Pricing strategies - rental car industry PDF

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pricing strategy assignment on the rental car industry.
distinction mark achieved...

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AUTO RENTAL INDUSUSTRY

The rental car industry has a strong history dating back to the 1920’s. Today the industry is highly competitive with each firm adopting a pricing strategy based on what they believe a consumer will be willing to pay at that period of time. Auto rental firms offer a range of prices across a variety of vehicle categories such as Small-to-Medium, SUV and 4WD, Luxury as well as an environmentally conscious Green Fleet of economic vehicles. This paper analyses the pricing strategies of the firms, specifically Peak Load Pricing during periods of high demand. To conduct this analysis our focus will be on the Small to Medium size car category, often associated with the budget rental market. This analysis will examine how prices change during periods of peak seasons, public holidays, school holidays, and weekend versus weekday pricing.

Pick-Up day 11am

Drop-Off day 11am

Weekday

Monday

Thursday

Weekend

Friday

Monday

The rental period will be conducted over three months to see the change of prices throughout the year as follows below:

October

Season

Weekend

Weekday

School holidays (September

2nd – 5th October

5th – 8th October

26th - October 11th) November

Regular season

6th-9th November

9th – 12th November

December

Peak season

18th – 21st December

21st- 24th December

Peak load pricing is a pricing strategy used by firms in the auto rental industry where a higher price is charged for the same good or service during a period of high demand. Although the industry is highly competitive, firms are not price takers and have the ability to set their own

price based on how responsive demand is to a change in price. Firms are able to charge a higher price as consumers have a lower price elasticity of demand at peak times, meaning they are more inelastic and less sensitive to a change in price. Price elasticity of demand (𝑃𝜀d) can be mathematically expressed as: 𝑃𝜀d = %  Q D / %  P Inelastic demand occurs when 𝑃𝜀d < 1. This due to a percentage change in price followed by a smaller percentage change in the quantity demanded. The significance of this becomes evident when we look at Total Sales Revenue (TR):

TR = P x Q

Total revenue represents the total sales based on a given quantity of goods or services. During times of inelastic demand such as peak rental season or a holiday period, an increase in the price will cause a proportionally smaller decrease in the quantity demanded leading Total Sales Revenue to increase due to the inelastic nature of the current demand curve.

To gain range of pricing strategies and the firms in the industry who use them we have conducted researched on three Perth based auto rental companies; Thrifty, No Birds Car rental and Northside Rental. All three firms like several other transportation industries adopted the peak load pricing strategy, alternatively all three firms executed the strategy in a different way. Northside Rental has the simplest form of peak load pricing as it states on their website that their prices will increase by 20% with ‘’a 20% surcharge applied over peak season, WA Public and school holiday periods”. The peak season prices run from December until the end of march, where after the surcharge applies only to periods of public and school holidays until December. ("Car Hire Perth,- Northside Rentals", 2020)

No birds similarly state on their website that “These special rates are not always available. They increase during busy periods, e.g. Christmas, Easter, School Holidays and some weekends” We have found that prices only increased during the peak season month of December. Whilst No Birds notified potential consumers of price increases during school holidays, we found that no price loading was added during the October school holidays compared to month of November. (Appendix A for evidence) Weekday

Weekend

Result

October

$108

$108

No change

November

$108

$108

No change

December

$138

$138

$20 increase 27.8% loading

No birds car rental has participated in the pricing strategy of peak load pricing only during the rental firms peak season of December. We found a $20 increase in the price of rentals during this period which is an equivalent to an increase of 27.8%. From our finding we can also conclude No birds did not adopt peak load pricing in the October holidays, rather the price for a three-day rental remained at the base price of $108. Commonly believed auto rental dealers increases prices on weekend, however we found that the price did not change from weekend to midweek and was only changed seasonally.

Thrifty Rental, dissimilar to our other two dealers did not state that prices may change during periods of higher demand. Our analysis on Thrifty found that it had the greatest fluctuation in price and a greater emphasis on peak load pricing. ("Thrifty Car and Truck hire", 2020) (Appendix B for evidence) Weekday

Weekend

Result

October

$291

$133

25% 11%

November

$262

$106

Base rate

December

$613

$613.

306% average increase

Thrifty engaged in peak load pricing for the school holiday month of October. Prices increased an average of 18% from the base month of November. The change in price was shown by an increase of 11% and 25% for weekday and weekend rates respectively. During the peak month of December, the variation in price between weekday and weekends was removed and we saw both prices skyrocket to $613, an average increase of 306% from the November rate.

