Avis Pricing Strategy

INTRODUCTION AVIS Avis is the Australian largest car rental company, with 33% market share across the nation’s airports, employing 1000 staffs in 240 locations (Super brands 2009). The company entered Australian market in 1955, initially only had a market share of just 10- 11% of the car rental market. In 1962 Robert Townsend joined as President of Avis and introduced a bold advertising campaign focusing on the company’s customer service: “We’re No. 2. We try harder! ”.

The message, together with its actual implementation of excellent customer service, were big factors contributing to Avis’s success in gaining more market power (Bob Ansett 2008) Avis is part of the Avis Budget Group which operates two of the most recognized brands Avis and Budget, targeting the travel industry premium commercial and leisure segments and price conscious segment respectively. Both brands benefit from sharing the same fleet, maintenance facilities, systems, technology and administrative infrastructure. Avis and Budget both enjoy complementary demand patterns with weekday commercial demand balanced by weekend leisure demand. Avis Budget Group 2009) CAR RENTAL INDUSTRY Car rental operates in an environment that is related and complementary to other sectors such as casinos, car rental agencies, hotels and tour operators. The majority of car rental companies are small businesses and the five largest companies are Avis, Hertz, Budget, Europcar and Thrifty. With 55,000 rental vehicles were registered across Australia, the motor vehicle hiring industry is highly competitive market, but is also highly concentrated with The Big 5 account for 75 percent of business turnover in the sector (ACCC 2005). In 2004 there was a case of price fixing in the car rental industry.

Considerable fines handed out to companies involved in the cartel that fixed prices for one way car rentals between Alice Springs and Ayres Rock. The fines and costs in that case totaled $1. 5 million (ACCC 2004), which indeed sent a clear message to the industry. During this economic down turn, the industry has been badly affected by declining demand (The Age 2009). Both corporate and tourism market activities reduce. On top of that, car rental companies have previously relied on the line of credit to turnover their vehicle stock, but such credit is no longer available in this financial crisis.

Companies LinhThuy Vu s2113253 Page 3 such as Hertz and Avis have good lines of credit and therefore are ahead of the game compared to many smaller operators who will continue to struggle to get financing and fall by the wayside (Making Life Ezy Market Research 2009). It’s an opportunity for the big car rental companies to pick up businesses from those failing in the tough market. ANALYSIS OF AVIS’S PRICING STRATEGIES QUANTITY PRICE DISCRIMINATION An inquiry on Avis reservation website reveals that daily rate for a 30 day hire is significantly cheaper than daily rate for short term rental.

The base rate for an Economy Hyundai Getz 3 Door is $31/day if hired for 30 days, but the rate for the same car for 7 days is $39/day, and goes up to $58/day if rented for 1 day only (Avis Australia 2009). The rental fee per day is reduced to nearly half if the number of hire days goes up to 30 day. Further research confirms it is a common practice in the car rental industry to price discriminates based on number of rental days (Bureau of Transport and Communications Economics 1988). Quantity price discrimination, also known as second degree discrimination, is a pricing strategy that varies price according to quantity sold (Perloff 2009).

This needs to be clearly distinguished with discount on quantity when the lower sale price is due to the decreased marginal cost, for example wholesale sells large quantity at lower unit price because they can save on retail setup and marketing cost. The marginal cost of leasing a car is the same for Avis regardless of number of rental days. Quantity price discrimination at Avis encourages customers to rent a car longer than they might need it for. Also customers who rent for longer period tends to do research on prices and therefore Avis needs to keep its long term rent (more than 7 days) rate at competitive price.

MULTI-MARKET PRICE DSCRIMINATION Avis operates in an environment where customers’ and price sensitivity vary greatly based on their needs, ability to pay, flexibility, time constraints, purpose and season, etc… In order to maximize profit, Avis needs to charge the highest price possible to the customers who are willing to pay such price for the service. LinhThuy Vu s2113253 Page 4 WEEKDAY & WEEKEND On Avis website as of Sep, 2009 the rate (incl. tax) for a Economy Hyundai Getz 3 Door is roughly $71/day on the weekend, and $85/day on the weekend (Avis Australia 2009).

