Case Study 4RENT A CAR!!!

Demand-Supply Function

Economic model of price determination in the market

in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted.

Competition Dependent Factors

Price of related goods and services

Extra services to attract customers

Reputation of company compared to its competitors

Advertisement amount spent

Discount and Upgrade

Customer database

Competition Independent Variables

Tastes and Preferences

Consumer’s expectations about future prices and incomes that can be checked

Number of potential customers

Income of people

Current situation of economy

Climatic conditions and cultural factors

What more data should have been given?

Amongst the local customers, the division of masses on the basis of age and occupation should have been given. As it would have helped the firm target particular areas like colleges, offices, etc. and at different times of a day.

The average maintenance cost of the two types of cars (including the mileage) used in the business should have been mentioned as it plays a major part while calculating the profits.

The reach of the rival firms isn’t mentioned – How many people do they reach to? Where do they have their business concentrated at? How much profits are they making?

What more data should have been given?

The country’s economic situation should have been mentioned. If there’s growth in the economy, more people will likely avail the firm’s services and if there’s recession, people will be earning less and will prefer a cheaper mode of transport, e.g. the public transport.

The price of the services that are being provided should have been mentioned in order to get a view of the money the firm is making.

Although the population of the state has been mentioned, the area isn’t. It won’t be feasible for the firm to work in a state with a large area. 25 million people can be spread over an area of 3,000 km² or they can be spread over 300,000 km². The business will be affected accordingly.

Importance of historical data

Although there are factors that change with time, making historical data not have much influence on the future projections, there are some factors about which predictions can be made depending upon the historical data.

The data from the previous years about the demand in each season (summer, fall, rainy) should be provided. This will help in deciding how much cars are to be rolled out and how much support staff needs to be employed.

The historical data about the places from where number of people have ordered to rent can be useful in determining the area to concentrate to increase the market.

Importance of historical data

The number of Luxury Sedans and Sports Sedans that have been demanded by the people in the previous years can help in determining if there’s need to buy more number of cars or to cut off the number on any of the two types of cars.

The profits made in the previous years might help in targeting the amount of profits to be made in the coming years.

Revenue and profit maximization – the basics

Revenue maximization: Revenue will be maximized when the price elasticity is unity.

The total revenue = Price of one x Quantity of goods sold or services offered

Profit maximization: As we have competition, our marginal revenue will be equal to the price of one rental.

Profit maximization will happen when marginal revenue is equal to marginal cost, and it will give us the quantity of cars that have been rented at that point.

Revenue and profit maximization

The firm can focus on improving car qualities and providing better customer service – Firstly, the nature of costumers should be analysed. If customers are quality conscious, the quality of cars can be made better and even cars manufactured by world-class companies can be provided and they can be charged more accordingly.

Low-price strategy – If the company has a fierce competition with the rival firms, it can reduce the rent and attract more customers. In the long run, the company will gain people’s trust and can achieve profits by raising prices later on.

By targeting particular areas of the state’s cities which have yielded more money as compared to other areas.

Revenue and profit maximization

Attractive advertising – The firm can reach more number of people quite easily by advertising in the form of Banners on hoardings, Ads on local channels, etc.

Easy to reach to people – Online booking can be made available and even a mobile app can be created to help people book a car easily. Depending upon the demand more cars can be called in a particular city to fulfil the requirements.

To cut down losses – The firm should keep a track of the money it is requiring to spend on cars and the staff. Cutting of unnecessary spending helps in improving the profits.

Revenue and profit maximization

More types of cars – People with different economic backgrounds have different differing needs. Someone would like to rent a Honda Accord and someone a BMW 3-series. So, catering to the needs of different kinds of people, different types of cars should be provided.

To attract more number of tourists visiting the state, the firm can come up with schemes like ‘Free first ride’ or ‘50% off on the first free ride’.

If it is feasible to call cars from cities 100 miles away, considering the fuel costs, only then such measures should be taken.

What if a customer is allowed to keep the rented car for an extra

day?

When a customer keeps the rented car for an extra day, the firm loses out on one car, and if the car had been allotted to another customer who would be requiring it the next day, the firm will have to allot another car for that purpose.

The margin cost will increase due to the uncertainty that the customer will keep the car for an extra day.

During booking, a customer can be asked if he/she wants to keep the car for any extra days and discounts can be provided subsequently.

But after renting a car, if a customer asks for extending the time to keep the car, he can be charged more to cover for the extra costs incurred in the form of calling a car from another city to make up for the car(whose time has already been extended) the next day.

What if a customer is allowed to keep the rented car for an extra

day?

However, charging a customer more can mean he/she loses the trust in the company.

And it can also affect the trust of the customer who has booked the same car for the next day. If the substitute car doesn’t arrive in time and also if the customer is not ready to accept the substitute, another customer’s trust can be lost.

Taking into consideration the covering up of losses incurred in such a situation and also to meet the costumers’ satisfaction level, a system can be devised which involves charging the customer who plans to extend the car’s renting without notifying beforehand more and doing the best to not lose people’s trust in the company.

Thank You