Russ Roberts poses the question.
Why is that you can rent a car for less than $20 a day, but renting a bike costs $10 an hour?
I don’t think it’s the case that the bicycle rental business is spectacularly profitable, with major barriers to entry. So here are some possibilities.
1. Labor costs are a much higher percentage of cost in a bike rental business. Suppose that it takes 15 minutes of labor time to deal with either a car customer or bike customer. Call that a $4 labor cost per customer. If the car customer keeps the car for 3 days and the bike customer keeps the car for 2 hours, then even at the numbers that Russ poses you get $60 from the car customer and $20 from the bike customer. Per dollar of revenue, labor costs are three times higher in the bike rental shop.
Looking at the investments that car rental companies make in automated systems for processing rentals, it seems to me that they must care about keeping labor costs per rental low. I infer that this is a factor that matters.
2. My guess is that a bike spends much more time than a car not earning any revenue. In some locations, people only rent bikes in the summer. In most locations, they rent more on weekends than on other days. During the day, the proportion of bikes that are rented out probably peaks somewhere around 1 PM, with much less demand before 10 AM and after 4 PM. Demand falls to zero when it’s raining or it’s too hot.
Suppose that the bike on average gets rented for 40 days out of the year, once a day, for 2 hours, at $10 an hour. That is $800 in revenue per year, minus 10 hours of labor cost, so make that $700 per year. If the bike costs $1000 (bikes are surprisingly expensive), and it last three years, that is a decent profit, but nothing spectacular.
3. I do not think that Russ has posed a car rental price that approximates the average. If a car rented for $20 a day, then even if it were utilized 350 days out of the year it would bring in just $7000. That might not even cover depreciation.
Instead, my guess is that the average rental rate is closer to three times that. The occasional bargain rates are a tool that rental car companies use to keep utilization rates high. By the same token, the same bike rental place that charges $10 for an hour will charge just $40 for a full day, because that reduces the idle time of the bike and the labor cost per customer. Price discrimination explains everything. Russ is citing the low side of price discrimination in car rentals and the high side of price discrimination in bike rentals.
4. I think that car rental companies are able to negotiate better prices on fleet purchases than bike rental stores can. Car rental companies make up a bigger portion of overall demand, and the car rental industry is more concentrated.
Suppose that the car rental company gets a car for $32,000 that retails for $35,000. If the car’s value in the used car market drops to $25,000 after one year, the car rental company sees depreciation of only $7,000.
Overall, I think that the most important relative cost factor is (2). The next most important factor probably is (4), followed by (1). What I am suggesting in (3) is that price discrimination explains the difference in the extreme prices Russ is citing–my conjecture i s that average price differences are lower than the ones he posed.
READER COMMENTS
Corey
Jul 23 2012 at 5:32pm
When I travel to the UK (outside of London) for business, I rent a bicycle as opposed to renting a car. The cost is usually phenomenally cheaper (maybe around 8 pounds a day). This lends evidence to point #2 – since Brits cycle in all seasons and all weather, bike rentals are not a seasonal or weekend business there.
Maurile
Jul 23 2012 at 6:47pm
This is answered on pages 39-40 of Robert Frank’s The Economic Naturalist (2007).
He discusses cars versus tuxedos instead of cars versus bikes, but the principles are the same.
National rental car companies negotiate deep discounts from manufacturers, and can sell a car after two years for 75% of what they paid for it. The market for used bikes is not comparable.
A substantial portion of a rental car company’s fleet goes out every day, while bikes are rented mostly on weekends. Most rental bikes sit idle during the week.
Finally, rental car companies collect significantly more than their advertised rates due to add-ons. They make plenty of money selling insurance and gasoline, for example.
Joe Cushing
Jul 23 2012 at 6:48pm
Bikes are very simple machines. I’m sure even a heavily used bike would last longer than 3 years. They probably last many times longer than rental cars. Bikes are usually made out of materials that won’t rust or corrode too.
Peter H
Jul 23 2012 at 7:02pm
I think your problem is that you’re misstating the price of renting a bike. It’s much cheaper than renting a car when it’s being done by a rental agency which has economies of scale.
