“Why the Zipcar Deal Means You'll Finally Be Able to GIVE UP YOUR CAR”

After yesterday’s post it would be rude not to use this quote from Wired. Here’s the article. And here's Give Up Your Car.

Asset Light Autos: Avis buys Zipcar

Nice news for shareholders in car share company Zipcar: Avis Budget Group just put in a bid to buy it for $12.25 per share in cash, a 49% premium over the closing price on December 31, 2012, valuing Zipcar at around $500 million. You could see this as a standard piece of corporate strategy: protecting and extending a business by buying out a competitor. Or you could see it as another example of the move towards an “Asset-Light” world, renting rather than owning. Strategy queen Mary Meeker sees the Asset Heavy lifestyle as consuming space, time and money. Currently, it’s a generational thing: for Under 25s life is becoming Asset Light. Take music, where buying albums and CDs in shops has been replaced by paying for access via Spotify, Pandora and iTunes - and consuming it via internet-enabled devices. Mary Meeker gives other examples of the Asset Light generation in her Internet Trends Update 3.12.12 available here. When it comes to personal transport, think Asset Light: give up on car owning, just rent or share one when you need to. (imge: Droiddog.com)

Economics, Behavioural Economics, Cars and Car Clubs

Today, the car club firm Zipcar, which acquired another car club firm, Streetcar in April 2010, is withdrawing its cars from Brighton and Hove and re-deploying them to London: good news for Londoners, and good news for City Car Club, which is now the only car club in Brighton and Hove. As a transitional deal, Zipcar is providing a year’s free membership to City Car Club. And Zipcar members will still be able to hire Zipcars in other locations, both around the UK and in Canada and the US.
Thinking about Zipcar’s departure from Brighton got me pondering how conventional economics and behavioural economics could help explain what’s going on here. Conventional economics would explain that providing a service like a car club (sometimes known as car share) means sweating the assets to the max – the costs are mainly fixed (capital cost of the car, insurance, cost of the parking bay etc), which makes it important to hire out the cars for as many hours a day as possible. It’s clear from Zipcar’s decision that this is going to be easier when the cars are parked in London. So why weren’t the people of Brighton and Hove using the Zipcars more often?

Behavioural economics (which I teach) can help explain this. A car club is a substitute for owning a car. But giving up your car is not easy: we hate to give things up. Human beings are loss-averse - psychologically, the “pain” we suffer from a loss is more than twice as much as the benefit we feel from an equivalent gain.  Adam Smith (picture from wiki), the man on the back of the £20 note, is sometimes described as a prototypical behavioural economist. In the Wealth of Nations he said, "we suffer more... When we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better.” Consumers view parting with an already owned good to be a greater loss than the potential gain from acquiring another good of equal value.

In 1979 Daniel Kahneman and Amos Tversky published Prospect Theory: An Analysis of Decision Under Risk.’ This seminal work of behavioural economics charted objective and subjective gains and losses with respect to a reference point, as opposed to the standard utility function of conventional economic theory. The shape of the curves using Prospect Theory illustrates that we focus on what we might lose, rather than what we might gain - thinking about selling something, we think about the things we'll miss, rather than the hassles of ownership. Combined with the status quo bias, this means that people prefer situations to remain static and unchanged. Change of ownership would disrupt the status quo, causing unease.

“Giving up” something like a car feels like a big loss: studies show that the perceived benefits need to be at least double the perceived losses to persuade people to give something up. A consequence of loss aversion is that people tend to place a higher value on a good that they own compared with an object of identical value that they do not own. This is called the endowment effect, and it means that people value things differently depending on whether they are gaining or losing them. Loss tends to be felt more keenly than gain.

And the latter means that ownership weaves it’s own spell, making it even harder to let go: people become attached to objects that are in their possession and are reluctant to part with them, even if they would not have particularly desired the objects had they not been endowed with them.

