Grounded ambitions

In the broader landscape of shared mobility, it seems almost routine over the past few months that a promising startup fold its operations each month or so, compelled either by its own strategic decisions or by local insolvency regulations. Each announcement, invariably disappointing for those championing greener mobility solutions, prompts an examination of why certain companies flourish in this sector while others struggle to make the economics viable — whether achieving cash flow break-even on a sustainable basis or securing sufficient economic appeal to attract new investor capital, even under draconian conditions.

Before we delve into the lessons observed in the market, notably from public disclosures of comparable enterprises, it is crucial to clarify that our intention is not a to disparage any specific failed car sharing initiative. On the contrary, at goUrban, as staunch advocates for a greener planet, we recognize the vital role car sharing plays in this pursuit. However, we believe it is essential to conduct a rigorously honest analytical examination of such businesses’ economics to understand what separates the wheat from the chaff. From a strategic perspective, these companies often lease their fleets directly from major car manufacturers and must therefore generate significantly more per vehicle in revenue than what they incur in leasing costs.

In essence, the short-term revenue per vehicle in a car sharing enterprise must substantially exceed the long-term costs associated with 3–4 year leases. Although this model, akin to firms like WeWork, may be sustainable over time, it generally carries a higher cost of capital due to the potential volatility and pro-cyclical nature of short-term revenues compared to longer-term lease obligations. Yet, many of the companies that have failed encountered fundamental economic challenges, specifically in maximizing revenue per vehicle and managing an inflated cost structure, both in terms of variable costs and outsized fixed costs as a percentage of revenue — and were not necessarily victims of a ‘perfect storm’ from a macroeconomic / interest rate policy standpoint — at least to a lesser degree than WeWork had been when COVID-19 hit and resulted in a dramatic rise in vacancy rates in the short term and a declining rental rates for office market real estate in the long term.

What best in class players do to maximize revenue (or rather gross profit) potential…

# Size of the car pool

The fleet size in a specific city or location is critical and, easier theorized than executed, should be ample enough to meet customer expectations (i.e., a vehicle should be available a designated percentage of the time when a customer uses the booking tool) but not so extensive that marginal vehicles fail to contribute positively to the gross margin. Achieving this balance is challenging, especially when other factors such as competitive dynamics are considered. At smaller fleet sizes, it prompts the question of whether a station-based vehicle sharing model may not be more appropriate (read: profitable) than a free-floating one.

# Vehicle utilization

There are numerous levers that allow this number to increase, with ensuing implications on revenue. In car sharing as in so many e-commerce adjacent businesses, it is important to re-activate customers by offering them vouchers for a cheap first ride, with the expectation that either even such a discounted ride is gross margin positive and / or the retention behaviour of such re-activated cohorts is sufficiently strong that the cohorts’ change in lifetime value from such a marketing measure increases by (meaningfully) more than the customer acquisition costs. It is important that the (internally developed or externally bought) software solution allows for such targeting, i.e. by selecting for only those customers that have not opened the App in over two weeks. Startups using SaaS solutions should think hard about what they need from a marketing and data perspective, and it should be a key driver of their decision-making given the large impact these things have on vehicle utilization and profitability. Similarly, it is important that the customer journey is a little cumbersome as possible, i.e. requires the least amount of time (i.e. friction) to book a car, as any additional click will result in lower conversion towards initiated ride.

# Dynamic pricing

Implementing dynamic pricing strategies can further optimize revenue per vehicle. By adjusting prices based on real-time demand, time of day, local events (similar to hotel prices when Taylor Swift comes to town), or even weather conditions, car sharing businesses can maximize earnings during peak periods and increase overall vehicle utilization. This approach not only aligns pricing with market conditions but also encourages usage during off-peak times through lower rates, thus balancing the load on the fleet and maximizing profitability.

These measures per se are quite plain vanilla, but still you will see (unjustifiably) large differences in how companies deal with them. But even when such setup is close to optimal, there are other left-field ways to improve utilization. One such approach is to also expand TAM by expanding the target group by offering longer rentals (or ultimately, offering substantial discounts for longer rentals) and go after rent-a-car users. ´There are multiple players in the market doing this and they tend to belong to those outperforming its peers.

…and how they manage costs

Clearly, unit economics need to be optimized, both by securing attractive leasing rates (which fall with increasing fleet size) but also operational costs involved on a per unit basis, as well as mechanisms to pass on costs for damages to the end customer or (positively or negatively) price-discriminate for different demographic groups, as e.g. insurance costs are higher for young males — obviously to the extent this is legally permissible which will depend on the specific jurisdiction a company operates in.

Only if unit economics are attractive per se does it make sense to properly scale and benefit from the dilutive effect that scale has on overhead costs. Still, many startups started to have outsized team sizes in central functions during the time when fundraising was easily available and cheap in terms of dilution and liquidation preferences and were not as cost-conscious as many of them certainly should have been, believing that a growing top line is all that counts — which was true in the ZIRP environment. Once interest rates started to rise, a monetary policy tool to fight inflation, public market equities took a beating, with non-profitable tech stocks being disproportionately affected which trickled down to startup funding in private markets. Having a credible pathway towards profitability became in many cases more important than unprofitable top line growth, especially for asset-heavy startup ideas such as car sharing. Fancy offices, employee perks, unnecessarily large teams are all hard to justify for startups with gross margins that will likely be meaningfully below 50% (vs. 80%+ in certain software businesses).

The way forward for many car sharing businesses

The fact that fundraising is more difficult than in the past also brings advantage, notably cheaper customer acquisition costs as there is less competition for the same customers. Those startups that manage unit economics well and function with lean overhead costs stand to benefit from this — and will have a unique opportunity to scale to e.g. other geographies, as they have proven to be successful in one market and can replicate this playbook accordingly — and then even benefit from fixed cost degression. Car sharing will likely benefit from secular trends such as a generational shift in opinions about the need to always own a car vs. selectively using a car on a need basis. Also, the regulatory regime will likely catch up to ensuring a level playing between the tax advantages of owning a car versus renting one — although as with so many things reliant on changes in legislation, this may take quite a while. But nevertheless, there a countless profitable or almost profitable car sharing companies out there and their success is testament that such businesses also carry attractive propositions for investors. Startups that did not manage to achieve this should not serve as a cautionary tale for the entire industry.