Car Rental Industry –
Revenue Management
Perspective
Submitted By:
Jagannathan R (27076)
Krishnan Jeesha (27085)
Car Rental Industry – Revenue Management Perspective
2012
Contents
Objective ................................................................................................................................................. 2
Company Background: ............................................................................................................................ 2
Auxillaries ................................................................................................................................................ 3
Revenue Objectives ................................................................................................................................ 3
Important factors that contribute to Revenue ....................................................................................... 3
Revenue variable and capacity constraints ............................................................................................ 5
Forecasting .............................................................................................................................................. 6
Need for Forecasting............................................................................................................................... 6
Seasonality and other factors that influence forecast ............................................................................ 6
Proposed forecasting method ................................................................................................................ 6
Demand ................................................................................................................................................... 7
Pricing...................................................................................................................................................... 9
Types of Pricing ....................................................................................................................................... 9
Price revision methods and frequencies............................................................................................... 11
Revenue Class ....................................................................................................................................... 14
EMSR and Protection ............................................................................................................................ 15
Optimisation ......................................................................................................................................... 16
Objective function............................................................................................................................. 16
Constraints ............................................................................................................................................ 16
Recommendations and rules for maximising revenue ......................................................................... 16
Measuring the effectiveness of the revenue management process .................................................... 16
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Car Rental Industry – Revenue Management Perspective
2012
Objective
The objective is to study about revenue management practices in Car Rental
Industry. For this purpose we have taken Shanthi Cabs India, Madurai as the service
provider we are going to analyse. Car rental industry is a service industry and the number of
cars it can rent is fixed, so optimisation of the demand is necessary for revenue maximisation.
Other businesses that provide services include airlines, hotels, restaurants, and theatres.
Unlike manufacturing companies that produce products that can be made in advance and
stored for future sale, service industries offer consumers a perishable commodity. Once a day
goes without a car being rented the cab service loses any chance to earn revenue from those
cars on that day.
The very first step of revenue management (RM) is to understand the characteristics
of demand, the strategies for managing the demand, and the forecast of demand. The second
step deals about the pricing strategies that are widely followed in the industry and the basis
on which the price of the inventory is fixed (in this case price of renting a car per day).
So the project involves understanding the existing system of forecasting, pricing,
capacities, timings & products offered and exploring the possibility of increasing the revenue
by using different forecasting techniques, new pricing strategies, introducing new product
varieties, protect the cars, optimization etc.
Company Background:
Shanthi Cabs India is a leading travel agency which provides air, train bookings and taxi
services. Mr.C.Baskaran is the managing director of the company. The company is in this
field for more than 20 years so they are known for their professional services and service
quality. The company is located in Madurai which is known as temple city; the city attracts
many tourist and pilgrims from around the world. This cab services company enjoys location
advantage as the city Madurai is strategically located at the centre of the state Tamilnadu so
the city acts as a gateway for the people who need to travel to southern cities. The city has
also got airport which is one of the reason for high floating population.
The company provides cab services and ticket booking services which includes air
travel and train. Ticket booking earns revenue based on the number of tickets booked and
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Car Rental Industry – Revenue Management Perspective
2012
charges vary based of the type and class of ticket booked. The company head office is located
in the vicinity of Madurai railway station; it is the added advantage the company enjoys as
the company need not have to pay for parking charges which helps reduction of huge
operating cost. The company operates variety of cars which includes Tata incida, Innova,
Tavera, Qualis and Tempo travellers. Customers are charged on per kilometre usage basis
and different charges being charged for AC and non AC usage.
Auxillaries

Train Booking – Charges collected on per person basis and also depends on class and
type (ordinary/ tatkal) of booking.