Avis has always been offering cheaper rental on the weekend. This is because the consumers of weekend rentals are in the leisure sector and are a lot more price sensitive than the business sector who needs rental cars on weekday (Bureau of Transport and Communications Economics 1988). There are also various forms of discounts for weekend rental such as the $20 off the rental cost, voucher, special rates … These vouchers are also being offered on eBay (EBay 2009) and it is expected that price conscious customers will be searching for those discounts.

It is noted that although price dispersion between weekday and weekend is attributed to price discrimination, the theory of capacity constraint (Dana 1999) may hold true. Study of the car rental market demand shows that many airports face significantly higher demand on weekday than weekend hence the price is higher during the week due to capacity constraints (Ting Zhu 2009). The car rental industry practice pooling fleets across rental location hence the impact of capacity constraints is mitigated. It is then mainly price discrimination that causes the price dispersion pattern we see above.

TOURISTS & LOCAL RESIDENTS It is by all mean made non-obvious to consumers that Avis charge higher rate to nonlocal residents. Customers cannot tell the difference unless they play around with the “Country of Residence” field when making a booking. After lots of research on Avis reservation websites, the finding points to a consistent 15-20% higher in basic rental fee (excluding insurance) for non-residents (Avis Australia & Avis New Zealand 2009). Note this has nothing to do with higher insurance cost for foreign residents.

Some online customers have figured out the trick to get better rate by lying about their country of residence on the booking form, which does not make it illegitimate since the booking form does not form part of the rental contract (Flyer Talk Forum 2003). Not surprising, Avis exploits the willingness to pay of foreign customers by charging them higher prices than local resident. Foreign customers, either from the leisure or business segments, are more likely to have low price elasticity and have more willingness to spend.

Also foreign customers have more specific needs and more constraints (time, pick-up location, etc…) than local residents and hence are more willing to pay the price for the right service. LinhThuy Vu s2113253 Page 5 Avis even goes as far as charging different prices for different countries of residence. For example, on Avis Australia reservation website, US resident has to pay higher price than Australian resident, but still pay a lower price than UK resident. There must be a study on tourists from different countries and the amount of money they have in their pocket. LOYAL CUSTOMERS

Avis First Program is a loyalty program that rewards customers with additional benefits from frequent rentals (Avis Australia 2009). What most customers do not realize is that Avis may quote higher prices at each rental to their top-tier members. This is price discrimination based on customer, and Avis can do it because it has the information on the customer who is making the booking (from member’s profile, rental history, etc…) and it knows that the customer will not be turned away by a slightly higher price since he wants to collect loyalty points and he would lose the benefit of the accumulated loyalty points if he goes to a competitor.

AVIS AND DIFFERENTIATION STRATEGY PRODUCTS, LOCATION AND PRICES The motor vehicle hiring industry in Australia is largely a matured oligopoly market, and sophisticated buyers’ needs for differentiation falls (Jaquier 2009). Avis offers very similar services, rates and cars to the rest. In short, there is very little product differentiation in the industry. Avis offers services at 240 locations around the country; Thrifty has 210 locations. Customers often find car rental companies locate literally next to each other at major airports, central cities and holiday and business destinations.

Many travel agency and booking websites advertised a rental car from Avis from $39/day (Vroom vroom vroom 2009), but only the fine print reveals the true cost. It is believed that most consumers do not go through all the fine prints at the rental desk, and pitfalls are not evident until accident occurs. The car rental contract leave consumers exposed to up to thousands of dollars deducted from their credit cards to cover car damages (ACCC 2005). A few years ago the Sydney’s Bayswater Car Rental advertised an “all-inclusive” price but had to quickly stop due to big a loss of business (The Age 2004).

