The economics of peer-to-peer car sharing

The concept of car sharing — where drivers can rent cars by the minute or hour from a company like Zipcar — has yet to reach mainstream status, but it has already emerged with a new format in certain cities. That’s peer-to-peer car sharing (sometimes called distributed car sharing, neighbor-to-neighbor car sharing or car sharing 2.0). In this model, regular car owners rent out their personal vehicles to the community by the minute or hour and make money off their car while providing a service to the community. The concept is so appealing, at least in the entrepreneur and startup world, that there are at least a dozen companies offering this service in various cities across the world.

While it’s still very early for this industry (the largest networks have just a few thousand members), the key to this concept taking off one day will be that the economics pan out — for the companies, the car owners and the drivers. Here are four important things that the companies, drivers and car owners need to pay attention to, to make the economics of peer-to-peer car sharing work.

Insurance needs

Insurance is necessary, and it is important for making sure that car owners and the car-sharing company aren’t held liable in the case of accidents. Drivers also need to be financially protected if they have an accident but don’t have their own insurance (if you got rid of your car and are driving shared cars, chances are you aren’t still paying for your own insurance). Companies like Spride Share were so worried about making sure insurance was kept intact despite the new nature of peer-to-peer car sharing that the company spent months working on getting a pro P2P car-sharing insurance bill passed in California.

But insurance can also be a relatively high fixed cost for these startups. Getaround tells me that insurance is its single biggest cost. The peer-to-peer car-sharing companies are commonly paying between 15 and 20 percent of the cost of the rental for insurance. So say a driver rents out a car for several hours for a total of $100; $20 of that fee will go to insurance. At this point, there’s little way to reduce this cost, as the companies are seemingly paying about the same for standard insurance. In comparison, car owners can pay anywhere between several hundred dollars and several thousand dollars a year for insurance, depending on the state and demographics of the driver.

What the car owner gets

Depending on the frequency that cars are rented out, companies say that car owners can make several thousand dollars a year participating in car sharing. RelayRides says that for an economy-sized car that is rented out for 10 hours per week, a car owner can make $2,300 per year, and specialty car owners (say a truck, a sports car or anything that isn’t a commodity car) can make closer to $3,700 a year. If the car is rented out for 20 hours per week, that doubles, to $4,600 per year for an economy car and $7,400 per year for a specialty car. Getaround says its cars generate $325–$400 per month ($4,800 per year), with the best-performing cars generating up to $1,500 per month ($18,000 per year).

Luxury cars can be rented out at higher prices. HiGear, which specializes in peer-to-peer rentals of sports and luxury cars, says its car owners make on average $400 per month, or $4,800 per year. Most of HiGear’s rentals are for an average three-day period, and the company also offers day-only rentals (though not by the hour, as Getaround and RelayRides do), which is another way it has been able to bump up its revenue for the car owner.

Clearly the amount of money that the car owners make is based on the frequency of renting the car. But in general the car-sharing companies are offering car owners between 65 and 70 percent of the revenues from the rental. Overall these revenues are helping the car owner cover some of the costs of owning the car, like parking and maintenance, but it’s not enough to pay off the price of the car. Perhaps one day these networks will make enough money to cover the cost of the car, but until then the owners will have to be satisfied with contributing to the cost of the car.

But there are ways companies can boost the revenue share further for the car owners, which could in turn bring in more car owners that want to make money off their cars. Zipcar says its average vehicles generate $65 per day — that’s almost $24,000 per year. Adding more members who want to rent cars to a company’s roster will help boost driving frequency too. Location-targeted advertising and alerts to let drivers know when cars are available in their area could generate more usage. Incentivizing longer rental periods, like HiGear does, could be another way to boost the revenue share.

The tech costs

The biggest variation among many of these peer-to-peer car-sharing systems is what tech they are using to create the automated locking, unlocking and reservation systems for the cars. RelayRides installs a robust system itself in the car owner’s vehicle, Getaround sells a car kit that the car owners install on their own, and some companies, like HiGear or new operators in the U.K., aren’t providing automated systems but instead require the car owner and driver to swap keys. In HiGear’s case, the company originally planned to have an automated system, but it found that its customers oftentimes wanted to meet (in a public place) with the person renting the car, because the cars are high-end luxury or sports cars.

Installing the devices in the car can be a particularly high cost. RelayRides founder Shelby Clark tells me that each RelayRide device costs about $500 to produce, plus it costs the company an additional $200 to install it. But Clark says that “these costs will likely come down dramatically with scale” and that the company is “more concerned with growing the service than profitability.” Newcomer Wheelz, which focuses on college campuses, also installs its devices itself.

In addition to declining costs, RelayRides has turned to a big partner to bypass the installation cost for some customers: A few weeks ago RelayRides said that in 2012, GM cars that have an Onstar system will be eligible to join the RelayRides network, using the Onstar communications network for the automated locking and unlocking and reservation system.

In contrast to the installation method, Getaround ships customers a kit that they install themselves in the car, which is a more low-cost way to get its devices in the cars. But Getaround’s communications system isn’t as robust as RelayRides, and for example, it doesn’t have remote disconnect, if a car gets stolen.

I think it remains to be seen what the best way is — both economically and in terms of customer service — to get these devices into the cars, and some niche networks possibly don’t need the automated systems at all. For example, HiGear says its customers want to meet face-to-face and demonstrate how to drive the mostly manual sports cars before renting the car out.

Cost to acquire users

This is essentially how much it costs to grow the network and bring in more users. I think these costs could also be high for some of the companies, because the concept of peer-to-peer sharing is so new that drivers and car owners need to be educated on how it works and how it can help them.

HiGear’s president, Murtaza Hussain, told me in an interview that it’s “too early to tell our CPA. We’ve seen it as low as $50 and as high as $500,” and that he “will have a better sense of this in the next few months.” I’ve seen a lot of new ads online and in physical locations from RelayRides recently (in the San Francisco BART for example), trying to educate potential new customers on how P2P car sharing works; these advertising campaigns can’t be all that cheap. Traditional car-sharing company Zipcar has a cost per new account of $70, and that’s after a decade in business and an IPO.

Will it catch on?

As Clark put it to me, it’s such an early market that the companies don’t necessarily need to be profitable at this point, as they grow and acquire new customers. But ultimately, establishing a solid business model early on will still be a key part of making sure the companies can be economically sustainable as they grow and can offer car owners enough incentive to join. Zipcar has never been profitable after a decade in business, and the costs of maintaining the car fleets and covering gas are high. If gas prices go up, the company’s fixed costs could go even higher.

In addition, the success of the idea — renting out other people’s cars and making car ownership more economical and environmentally conscious — rests in the hands of these pioneers. Their business success is important to making the early adopter concept a reality.