Air Ticket Booking – Charges collected on per person basis and also depends on class
of booking.
Revenue Objectives
1. Generation of incremental revenue by optimum utilisation of existing inventory (Here
inventory is car rental day).
2. Reduction in operating costs.
3. Increase customer satisfaction.
Important factors that contribute to Revenue
1. Fuel Prices
With constantly changing petrol and diesel prices, the price needs to adjusted to cover
the operating expenses and thus affects the revenue.
2. Driver Salary
With the competition in this industry increasing competition, the attrition is increasing
and hence the salary to be paid also.
3. AC or non-AC
The charges for using a AC car and using a car without AC varies, typically 1 or 2 Rs
more per km for AC usage compared to non – AC
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Car Rental Industry – Revenue Management Perspective
2012
4. Type of Car
The revenue generated varies depending on the type of car used. In increasing order
of revenue the car types are – Indica, Tavera, Indigo, Lancer, Corolla, Innova, Mazda
5. Operating Expenses
This includes rent of building, telecommunication charges, internet charges, office
staff salary etc.
6. Seasonality
Madurai being a temple city and a religious destination for Hindus, there is huge
demand during the annual festivals in the Madurai Meenakshi temple. Even when it is
peak season at Kodaikanal tourists gets cabs from Madurai to go there
7. Competition
The numbers of competitors in this field are increasing year on year and prices are
becoming more and more competitive and hence affecting the revenue.
8. Customer segment
There are mainly two customer segments – retail and corporate. The rates varies for
both.
9. Mileage
The mileage of the car affects the revenue as the fuel consumption increases revenue
is affected as operating costs increases.
10. Driver’s credibility
With widespread stealing of petrol and diesel happening to sell in black markets, the
credibility of the drivers employed is a main factor. Also they directly interact with
the clients and hence influence the customer satisfaction.
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Car Rental Industry – Revenue Management Perspective
2012
Revenue variable and capacity constraints
The revenue variable in the bus travels industry is the Price per km per car or Price
Per Day per Car whichever is higher.
The price varies as per the type of car that is rented out. In Shanthi cabs the various types of
cars used and the capacity constraints are shown below.
Car Type
Indica
Qualis
Tavera
Indigo
Innova
Lancer
Corolla
Ikon
Mazda
TATA 407
Numbers
30
5
5
10
4
2
3
3
2
3
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Car Rental Industry – Revenue Management Perspective
2012
Forecasting
Need for Forecasting
In service industries like car rental, it is known that demand for the product exhibits one or
more patterns. It can be either cyclic in nature or it may follow some trend. This can be
projected forward in order to estimate future demand in each market segment. To accurately
forecast demand, the travel operators need to keep good records of historical demand from
different categories of customer types (Economy, Mid-Size, Luxury) at specific times.
The level of forecast will be at car level and segment level
Seasonality and other factors that influence forecast
The Car rental industry in Madurai is certainly affected by seasonality. But the corporate
segment demand is more based on quotation and sales effort than seasonal factors. But when
it comes to the retail customer segment there is a clear seasonal variation in demand.
The Alagar festival, a one month long event, which happens during April attracts a lot of
crowd to the extent of couple of lakhs of devotees coming to participate in the festival. This
creates a high demand period with almost full capacity utilisation throughout the month.
Jallikattu, bull fight, a world famous event, attracts a lot of crowd during the month of
January.
During the Kodaikanal, also known as “Queen of hills”, season Madurai being near to the
place acts as a hub from where Cabs are hired.
Proposed forecasting method
Moving average method can be implemented as this method takes into account the previous
data and the future value is predicted based on the recent past values.
Where, n-value represents a time period to be taken into account for calculating the
forecast.
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2012
Car Rental Industry – Revenue Management Perspective
Demand
Normal Season
Graph shows how many cars are hired daily on an average under each category.
16
14
12
10
Long Trips
8
local Trips
6
Rental local Trips
4
2
0
Indica Qualis Tavera Indigo Innova Lancer Corolla Ikon Mazda TATA
407
Peak Season
Graph shows how many cars are hired daily on an average under each category.
30
25
20
Long Trips
15
local Trips
Rental local Trips
10
5
0
Indica Qualis Tavera Indigo Innova Lancer Corolla Ikon Mazda TATA
407
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Car Rental Industry – Revenue Management Perspective
2012
Shoulder Season
Graph shows how many cars are hired daily on an average under each category.
12
10
8
Long Trips
6
local Trips
Rental local Trips
4
2
0
Indica Qualis Tavera Indigo Innova Lancer Corolla Ikon Mazda TATA
407
Annual Sales
Rs. 1,400,000.00
Rs. 1,200,000.00
Rs. 1,000,000.00
Rs. 800,000.00
FY 10-11
FY 09-10
Rs. 600,000.00
Rs. 400,000.00
FY 08-09
FY 07-08
FY 06-07
Rs. 200,000.00
Rs. 0.00
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Car Rental Industry – Revenue Management Perspective
2012
Pricing
The main objective of the pricing is “To price the inventory competitively in order to sustain
the market share and thus increase the incremental revenue”
In this industry, when setting price, the bus operators consider the economic conditions in the
marketplace, the activities of their competitors, and the behaviour of their customers. To
remain competitive, operators keep their prices at levels intended to discourage new entrants
into the marketplace. When there is an established player, new competitors usually enter the
marketplace with a low-price strategy. The base (minimum) price for a service is the price
that covers a company’s costs. The ceiling (maximum) price of a service is the highest price
that customers would pay for a service with this perceived value. The actual price is
somewhere between the base and ceiling prices.
Types of Pricing
There can be 3 strategies that are usually followed for pricing. They are