In Montreal, you can rent a bike as part of a point-to-point automated system (called Bixi) for $7/day or $15/3 days or $80.50/yr for an unlimited use pass. These prices allow you unlimited use of the rental system for the time period, not just rental of a single bike, though each point-to-point ride is limited to 30 min before extra charges are added.
I challenge you to find me a rental service that will allow me unlimited car rentals for anything close to that price. The prices you’re seeing for rentals are probably in tourist locations where there is location-based rent-seeking driving up the price.
http://montreal.about.com/od/gettingaroundtown/a/public_bikes.htm
Ian B
Jul 23 2012 at 7:13pm
Just as with car rentals, there are different kinds of bike rental businesses.
There are parks that charge tourists $8/hr to ride around (see Washington Sailing Marina). The WSM has a relatively small fleet.
There are also cities that have large fleets with annual memberships + a near-zero hourly rate (see DC’s Capital Bikeshare).
The WSM has a manual process for renting a bike. You have to fill out a form and maybe leave an ID. Capital Bikeshare has an automated system for renting a bike. There are dozens of stations and virtually no staffers. You can buy an annual membership and pay hourly rental fees using a machine.
The WSM also has other, higher-revenue businesses: a couple restaurants, boat services, and boat slip rentals.
libfree
Jul 23 2012 at 7:45pm
$20 a day is very light for a rental car, probably closer to $30 for off airport rentals (where length of keep is higher). The longer vehicles are rented the cheaper they are because of reduced labor costs.
Depreciation is higher in higher mileage markets and increases the price of rental vehicles. Holding cost (Depreciation + interest + insurance) on the vehicle make up the greatest expense for rental car companies. That cost is significantly lower than $7000.00 a year, less than half that number. Wages are usually the second largest cost and those two numbers together usually come out somewhere around 40-50% of revenues.
Utilization is everything in the rental business. I know nothing about bikes, but I would assume that they have very low utilization rates. Rental car companies expect in excess of 80% utilization.
CC
Jul 23 2012 at 7:48pm
Hmmmm…. with Zipcar in Manhattan, I end up paying around $160/day to rent a compact car.
Who would’ve thought Manhattan is more expensive than other parts of the country?
Seriously though, where is Russ renting a car for under $20/day?
John David Galt
Jul 23 2012 at 8:59pm
I think you’ve left out an important factor. Judging by what I see in bike racks around town, any bicycle you let out of your sight away from your own home will likely be stripped, if not stolen whole, before you come back to use it again. Thus the loss rate in the bike rental business must be very high. (And demanding that renters repay the losses will probably mean you don’t get any renters.)
I seem to recall that some city in France tried offering subsidized low-cost bike rentals, and the outcome was the same — nearly all were stolen.
What this means in practical terms is that bikes are a practical means of transportation only among places that allow you to keep your bike with you and/or will store it under guard for you. Thus most use of bikes, both rented and owned, has or will die off.
libfree
Jul 23 2012 at 9:16pm
I was amazed at the cheap cost and the availability of bikes in Lyon, France. The people there had a very high opinion of them. I researched further when I got home and found that they experienced high rates of theft and vandalism. It was hard to verify how true this might be. I saw little to make me think that it was, but I was in some of the nicer areas.
Joe Cushing
Jul 23 2012 at 11:08pm
CC,
Wow $160 a day, you could lease a car for less than that per month sometimes.
ThomasL
Jul 24 2012 at 12:40am
Quick question because there is no bike rental where I am… are there normally multiple bike rental places within easy distance of each other? Are they for transit, or more for leisure, touring, etc?
I am going to suppose leisure/touring for the moment, and suggest a few things that could lead to imperfect competition:
A) If you are renting a bike, you probably want to ride it right there, on that particular park, bike path, nature preserve, or whatever. That limits my outside options.
B) Even if more than one rental place exists, it may be an annoyance or take a lot of time to walk to the next rental location, particularly if I do not know where it is or if the bikes will be any cheaper when I get there. If I wanted to walk around a lot, I don’t suppose I would be getting a bike in the first place. