 Introduce more expensive models of cars
ii. Travel add-ons
 Introduce new travels add-ons such as end-to-end travel services
b. Increase volume of rentals
iii. Existing customers
 Introduce attractive loyalty program (own or with partner)
 Offer discounts for customers who haven’t returned for a long time
 Launch marketing campaign
iv. New customers
 Introduce discount for first time rentals
 Increase number of location in US or expand in new geography
c. Increase average spend per customer
v. At booking
 Proactively offer options during booking
 Offer more attractive bundling packages, including new travel add-
ons
vi. During travel
 Offer location-based services such as guided tour, museums tickets,
restaurant deals
vii. At check-out:
 Enforce more stringent policy on starches, fuel, reasonable
cleanliness
 Sell airport-related services at check-out such as chargers, transfers
d. Explore revenues through new business models
viii. Introduce advertising on cars to generate advertising revenues
ix. Expand in B2B market by making corporate deals
x. Launch new services such as door-to-doors services, etc.

2) Math question: answer

Missing information: you need to know the total volume of rentals in order to compute the increase
in profit: 6M rentals per year.

The trick is to realise that the increase in profit comes from the increase in price, with the volume
and portfolio mix remaining constant.

So for category 1 and 3, we should compute how much extra profit the price increase will bring,
then, see how much profit increase is left to get to $100M, and back calculate the price increase
necessary to get there.

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Revenue increase from category 1 = price increase in category 1 * volume of category 1
= ($50 * 10%) * (6M * 30%)
= $9M
Revenue increase from category 3 = price increase in category 3 * volume of category 3
= ($100 * 15%) * (6M * 20%)
= $18M
So from category 1 and 3, profit increase will be $9M + $18M = $27M, therefore to get to $100M, we
need to generate $100M - $ 27M = $73M

So similar to the equation for category 1 and 3:

$73M = price increase in category 3 * volume in category 3
$73M = ($80 * % price increase in category 3) * (6M * 50%)
 % price increase in category 3 = $73M / (6M * 50% * $80)
= $73M / $24M
= 30%

30% price increase for category 2, which is the largest category in terms of volume, will be quite hard
to justify to our customers, who are likely to move to category 1. Therefore, we shouldn’t
recommend this price increase.

3) Math question: answer

The strategy is to compute how much revenue the price increase initiative is bringing with the 10%
price increase from category 2. Then we see how much we need from the ‘category 4’ initiative to
reach $100M. Then, it will just be a matter of solving the volume of rentals for category 4 needed at
150$ per rental.

Revenue increase from price initiative = revenue increase from category 1 + revenue increase from
category 2 + revenue increase from category 3
= $9M + ($80 * 10%) * (6M * 50%) + $18M
= $9M + $24M + $18M
= $51M
Revenue increase from category 4 = $100M - $51M
= $49M
So now we just need to solve for volume needed in category 4
Revenue increase from category 4 = $49M = $150/rental * Volume of rental in category 4
 Volume of rental in category 4 = $49M / $150
= 330K rentals

This number seems reasonable since it represents only 5% of total current volume. However, we
need to make sure that the market need and market share for these luxury segment is large enough.

4) Creativity question: possible answer

Hypothesis: customers of category 4 will most likely be wealthier individuals or on business.

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 a. Launch a targeted marketing campaign
- Place advertisement on places where wealthier people are more likely to travel:
airport lounges, back of business class seats, brochures in luxury hotels
- Create new website with ‘luxury’ look and feel for category 4
- Propose discounts, upgrades and bundles including category 4 cars to ramp up
revenues quickly
b. Partner with other travel companies and corporates
- Partner with credit card company, airline company or hotel company to create or
join a shared loyalty program
- Incentivize partner company to promote your services (hotel reception proposing
rental services etc.)
- Seek corporate deals to serve all rental car needs from partner companies
c. Open new rental sites in high revenue locations

5) Synthesis question: We think we have found a way to reach the target of $100M revenue
increase by doing 2 things: increase prices by 10-15% on all categories and create a fourth
category of more luxurious rentals:
- On the first initiative, we believe that we are current elasticities would allow us to
increase prices without losing volume. This would bring about $50M of revenue
increase
- On the second initiative, we believe that a new category priced at $150 per rental
would easily attract an additional 330K, which is the minimum to bring us the other
$50M and we have a lot of ideas on how to market this.
Next steps are to roll-out our price increase and monitor volumes carefully and develop a
marketing strategy for the new category.

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