Business model comparison: Uber vs Zipcar

Zipcar and Uber are both very innovative companies that, at least in part,
appeal to the same customer and offer similar customer value propositions.
Today, we are going to compare their business models. To start with the
confusing part first, both can be categorised into more than one business
model.

Zipcar falls under the Pay-per-use business models often also called “On-
demand” business models. Both are very similar though not exactly the
same. And if that is not confusing, Zipcar also considered part of
the sharing economy by some.

Uber, on the other side, uses a platform business model (and there is no
differing view here, phew). But this would be too easy! The differing views
are on whether or not they are also part of the sharing economy. Many
experts as well as most of the media consider Uber part of this socio-
economic trend (the sharing economy) and so do I.

If you don’t worry to much about terminology (and I recommend you don’t),
then you can move onto the easier task. And that is actually the
comparison of their business models on a more detailed level.

We are comparing Zipcar vs Uber who compete on personal mobility but

with different business models (on-demand vs platform business model)
(1) Economic benefits
Both business models are based on economic benefits. And these benefits
are based on the fact that the users save buying, operating and maintaining
an expensive asset: a car. It is beneficial especially for those who would
use their cars infrequently.

Regardless which way you measure, it seems cars are parked roughly 95%
of the time. Add to this the fact that it costs an average of $8,558 per year
to own a car in the U.S.

Peter Cohen, et al. state “using almost 50 million individual level

observations and a regression discontinuity design, we estimate that in
2015 the UberX service generated about $2.9 billion in consumer surplus in
the four U.S. cities included in our analysis.” This is for the four cities
of Chicago, Los Angeles, New York, and San Francisco. Based on this they
estimate a consumer surplus (=economic benefits) of $6.8 for the US in
2015 alone.

The economic benefits summarise to:

 Average cost of ownership per year in the US: $8,558 ($23 / day)
 Cars are utilised only 5% of the time (72 mins/day)
 Economic benefit for consumer of $6.8b (in the US) in 2015 from Uber
alone

(2) Asset management

There are differences in the management of assets between Zipcar and
Uber. Zipcar owns the products/services that they provide, Uber does not.
This is significant in a number of ways.

Zipcar has to manage the operational aspects of the provided

asset/product/service themselves. They do so by pushing the accountability
for the more frequent tasks to the user where possible and by assuming
responsibility for the less frequent, more specialised tasks themselves.

Zipcar moves the responsibility for fuelling the car to the user; same with
keeping the car clean. But they are responsible themselves for getting the
maintenance conducted. Take as an example getting the car serviced at
the right intervals.

Zipcar: reduction of transaction costs (e.g. having to check the car after
each usage) by pushing responsibility to the user
Uber and Airbnb go one step further. They push this task to the owner of
the asset. Thus, they incur no costs in relation to the fuel, the act of fuelling,
maintenance, cleaning, etc. They rely on the fact that if a car looks very
messy or unsafe, e.g. due to unrepaired damages, the customer will either
complain or give the driver a bad rating after the ride. Airbnb relies on
similar mechanisms. Further on they foster a community and award “super
hosts” – those hosts who get repeat great ratings/feedback. I have covered
Airbnb at great detail here using the business model canvas
(and Uber here).

This leads to considerably lower operational costs, positively affecting their

income statement (P&L). A bit later I will also discuss the benefits for their
balance sheet and capital investment. (And yes, they do have assets, but
they are mainly intangible: brand, algorithms, big data, customer database,
and other goodwill items. And they can use their capital to invest into
these.)

You might say that Zipcar passes all these costs onto the user anyway. But
the whole point is that this makes Zipcar’s offering more expensive and
thus less competitive. And this holds equally true if they lease the cars
(which they partly do) as the cost of ownership of the car for the respective
portion of its lifecycle will be pushed to Zipcar in any case.
Comparison of cost allocation Uber vs Zipcar. This is where the big
differences are

(3) Product/service distribution

Both, the sharing economy firms as well as the on-demand companies
need to find cost-effective ways to distribute their product or service.