In periods of peak demand, prices rise to reflect the capacity constraints placed on the business and the economic problem of scarcity . Marginal costs will increase to represent the additional cost a firm is faced to supply one additional unit. A large marginal cost will occur if a business has to purchase additional capital to supply to the one unit increase in production, However the marginal cost can be significantly less if the additional unit can be supplied on existing capital. An auto rental firm will face high marginal cost as the price to supply an additional vehicle requires large upfront capital cost to buy and further costs to register and insure. Knowing this auto rental firms can use the price elasticity of demand to find the optimal price of the good or service. Profit maximisation occurs where marginal revenue is equal to marginal cost (MR = MC). Using the total revenue and marginal revenue functions we able to find the optimal price

knowing our price elasticity of demand and marginal cost. Optimal price is the price at which profit is maximised and can be expressed as: Optimal P* = MC/( 1− 1/|𝑃𝜀d|)

Alternative Pricing Strategies Predatory Pricing Firms often engage in more than one pricing strategy and can switch between strategies to ensure maximin profits are achieved. As the auto rental industry is highly competitive an alternative pricing strategy firms could engage in is predatory pricing. Predatory pricing while being illegal in Australia can be challenging to prove and firms may choose to participate in a price war. Firms charge prices below costs in one segment of the market to eliminate competition as competitors are driven out. The firm engaging in predatory pricing subsidises the loss with profits from another segment of the business. A relevant example would be for No Birds to charge a price just below cost for the small and medium car segment. In the short run consumer will gain from the cheap prices and competition firms like Thrifty and Northside Rental will be undercut and forced to leave the market. No birds will cover the cost of price war through profit from its SUV and Luxury vehicle fleets and will them raise prices when the competition is removed. We could use predatory pricing the explain the variation between Thrifty’s weekend and weekday prices. Thrifty’s weekend prices in the off-season month of $106 was the cheapest available at that time. Perhaps Thrifty was operating below or close to cost for weekend rentals and which was being cross subsidised by its $262 midweek small car segment. Multi-Product Pricing Another pricing strategy auto rental firms should consider is multi-product pricing as firms who produce both compliment and substitute goods. When a firm who produces two compliment goods has an increase in sales in one product or service results in an increase of sales in another product. This statement holds true in the auto rental industry. If a rental dealer was to increase sales of the small and medium car segment through a slight decrease in the price, we would see an increase in the sale of added extras such as child seats, GPS, reduction in damage excess and

extended travel range. With extras costing up $14 a day and $100 flat fee for extended travel range, the increase in sales could be a highly profitable business decision. ("No Birds Car Rental - Bayswater Car Hire - No Birds", 2020)

While pricing strategies can appear to seem like acts of price discrimination, firms still price discriminate in the auto rental industry. Third-degree price discrimination is the act of charging a different price to a two or more groups of consumers for exactly the same product. This type of price discrimination is the most common. Rental firms charge customers different prices due to their age. Consumers aged between 18–21 & 79+ (No Birds), 21-24 (Thrifty) and 21-29 (Northside) are charged a greater price than those outside of the age range due to the added risk the dealer accepts renting cars to a more accident-prone demographic.

Conclusion

Throughout the auto rental industry, a significant number of firms adopt a pricing strategy in order to maximise profits. From the three firms we analysed the pricing strategy of peak load pricing was the most commonly used with the greatest results due to the structure of the industry. The industry experiences large fluctuations in demand for vehicles, peaking in the summer months and school holidays. All three firms executed peak load pricing in a unique way

to their business with No Birds increasing prices by $20 in peak periods, Thrifty increasing prices based on the level of demand and Northside Rental applying a 20% flat rate on all rentals in holidays and peak season. There are also a number of alternative pricing strategies firms could choose to adopt such as predatory pricing and multi-product pricing.

Appendix A ("No Birds Car Rental - Bayswater Car Hire - No Birds", 2020)

Appendix B ("Thrifty Car and Truck hire", 2020)

References

No Birds Car Rental - Bayswater Car Hire - No Birds. (2020). Retrieved 20 September 2020, from https://www.bayswatercarrental.com.au/

Thrifty Car and Truck hire. (2020). Retrieved 20 September 2020, from https://www.thrifty.com.au/

Car Hire Perth, Rent cars from $20/day- Northside Rentals. (2020). Retrieved 20 September 2020, from https://northsiderentals.com.au/...