Capacity management is one of the basic problems in Operations Management. Whether one has enough capacity depends, of course, on demand. Consequently, demand management has also become a topic within OM. One way of managing demand in a service setting is advance sales. By selling ahead of the time of service, the firm can both better predict the number of customers who will request service and (potentially) charge different prices. That is, the time of sale can serve as a way to segment customers. But what if an advance sales isn’t really a sale? Think about car rental reservations. What rate Hertz or Avis will charge you depends on when you make your reservation but you can walk away from the deal with impunity. Unlike a hotel, being a “no show” does not mean being hit with a charge.
According to the L.A. Times that may be about to change (Car rental firms may charge no-shows, Nov 28):
But Avis Budget Group Inc., which operates both Avis and Budget, has begun to install the technology to collect credit card information for car reservations, signaling a change in the cancellation policy. That technology should be in place by December. John Barrows, a spokesman for Avis Budget Group, confirmed that the company was adding the technology to accept credit card information to hold reservations as a way to better control inventory. Barrows said he expected rental car companies — either Avis and Budget or their competitors — to eventually impose a no-show fee on customers. But when pressed, he refused to say when Avis and Budget would begin to require credit cards to make a reservation: “In terms of when and where, I can’t say.” He suggested that the rental car companies might start by requiring credit cards to place reservations for specific high-demand cars, such as hybrid vehicles. “Everybody is taking small steps in this direction,” Barrows added.
The article points out that this is a real problem for the industry since roughly 30% of customers who make reservations don’t keep them. The article does not discuss why rental agencies have not traditionally imposed any no-show fee but one suspects that it has a lot to do with the interchangeability the firms. If you want to rent a midsized car on your next trip to Phoenix, it really doesn’t matter whether you rent from Avis, Dollar or National; you’re going to get something bland that you would never choose to buy. Further, you could simply skip making a reservation and choose from the various counters at the airport once you land. In contrast, hotels are more differentiated either in their amenities or in their locations. It is also harder to hop between options after you land; striking out when you walk into the Marriott might mean a long drive to the Hilton. In such an environment, imposing an extra cost (even if it is just a threatened one) on customers is unattractive.
So why are Avis and Budget considering this now? Because times are tough. Not only is travel down but you can’t count on American car makers to give you great deals on bland midsized cars that normal people don’t want to buy. In such an environment, the immortal words of Geddy Lee carry a lot of weight, “Ten bucks is ten bucks, eh?”
So is this likely to happen? The article suggests that competition may keep Avis and Budget from trying this. An analogy is drawn to airline bag fees and Southwest’s aggressive promotions of its bags-fly-free policy. I think that there are other considerations that can keep this from happening. If we focus on car rental firms at airports (as opposed to neighborhood locations that rent you a car when yours is in the shop), there are two basic segments, business travelers and leisure travelers. The latter are going to be very price sensitive and you can probably change their behavior by imposing a no-show fee. I would guess that the former are responsible for a large share of the no shows and that they often fail to keep their reservation for reasons beyond their control — meetings get canceled at the last minute and connections are missed. I am not sure that a fee will change their no-show behavior but I am sure that corporate travel managers will negotiate on this point. The analogy to baggage fees is somewhat misleading. Airlines court road warrior business travelers but those people rarely checked bags before fees were introduced. Even if they do check bags, they likely have high enough status in the airline’s frequent flier program to avoid the baggage fee. Car rental firms also need to court business travelers but no-show fees will hit those travelers.
There is also the question of how big a fee you need to actually make a difference. That gets me to a gratuitous self-citation. I have spent a lot of time thinking about restaurant reservations, which are even more curious than free car rental reservations. Restaurants (like car rental agencies) give away reservations but don’t vary pricing with when you request service. Whether you have a reservation or just walk in, you see the same menu. This creates an arbitrage opportunity and has led to web sites that scalp restaurant reservations (check out Prime Time Tables, which may be the only survivor in this field). In the course of presenting this work people have often asked why restaurants don’t charge for reservations. My default answer has become that until you had widespread credit card penetration, it was too cumbersome to charge for reservations. In reality, you could now charge but the market is so fragmented and competitive and consumer expectations are so set that it would be very hard for one firm — or even a handful of firms — change the industry norms. No one wants to spit into the wind.
Someone then points out that some firms charge when you don’t keep your reservation. Fair enough. But there are some problems with this. First, the boilerplate agreement that most restaurants have with their credit card processor is different from the one hotels have. Hotels can charge for a service not provided (i.e., for a night’s stay when you don’t show); restaurants can’t. Second, it is not clear that a nominal fee will make that much of a difference. If a couple is planning on going out to nice restaurant, they are easily looking at spending over $100 (at least in Chicago). Will saving, say, a $10 no-show fee be the first thing on their mind when their toddler gets sick as they are getting dressed to go out? To really matter the fee has to be large and the deadline has to be fairly far out from the time of service (if the restaurant hopes to re-offer the seat). For example, Alinea, one of Chicago’s pricier restaurants, has the following policy:
We ask for a minimum notice of 48 hours in the event that you wish to cancel this reservation. Should you fail to provide such notice, or should you fail to appear on the evening of your reservation, we will process a charge to the credit card listed below in the amount of $75 per reserved guest.
Needless to say, when you are making a reservation for five (as I was), that catches your attention. Car rental agencies might well need similarly draconian policies to really impact behavior and I cannot imagine business travelers putting up with it. That brings us to the final chestnut from the Times article
If a car sits idle because a customer made a reservation but failed to pick it up, a rental company can lose up to $60 a year per car, he said. For a rental car company with 2,000 cars, that can mean a loss of as much as $120,000 in revenue annually, Barton said.
Now 120 grand is more than I have in wallet right now, but it is hard to imagine a major car rental firm jeopardizing its bread and butter business traveler market for such a small increase in revenue.