Cost-based pricing

Competitor-based pricing

Value-based pricing
Cost-based Pricing:
In cost-based pricing, companies set prices based on their costs of providing services. To
make a profit, they set a price that covers their variable and fixed costs and includes a profit
margin.
Competition-based Pricing:
In competition-based pricing, companies set prices based on what the competition is
charging. When competing service providers, provide similar services, price-sensitive
customers will choose the player with the lowest ticket price. It can offer a low ticket price
that competitors with higher costs cannot afford to match. Alternatively, it can charge
the going market rate and earn higher profits than its competitors.
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Car Rental Industry – Revenue Management Perspective
2012
Value-based Pricing:
In value-based or benefit-driven pricing, companies set prices for services based on their
customers’ perceptions of the value of the services. If customers are unsure about how much
value they will receive from a particular service, they may remain with a known supplier or
not make a purchase at all.
Fare types: Pricing and demand
Other Pricing strategies
Apart from the above said pricing strategies, there can also be other pricing strategies that are
followed in any industry. Some of them are given below:
a) Market segment pricing
b)Peak/Off-Peak Pricing
Market Segment Pricing:
The first step in pricing program is to define the various segments of the market for the
service offered. Then designing ways in which the industry can charge different prices
to the different market segments, a practice which economists refer to as economic
price discrimination.
The objective is
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Car Rental Industry – Revenue Management Perspective
2012
(a) To expand market
(b) To Increase revenue potential by charging higher prices to those market segments
which are not responsive to changes in price level and lower prices to those market segments
which will respond to a price reduction by increasing their purchases by a large enough
amount to more than offset the revenue reduction occasioned by the discount
In the case of car rental industry, the segment based pricing is followed. The reason is that
the pricing is based on the cost incurred in delivering the service to the customer and the
value. In order to retain corporate customers we need to give discount over retail market rate
and superior service.
Peak/Off-Peak pricing:
Quite often, a time element is added to the pricing of a service.
Demand for a
service is managed by raising prices during periods of peak demand and discounting
prices during periods of slack demand.
Price revision methods and frequencies
The price revision in any industry occurs when the cost of the raw materials concerned
increases. In this industry, the price revision happens whenever the cost of the fuel increases.
The price revision is done based on the cost incurred per Km.
Price Elasticity
Price elasticity, or change in demand in response to change in price, is a measure of
how sensitive demand is to price.
 Corporate customers are more sensitive to price changes.
 Non-regular (retail) customers are lesssensitive to prices changes.
Pricing at Shanthi cabs
Shathi cabs follows three ways of pricing their product based on the usage.

Local Trip (below 12 hours)

Long Distance Trips (above 2000 Kms)