Zipcar locates their cars in the neighbourhood of uni campuses close to

one of their target users, being students. Their cars are located in fixed
parking spots which can be looked up via the Zipcar app or on their web
pages. This is a significant improvement compared to the classical car
renting models who are mainly based somewhere near airports, making
pick-up and drop-off a prohibitive effort to start with.

With Zipcar, there is still some effort involved for the user in bridging the
“last mile.” This is true for many of the on-demand, platform business
models and sharing economy companies where tangible goods are
involved. E.g. if I want to borrow a drill, camping equipment or a
lawnmower, I have to go and pick it up and return it.
Uber offers the convenience of the car coming to you, i.e. has zero cost of
distributing the asset or service.

Uber cars
move like little ants near my mobile phone GPS-located pick-up point.
Zipcars are in static locations at their designated parking spot waiting for
me to pick one of them up

(4) Transaction costs

Both the on-demand as well as the platform businesses must minimise
transaction costs at least for the frequent transactions.

“I would never be able to provide you a car for an hour if the transaction
cost was anything” Robin Chase, former CEO and co-founder Zipcar.

Both, Zipcar as well as Uber use technology instead of humans for

coordination tasks. When in the past taxi companies had a phone operator
and a base, these overhead/admin costs have now been eliminated along
with many other costs.

Uber brings two parties (often peers) in touch while providing clear
guidelines on their interactions. Where necessary they will need to have an
arbitration process. Zipcar doesn’t bring peers in touch as they own the
product/service themselves. Nevertheless, they both have to keep
transactions lean.
(5) Trust
Trust is important for any company. But it is more important for newer and
less known companies. This affects all areas of the business, starting from
making business with them to feeling comfortable with the offering.

It starts with giving out credit card information. In an interesting article

Bloomberg describes the various difficulties that Netflix had when they
expanded to Brazil: “Those who did have credit cards were often reluctant
to hand over their information to a company they didn’t know. The service
began accepting alternate forms of remittance, such as debit cards or
payments via Apple’s iTunes, but it still needed to address the trust
issue. “We had to prove we were a credible company,” Yellin [Netflix] says.
“When a Brazilian sees a company put up a TV commercial, they know
that’s for real.””

This may be equally stated about any country. But having to run TV
commercials (or other expensive forms of ads) is exactly that: an expensive
way to be trusted. And it may not work for many young companies.

You can imagine how steep the trust barrier would be if the payments had
to be conducted between peers. Sharing economy companies do not use
any cash payments nor peer-to-peer payments. All payments directly go
to the company.

(6) Safety/insurance/liability
Depending on the type of business many other safety measures are being
put in place. Both Zipcar and Uber have requirements to the age and
inspections of their vehicles. Uber additionally has to put checks into place
regarding the driver (driving history, criminal background, etc).

Similar considerations apply t0 the liability and insurance. Zipcar, as well as

Uber, have their insurances covering a range of accidents but of course,
there will always be those tricky ones that one ever thinks of. In any case
provision of some insurance for the most anticipated case is a basic
expectation.
For Uber, there are additional challenges on this to ensure driver and rider
safety. This applies to all sharing economy companies to a varying degree.
As many of them enable peer-to-peer transactions, the company has
a responsibility to manage the risks that can occur during (and even after)
those human interactions.

Uber aspires to go beyond just driver and rider safety by doing stuff for the
community.

(7) Quality & customer experience

consistency
Pay-per-use companies own the assets (or services) that they provide. It
means they have direct influence over its condition. Platform businesses do
less so. If it is a neighbourhood good that you borrow from someone or
take a ride with an Uber driver, the condition of the asset (drill, mower or
car) is managed by the owner.

Zipcar owns various types of cars. But they select the vehicles types that
a being added to their fleet. They seem to be increasingly distinguishing
between those types which they provide to students (located near
campuses) and those they offer to businesses (located near CBDs and
airports).

Uber takes a different approach partly because they don’t have control over
the asset. And partly because it may be a great system. The
quality/experience of the actual ride is rated by the passenger (btw the
driver can also rate the rider – a little-known fact).

Uber leaves it to the feedback mechanism to weed out offenders of the

actual (as opposed to the assumed) experience of their customer. To many
people, the interaction with the driver may be more important than the size
or brand of the car. And on top, this might be quite different in different
countries. Why would we assume that the customer experience or quality
expectations are the same in New Delhi as they are in New York?