And there’s something else. Zipcars were pretty discreet. Nice cars, usually VW Golfs. You had to look hard to spot that they were Zipcars. No doubt it was a marketing decision to put them on the street practically unbranded. City Car Club cars are different: the company logo is emblazoned on the side. They get noticed. Unlike Zipcars, they are salient. And salience, the extent to which something stands out from its surroundings, translates in behavioural economics to a tendency to over-weight certain phenomena, which may then account for bias in decision making.  Zipcars, lacking salience, weren’t “front of mind.” So maybe fewer people were aware of them, fewer people who might join up and use them, which meant less sweating of those assets. Which was where we came in… And, as far as Brighton is concerned, where Zipcar goes out.

A Flexible Friend

I am often asked (especially by media types) the following question: “Don’t you ever miss not owning a car? Don’t you miss the spontaneity, the flexibility of just being able to jump in a car and drive off?” To which my (truthful) answer is, “hardly ever.” Behavioural economics says that human beings tend to value a loss at twice as much as a gain – so ‘losing’ something (a car) needs to be offset by double the benefits. We find that the loss – an occasional bit of flexibility and spontaneity – is more than offset by the gains – being thinner, fitter, having more money etc. But yesterday was one of those occasional days when we needed some flexibility: we were going to visit a friend in a distant part of the city, it was rather cold, and very wet. Getting on and off the bus with our loaded bags didn’t appeal. If there had been a car parked outside, we would have used it. But hold on. Around the corner there is a car. It’s a carclub car (a Zipcar, formerly Streetcar). So we got on the web at 2pm, booked the car for 3.00-6.30pm, and used it for our visit. Pretty spontaneous. Our flexible friend, a Zipcar VW Golf, cost us £17.50 (including petrol). Way cheaper than a taxi. Particularly when you use it to do some shopping on the way back. And the best bit of all? When we’d finished with our Zipcar, we put it back where we’d started, and walked away. Freedom without responsibility. (picture from Zipcar)

A Streetcar Named Golf

I’m prepared to admit it: when it comes to cars, I’m not pure. I’m a pragmatist. There are times when only a car will get you to where you need to go, and yesterday was one of them. I needed to be in a location that was about seven miles from where I live, but that was, bizarrely, impossible to reach by public transport, and, being accessed via the A23 dual carriageway, ill-advised by bike. So I needed a car. And I don’t own one. So, two choices: one, a taxi. Very expensive for this kind of out-of-town round trip. Or two, hire a car. As I only needed it for a few hours, I got on the Streetcar website and booked a VW Golf for £5.95 an hour including petrol.

At the appointed hour, I walked for a few minutes to the car’s parking spot, and placed my Streetcard against the car’s windscreen-mounted electronics box. Doors unlocked, I logged in with my pin number, fired up the engine, and set off. At the end of the hire, I parked the car and ran the sequence in reverse. Then I walked away from the car: a free man once more!

Streetcar and Zipcar join forces

Interesting news from the world of car clubs today, as Streetcar is acquired by Zipcar. The deal brings together the largest car club in the US and the fastest-growing car club in Europe. They say that it will bring about a global fleet and a shared vision “to make transport smarter.” Amen to that. Streetcar members will get access to a wider variety of cars, and when the transition is complete, the ability to access cars across Zipcar's network in the US and Canada. With more than 400,000 members, there will be more vehicles, a greater variety of hybrid and other green cars, and more locations. Streetcar will disappear, as the companies will ultimately operate under the Zipcar brand. Streetcar was launched in April 2004, and currently has a presence in more than 1,100 locations across eight cities, including London, Brighton, Cambridge, Southampton, Guildford, Maidstone, Oxford and Bristol.  Zipcar has 360,000 members in urban areas and college campuses throughout 28 North American states and provinces and Europe, and offers more than 30 makes and models of self-service vehicles. Wearing my economist’s hat, the thought occurs that buying up the competition can be a classic way for companies to grow their market without the hard slog of organic growth. And for this type of business, size really does matter: the economies of scale from a bigger operation should be good news for the cost base – and, hopefully, prices. Wearing my carfree customer’s hat, the prospect of getting access to more vehicles in more locations, with the promise of more rapid growth in the future, looks pretty attractive.