Rental local trips
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2012
Car Rental Industry – Revenue Management Perspective
Fare list is given below for all three types of trip.
Local Trip (Below 12 hours)
Swaraj
Mazda
Tempo
Tempo
A/C
Non
Non
(13
A/C
A/C
Seat)
(21seat)
Innova
A/C
(13
(7 Seat
Seat )
)
Tavera
Non
A/C
(9 Seat )
Indica
Indic
Indigo/Lo
Ford
Non
a
gan
Fiesta
A/C
A/C
A/C
A/C
A/C
(9 Seat
(4 Seat
)
)
(4 Seat )
(4 Seat )
Tavera
(4
Seat
)
3 Hour (30
km
1200
900
1200
900
600
750
450
550
750
1000
13
11
13
12
9
10
6
7
9
12
1200
900
1200
900
600
750
450
550
800
1000
250
200
250
200
150
175
125
150
150
150
2200
1900
2250
2000
1400
1650
1100
1300
1650
2000
Allowed)
Extra Kms
Per K.M
Airport &
Back
(3Hrs/30
Kms)
Extra Km
per Hour
One
day(100km
allowed 12
hours)
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2012
Car Rental Industry – Revenue Management Perspective
Long Distance Trips (above 200KM)
Swaraj
Mazda
Tempo
Tempo
A/C
Non
Non
(13
A/C
A/C
Seat)
(21seat)
Innova
Tavera
Non
Tavera
Indica
Non
Indica
Indigo/Logan
A/C
A/C
A/C
A/C
A/C
A/C
(13
(8 Seat
(8 Seat
(8 Seat
(4
(4
Seat )
)
)
)
Seat )
Seat )
(4 Seat )
Ford
Fiesta
A/C
(4
Seat )
Long
Distance
(Per
13
11
13
11
8
9
5.5
6.5
9
11.5
1
1
1
1
1
1
1
1
1
1
Indica
Indigo/Logan
A/C
Km)
Driver
Batta (
per Day
/ Per Km
)
Rental Local Trips
Swaraj
Mazda
Tempo
Tempo
A/C
Non
Non
(13
A/C
A/C
Seat)
(21seat)
Innova
Tavera
Non
Tavera
Indica
Non
A/C
A/C
A/C
A/C
A/C
(13
(8 Seat
(8 Seat
(8 Seat
(4
(4
Seat )
)
)
)
Seat )
Seat )
(4 Seat )
Ford
Fiesta
A/C
(4
Seat )
Day Rent
( Per
1400
1100
1400
1200
800
1000
550
700
900
1200
7.5
6.5
7
6.5
5
5.5
3.75
4.25
5.5
6
300
250
250
200
200
200
200
200
200
200
day)
Fuel
Cherages
Per K.M
Driver
Batta
(200km)
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2012
Car Rental Industry – Revenue Management Perspective
Revenue Class
We have three revenue classes in car rental industry (i) Economy (ii) mid size and (iii)
Luxury
Economy class – Indica, Qualis and Tavera
Mid size class – Ikon, Innova and Indigo
Luxury class – Corolla and Lancer
Apart from these segments they have Mazda and Tata 407 which are special type vehicles.
The vehicle details and per KM charges are given below
Rate(Rs.per km)
Rvenue
Numbers AC
Class
Economy(C)
Mid-Size(B)
Luxury(A)
Non-AC
Indica
30
6
7.5
Qualis
5
8
9
Tavera
5
8
9
Indigo
10
10
NA
Ikon
3
13
NA
Innova
4
13
NA
Lancer
2
20
NA
Corolla
3
20
NA
Mazda
2
TATA
Special
407
3
13
Based on the demand and supply each class needs to be opened and closed in order to
maximize revenue, product offering can also be decided based on the client. For example
when a corporate customer calls we need make them take high revenue products and for low
profile retail customer, we can offer economy class product.
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2012
Car Rental Industry – Revenue Management Perspective
EMSR and Protection
Protection is a process of opening and closing revenue inventories so as to maximize revenue.
The car types are the revenue class in this business and it has to be protected so that it can be
used to attract a Quality customer. A quality customer is a customer who hires medium or
luxury type cars.
Based on the forecasting data,
Fare
Classes
Fare Range
Forecast
Error
Protection
Authorized
Units
20
A
>16
12
B
10
7.5
C
6
4
1
4
62
16
15
5
15
58
10
50
10
43
43
69
62
25
20
15
CLASS A
CLASS B
10
CLASS C
5
0
1 3 5 7 9 1113151719212325272931333537394143454749515355575961
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Car Rental Industry – Revenue Management Perspective
2012
Optimisation
Objective function
Objective function is to Maximise Revenue. The revenue generated out of the entire network
is to be maximised. So, the summation of the individual revenue from each route must be
maximised subject to the constraints.
MAX REV[Demand(Indica) X Fare (Indica) + Demand(Qualis) X Fare (Qualis) +
Demand(Tavera) X Fare (Tavera) + Demand(Indigo) X Fare (Indigo) + Demand(Innova) X
Fare (Innova) + Demand(Lancer) X Fare (Lancer) + Demand(Corolla) X Fare (Corolla) +
Demand(Ikon) X Fare (Ikon)]
Constraints
 Number of cars available per day = 62
 The optimized customers cannot exceed the forecasted demand
Recommendations and rules for maximising revenue
1. There is no forecasting being done finding the demand, forecasting can be done using
Moving average method.
2. Decrease prices during the off season and advertise in local papers, so as to attract
local consumers to use cab services.
3. Have tie ups with other Rental services to virtually increase available demand during
peak seasons so that no consumer is unsatisfied.
Measuring the effectiveness of the revenue management process
1. Find the capacity utilisation factor. It is the ratio of actual capacity used to the total
available capacity
2. Revenue per car per day can be calculated.
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