How Mobile Apps Are Disrupting the Car-Rental Business

I work in Boston, a city where someone recently paid $300,000 for a parking spot. Drivers are constantly circling as they hunt for an opening. Add the notorious aggressiveness of Boston drivers and the high insurance rates into the mix, and it becomes clear why this is one of the most expensive and difficult places in the nation to own a car.

So it’s probably no coincidence that this is where Zipcar was founded more than a decade ago. At first, the company that introduced America to rent-by-the-hour, pay-as-you-go car sharing grew slowly. Rivals saw it as a niche market for the ecologically minded and others who were willing to ditch their full-time vehicles.

But the advent of the smart phone has helped reshape the way Zipcar operates, greatly broadening its appeal. Launched two years ago, Zipcar’s app for the iPhone has been downloaded by 400,000 people, who use it to locate the nearest available car and even honk its horn. That has made it much easier for customers to find cars wherever and whenever they want one. Now the company has expanded to 55 cities and 225 college campuses in the U.S., Canada, and the U.K.

By letting customers book cars spontaneously with their mobile phones instead of making reservations ahead of time on PCs, Zipcar has found a much easier way to manage its challenging logistics. Unlike a big car-rental company, it arranges many short-term rentals in widely distributed locations. Customers must return the car to its home spot, which is often on a side street—a different model from the central lots that most rental companies use. At Zipcar’s fleet control centers, operators can keep track of vehicle demand, driver reservations, and car maintenance schedules using home-grown software called FastFleet that it is marketing to other vehicle management companies.

Whereas standard rental cars are typically rented for $30 to $80 a day from just a few places in each city, Zipcars typically rent for about $10 per hour from hundreds of places. The fee includes insurance and a gas card for refilling the tank as long as you stick within mileage limits. The deal makes sense for college students, busy professionals, and other people who don’t want to use an airport-based rental service but do need a car for part of a day now and then.

Since Zipcar has shown that a mobile app and special software can help tackle the logistical challenges of car sharing, rivals have been following suit. Six months ago, Hertz launched an iPhone app that functions in much the same way for Connect, its own Zipcar-like program. Whereas Zipcar has 6,500 vehicles, Hertz has nearly half a million, although only about 1,000 of those are available through Connect. “As we began to look at [Zipcar] and to see that model grow, it was a natural evolution for Hertz,” says Joseph Eckroth, Hertz’s chief information officer.

Meanwhile, Enterprise Rent-a-Car has launched a car-sharing program, WeCar, in six cities so far. The Avis Budget Group has yet to develop one, but it did develop an iPhone app for reserving vehicles at traditional locations. “Look at how things have changed in the last 12 months,” says John Peebles, vice president of online marketing for Avis. “It’s astronomical.” Customers have been adopting smart phones so rapidly that it’s become mandatory to offer an app, he says: “It wasn’t in your strategy last year, but it’s got to be this year.”

For Zipcar, mobile was on the radar early on. “Within 12 months of the iPhone being introduced, over 20 percent of our customers had already purchased one,” says Lesley Mottla, Zipcar’s vice president of member experience. Now, she says, most of its customers have smart phones. Apps for those devices increasingly serve as the company’s customer interface; unlike the other rental companies, Zipcar operates without any storefront locations.

The Zipcar app has already brought in new revenue by encouraging more frequent rentals and time extensions. “Initially, we were mostly focused on the app as improving the [Zipcar] experience,” Mottla says. But the app makes it so easy to rent a car or change the time window that people take advantage of the service more often than they did when they used a PC, which remains more conducive to planning rentals further in advance. In other words, it’s created a new avenue for consumption—part of the classic definition of a disruptive technology. Zipcar has only minuscule market share in the auto-rental business at large but holds more than 80 percent of the U.S. car-share market (and about 50 percent globally).

To test-drive the iPhone app, I joined Zipcar for a $60 annual fee and waited for the post office to deliver my “Zipcard,” which contains a wireless chip that authorizes the user to unlock a reserved car. (The real keys are always left inside for the next driver.) Days later, there I stood in front of a Dunkin’ Donuts, in need of some wheels. The app displayed a GPS-enabled map dotted with a handful of Zipcars that were within shorter walking distance than the two subway lines near me.

I chose a gray sedan that I saw was parked just a couple of blocks away. As I approached the car, though, I encountered a glitch. When I tried using my phone to honk the horn, the app failed and needed a couple of minutes to reload. But I unlocked the door successfully, and it felt futuristic to have rented a car without seeing or speaking to any customer service people.

Zipcar relies on hardware mounted on each car’s windshield—the so-called “black box,” which includes an RFID transponder and a wireless data link. Reservations are transmitted to the black box, so that the car knows who will be driving it and when. When you hold your Zipcard up to the windshield, it unlocks the car for the first time. Then you can use your iPhone to unlock it thereafter. When you’re finished with the car, you hold the Zipcard to the black box again, and it deauthorizes you.

Zipcar’s app “nails it on two fronts,” says Brad Spirrison, managing editor of the online app review community Appolicious. “It has this gee-whiz technology that allows you to honk the horn. Pretty Jetsons.” But more important, the Zipcar app naturally attends to the needs of mobile-phone users—“people who are on the go, have limited typing ability, and are probably searching for something.”

Zipcar says that new mobile features will keep coming. Emerging technology such as “near-field” communications will allow drivers to use a phone as a virtual debit card, Mottla says. That would eliminate the plastic Zipcard: drivers could use their phones to authorize the car and pay on the spot.