(8) Business model

I have shared the business model compass created by Boyd Cohen before.
It is a useful tool in determining if you are more a “commons sharing”
business or a “market sharing” business. Commons sharing businesses
embody more the original idea of the sharing economy which is about
community, empowered people, etc. Market sharing businesses are mostly
profit-orientated. If you are the latter, do not pretend to be the former. You
would simply be fighting a forever uphill battle. You still need to care about
your footprint and claim credit for the good things you do but don’t state
that it is your (only) mission.
The sharing business model compass can help with elaborating your
business model.
I like the dimensions of the compass (first four) and would add a whole
stack more to it:

1. Are you a marketplace? How are you bringing demand and supply
together?
2. Are you for profit or mission driven?
3. Are you a corporate-driven or a collaboratively governed business?
4. Are you peer-to-peer (Uber), business-to-business (Hilti), business-to-
crowd (Kickstarter)?
5. Economic benefits
6. Asset ownership and asset management
7. Distribution model (esp for durable/physical goods)
8. Transaction costs
9. Customer experience, quality
 10. Self-regulating mechanisms (e.g. a fake-proof review system)
11. Footprint/impact on existing businesses, workforces, environment,
laws, etc
12. Local & geographic aspects

(9) Funding & growth

Because on-demand companies own the assets that they provide, this
somewhat limits the pace of their growth. A large share of their capital has
to be invested in buying or creating those assets. Since the capital
generally is provided by their investors (or bondholders) their growth is
limited by investors’ risk appetite. Before committing to the next tranche of
capital, investors will want to see returns on their previous investment.

Platform business models are capital-light and can use more of their
funding for customer acquisition, brand building and so on. Uber, for
example, has used about $2b in customer acquisition in China alone. And
even this was too much of an ask for their investors. Realising this is not a
sustainable, they have pulled out of what once seemed to be their biggest
potential market. At the end, they settled for a 20% share of the largest
Chinese ride-hailing company, Didi.

In any case, it is not surprising that Uber and Airbnb have a significantly
faster growth trajectory than say Zipcar who are one of the most successful
carsharing companies. And even if they lease their cars (which they do to a
certain degree), they get to pay for the cost of ownership (depreciation,
maintenance costs, etc) in the lease rates. Thus it makes no material
difference to owning a car (other than possibly in the cost of capital which
may be lower for the lessor than for a start-up). JVs with a manufacturer
could bring capital costs down as well but it will never be close to what the
Uber’s and Airbnb’s can achieve.

(10) Regulatory and social implications

I have covered the social impacts and regulatory implications of sharing
platform businesses in great detail. These can be very profound in case of
the large platforms. With on-demand businesses who own their assets and
have no service component, this is quite different.

At the bottom of this article you can download the sharing platform
business model value chain which shows all the considerations
above (and more) in one inforgraphic.

Your opportunity
There are four ways to benefit from this knowledge if you are working in an
established company:

1. Watch out for emerging competition that uses sharing economy

principles.
2. Learn from one or hopefully more of the elements that distinguish
sharing economy companies from traditional businesses.
3. Actively expand your business to include sharing economy (or on-
demand) type offerings (remember BMW and Mercedes have done
so).
4. Start-up your own sharing economy company or form a joint venture
with a suitable partner.

Take action now & boost your innovation

skills
Download the worksheet as pdf (click here)
On a very basic level, which of the sharing economy elements can you get
ideas from to apply to your company, department or role?

 The way of bringing demand and supply together (e.g. online

marketplace)
 What elements of sharing economy vision could be valuable for your
company?
 Can you apply any of the collaboratively governed mechanisms?
 Can you connect peers-to-peers?
 Which economic benefits would be there if your customers were to
use existing assets better?
 What can you learn from sharing economy’s asset management
principle?
 Anything you can learn from sharing economy (or on-demand)
businesses distribution models?
 How can you reduce transaction costs based on some ideas of the
sharing economy (or on-demand) businesses
 Can you establish a better feedback loop on your customer’s
experience?