Revenue Managers would agree that car rental pricing is a tricky subject – Price your products too high, and the demand drops, price it too low, and you end up losing revenue.
NB: This is an article from RateGain
In such a case, it becomes essential to forecast demand by carefully analyzing multiple parameters such as fleet type, season, location, and more importantly, the Covid restrictions in place at that location.
Subscribe to our weekly newsletter and stay up to date
Has it become easier to analyze trends and determine the right price to rent the car – according to our analysis the answer is – NO. An analysis of the last six months tells us more.
Despite Traveler Intent Volatility Persists
As per the data collected between March and September this year, there has been a major variation in the Average Daily Rates (ADR) and the Average Demand Index (ADI) for car rentals, with ADRs varying between $80 to $100. May had the highest outlier prices, while September was the most expensive month to rent a car. This was however expected, with recoveries in the market and the declining trend of new Covid cases ushering in renewed confidence among travelers.
Data released by the American Automobile Association (AAA) shows that 75% of Georgians now feel more comfortable traveling as opposed to three months ago. 48 million Americans were expected to travel during the 4th of July holiday, which is historically the busiest time of the year for travel, regardless of the prevalent situation.
While this was a situation that could have been capitalized on, available data shows that the price positioning has been nowhere close to optimal yield levels. Pricing was managed multiple times a day based on short-window changes in demand. By focusing on short-term utilization gains rather than a systematically planned pricing setup, operators have lost more than they have gained.
Seasonality in demand can cause RMs to price their products inaccurately. Simply taking into consideration previous daily, weekly and monthly variations will not help. A collective analysis of real-time or near real-time data from multiple sources is what is essential for accurate forecasting.
For example, Reuters has reported that due to the Delta variant of the Covid virus, the White House has decided to not lift travel restrictions for inbound travelers from Europe. If this news is not factored in while forecasting, the variation would be high as there are a sizeable number of travelers from Europe who visit America.
To maximize revenues, there is a need for a pricing approach based predominantly on demand forecasting.
Summer Prices in the US by Car Type
Demand and price variations are not just influenced by dates or time of travel, but also the car category that is chosen for travel. Data obtained for Summer 2021 in the top 10 cities of the US shows that the price alignment is not in sync with its demand trends and pricing.
Most of the prices within 2 weeks of the booking date are being driven solely by competitor rates and not revenue potential. Even beyond the 14-day window, pricing is being decided on assumptions rather than systematically obtained forecast data.
Trends show that competitiveness in pricing based on the market took precedence over demand assessment. By focusing on being cheaper than their competitor, car rental businesses have lost easy revenue arising out of demand.
Compact cars were priced the cheapest in Boston and were most expensive in Atlanta. The ADR variation for this segment was massive, ranging between $70 and $142.
Economy cars too displayed a major variance in the ADR, with a range of $70 to $158. Orlando and Houston had the lowest prices while New York was the most expensive.
Midsize cars ranged between $72 and $152 in terms of ADR and were the cheapest in Orlando and most expensive in Boston.
Standard-sized cars had an ADR between $78 and $167, with Miami having the cheapest rental price and Chicago being the most expensive.
For the Full-size car segment, the ADRs ranged between $82 and $161, again with Orlando being the cheapest and Las Vegas being the most expensive.
In the Premium car segment, ADR stood between $105 and $210. Houston and Orlando were the cheapest locations to rent a premium car, whereas Chicago was the most expensive.
With regard to price variation for all car types, a common trend observed was the highs being 2x or more of the lows. In general, Orlando was the cheapest location for car rentals in most categories except compact and standard.
Summer Prices in the US by Zones
In addition to categorizing demand based on car type, we analyzed the price-demand data based on zones in the US. Additionally, Covid-related statistics such as the number of new cases per day and the adult vaccination rates in the chosen region were taken into consideration. This analysis includes forecasts for October and November, in addition to existing data for August and September.
For the Eastern Seaboard Zone, the Average Closing Utilization (ACU) for a 2-week booking window stood at 74%, while the Average Cancellation Trend (ACT) stood at 24%. Interestingly, the utilization levels recorded here were higher than that of 2019. On the flip side, however, all the pricing parameters after 1st October 2021 are opposite to the demand indices in the city, with higher rates being charged on days with low demand. The rate of increase of Covid cases is not as steep as other major cities, so it should have a low impact on the forecasting for the coming weeks
For Orlando, the 2-week ACU stood at 78% while the ACT was 23%. The pricing parameters between 5th September to 1st October are majorly opposite to the demand indices in the city, with lower rates being charged on days with high demand. Covid cases are on a steep rise here, which could result in improper forecasting due to last-minute changes in travel plans or local regulations.
In Miami, the 2-week ACU was 84% with an ACT of 22%. The pricing parameters for September and October are majorly opposite to the demand indices in the city, with lower rates being charged on days with high demand. Covid cases are on a very steep rise, which could result in last-minute demand fluctuations.
For the Central US zone, 2-week ACU stood at 91% and the ACU was a mere 13%. The utilization and cancellation trends here are much better than in all the other zones. The pricing parameters from the last week of September to the second week of November are majorly opposite to the demand indices in the city, with higher rates being charged on days with low demand. Despite a steady rise in Covid cases, the forecasting is unlikely to get affected to a great extent.
In the Pacific Coast, 2-week ACU was at 81% with an ACT of 16%. In this zone, price competitiveness is taking prominence over the availability of demand, resulting in a loss of revenue. The ADR can easily be improved by 10% even while maintaining the same utilization. Covid cases are on an increasing trend, and thus could slightly affect the forecasting.
For San Francisco, a 2-week ACU of 81% and an ACT of 19% were observed. The slow rate of new Covid infections recorded is unlikely to affect the forecasting much.
However, despite all these trends, it is important to note that higher utilization alone does not guarantee a higher revenue, as the average daily rates also need to be taken into consideration. Higher utilization with a lower ADR means significantly lesser revenues than lower utilization with higher ADR.
To better price car rentals, Revenue Managers need to consider demand-price elasticity. Lower demand-price elasticity means that price changes do not affect demand much. Higher demand-price elasticity means demand sharply changes as the price changes. Thus, in places with higher price elasticity, revenue managers need to be careful while pricing to get the maximum utilization as well as revenue. In places with lower demand-price elasticity values, RMs can increase rates to maximize revenues without worrying about reduced occupancy.
It was observed that Demand-Price elasticity increased correspondingly from low to very high as the size of the car increased. In terms of locations, Atlanta, Miami, and San Francisco showed higher Demand-Price elasticities while Orlando and Las Vegas showed lower elasticity.
What is the future?
Car rental companies tend to make pricing decisions based on their gut feelings, or on outdated trends, which often leads to loss of revenue opportunities. This can be fixed by proper demand forecasting, which helps identify demand patterns and set price points smartly. That way you can be sure that you’re always charging what your customers will be able to pay.
Utilizing technology, you can identify fluctuations in pricing based on seasonality or other parameters thus predicting accurately how much each customer would be willing to spend before they even book their rental!