Risks to Innovation: A Case Study in the Zipcar Acquisition by Avis Budget Group

Zipcar’s recent agreement to be acquired by Avis Budget Group has the potential to change the face of the car sharing and rental industries as we know them. The partnership creates an opportunity for the aging car rental giant Avis to revive itself, while Zipcar gets a boost from the infrastructure and inventory of Avis car rental system. Where there are significant gains to be had from the merger in terms of synergies, there is a risk that a forced collaboration between two companies with divergent business models can spell an end to the very innovative services that brought Zipcar its recent successes.

Proponents of the acquisition hail the projected synergies, saying that there will be large gains for Zipcar and Avis alike. Zipcar gets access to Avis’ fleet, a much needed supplement for rentals during peak times (weekends) where Zipcar is largely under stocked (compare Avis’ fleet of 300,000 cars to ZipCar’s 10,000). Also, Avis’ infrastructure can help debug Zipcar’s booking systems that suffer from mistimed reservation reminders sent to users.  All the while, Avis gets to tap into Zipcar’s customer base—young drivers (18-24) and urbanites who prefer car sharing to ownership. Avis Budget Group has estimated that the potential synergies between the two companies will lead to a cumulative cost savings of $50 million to $70 million annually.

On paper, it seems straightforward that a car rental and car sharing company can reap the benefits of joining their service offerings.  Yet, this analysis may be leaving out key risks that both companies face in the acquisition. The two companies each operate under divergent business models that, when joined together, may destroy the very elements that made the different model successful in the first place. This risk is especially true for Zipcar.  The company has a strong brand identity and a niche customer base. The tension is already starting to show as customers have started raising concerns about the acquisition across social media sites.

The Zipcar acquisition by Avis Budget serves as a prime case study in the challenges that disruptive companies face in keeping their competitive edge after being acquired by larger organizations.  Though Zipcar has been out for too long to call their core service “cutting-edge”, the company has still pursued innovations around its services such as a versatile mobile app and adding moving vans as well as electric vehicles to its fleet. The way Zipcar evolves its service offering is at stake as a result of the acquisition.  Here the aim is to discuss the risks Zipcar faces in maintaining its unique service proposition during and after the acquisition, while proposing a basic strategy for the company to sustain a focus on innovation for its car sharing service.

Risk #1: Losing a Distinct Brand Identity

Despite recently scaling the business well beyond  a start-up phase, Zipcar has effectively maintained its aura of “small and cool”. This relies in large part on two factors: its technology integration into the car sharing service, and its ability to create a strong user community.

Zipcar is highly integrated with mobile devices: you can reserve vehicles with a smartphone, unlock your vehicle with your phone and even send text messages to Zipcar to extend a reservation. Though Avis also has a mobile app, it pales in comparison to the interactive capabilities of its Zipcar counterpart. Avis customers and Zipcar users experience very different levels of technological integration with their respective service, which highlights the differences the two companies have with respect to leveraging emerging technology to improve customer experience.

When a driver joins Zipcar, they are onboarded into a community of users. Zipcar’s image relies on its specific service provided to a particular demographic of individuals: young, tech savvy, urban dwellers that shy away from car ownership. Offering Zipcar services at Avis rental locations, for example, would work against a carefully cultivated brand image by blurring the line between who’s a “Zipster” and who’s not.

Risk #2: Losing Customer Loyalty

Though losing a distinct brand image is a risk whenever a smaller company scales up, it’s particularly treacherous for Zipcar due to its heavy reliance on its loyal customer base. The company’s straightforward no-strings-attached service has built a following of satisfied customers who act as Zipcar advocates. Every time a customer recommends Zipcar or their experience with car sharing, Zipcar saves that much more in advertising spending.

Avis, along with every other car rental agency, are notorious for constantly trying to push insurance packages, car upgrades, and even vacation deals onto their customers, trying to convince them that they need more than what they originally came in for.  On the contrary, Zipcar relies on self-booking where the customer is empowered to make their own decision without having to worry about a barrage of deals pushed on them at checkout. Transferring Avis’ aggressive cross-selling and up-selling strategies into Zipcar’s business would risk scaring away the loyal customers that are the foundation of the company.

Risk #3: Big Company, Big Processes

Zipcar shields its customers from much of the bureaucracy that goes behind car rentals, while Avis customers experience much of the red tape and paperwork with every trip to the rental counter. Because much of the projected synergy relies on Zipcar taking advantage of Avis’ fleet, Zipcar has to make sure that any increased complexities in insurance or booking policies don’t spill over and affect Zipcar users. Adding hurdles to an otherwise streamlined user experience risks losing exactly what made customers satisfied with the service to begin with.

Wrap Up

In no way is this article meant to characterize Zipcar as the small disruptive startup left to fend for itself during a takeover by a corporate behemoth. The situation is far from black and white. Still, Zipcar’s focus and success in providing innovative services to its customers allows the company to distinguish itself for Avis’ car rentals.

Zipcar (and Avis) should not lose sight of this distinction. Avis should pinpoint exactly what Zipcar needs to be a successful subsidiary, provide the necessities, and remain hands-off in all other areas of Zipcar’s business. Avis can still take in big rewards from a robust car sharing market, projected to reach $10 billion worldwide over the next five years. There is much to be gained, but neither of the companies should overestimate the challenges of intergation, as the success or failure of a firm that carries a history of innovation is at stake.