Everyone else excluded the insurance part of the rental and therefore their prices appear cheaper. It is clearly an example of high cost of differentiation even if the company was trying to do the right thing by the consumers. LinhThuy Vu s2113253 Page 6 REPUTATION, SERVICE, SUPPORT AND TIE-IN Avis, however, don’t become Australia’s biggest car rental company by being “just another car rental company”. Avis has differentiated its services from others by implementing various strategies to set itself apart from the rest. One of the most powerful bases of product differentiation is reputation or brand name.

It is very difficult to establish a reputation but once it is developed it lasts for a long time (Jaquier 2009). Avis’s marketing and philosophy based on the slogan “We try harder” has persuaded customers that the company would work harder to prove they are worthy of their business. This value proposition recognized that, for many car rental customers, prompt, caring, and friendly service was far more important than the car (Neely 2008). Avis since has been well known for its top quality service level and it attracts a lot of premium businesses.

It is also the most awarded car rental company in Australia for quality and customer service (Super brands 2009). Another basis of product differentiation is linkages between a firm’s products and the products or services of other firms. One of Avis’s biggest affiliates is Qantas Frequent Flyer program. Although it is not Avis’s competitive advantage since both Hertz and Thriffty are Qantas’s affiliated partners too, Avis offers Qantas frequent flyers a much wider range of benefits using its global services. For example customers can earn double Qantas frequent flyer points when hiring an Avis car in the USA (Qantas 2009).

In addition, Avis also have linkage with various credit card companies, insurance companies, hotels and resorts. RECOMMENDATIONS TO REALISE PROFIT POTENTIAL One of the largest profit potentials for Avis lies in getting the optimal price differentiation between the different customer segments. Avis should be asking itself if its price structure is yielding optimal returns. Avis has been hit hard by the global financial crisis and slowing demands, just like any other car rental company in particular and tourism related industry in general.

In the second quarter of the year 2009, it has already made $6million dollar, with previous half saw a whopping $55million loss (E travel blackboard 2009). Just last year 2008 Avis Budget group made a $15million profit. LinhThuy Vu s2113253 Page 7 With what seems to be a stabilizing demand for rental car in the last few months and moving forward, Avis Australia should consider optimizing its price structure to maximize profit by implementing one or more of the following strategies: 1. Consider establishing a different service and price level for corporate clients.

This will allow the company to fully exploit profit potentials. Several options for consideration are: specifically designed products for business customer segment, special corporate loyalty program, and corporate agreement offering a fixed fee for capped usage. 2. Implement different price structure for different distribution channels. Basic rental price for booking over Internet can be different from booking over the telephone, at the Airport and via Travel Agency. This is an opportunity to exploit the full willingness to pay of customer.

For example, Internet booking with a secured deposit could be cheaper than booking at the airport desk, given it’s only logical that the customers at the airport desk have fewer options and are willing to pay more. 3. Consider and research an alternative price model to charge base price and incremental kilometers. Recently the German car rental market has moved to distanced based pricing or Pay-As-You-Drive (PAYD), introducing an Introductory tariff that includes a base price and extra charge per km and a Km-package that includes a base price and a price for the first 500km then extra charge per additional km.

This Pay-As-You-Drive pricing model has proven to be more profitable than basic rental pricing model. Research also points out that this pricing model is more economically efficient and fair than other pricing practices (TDM Encyclopedia 2008) SUMMARY Avis is in relatively good shape, despite its losses in the last 12 months, and with a good line of credit the company is ahead of the game to its big and small rivals in the market. This year revenue is only down 17% but profit plummeted pretty badly.

One must question whether Avis’s price structure is returning optimal yields. Although it is already price discriminating the different customer segments, there is still room for improvement. Avis needs to compare its price structure to the price structures of its main LinhThuy Vu s2113253 Page 8 competitors to realize if it is making the most profit or giving money away. A comparison to other pricing models of other car rental markets in the world will be very useful too.

Avis can potentially mimic a proven strategy implemented by German car rental companies to charge customers per km they drive. Such pricing model will allow Avis base price to appear very competitive to consumers and the company can also realize the maximum profit from customers who drive high millage. Several other strategies such as utilizing the distribution channels and designing a product/program for the corporate clients should also be considered in order to maximize the potential profits for the company.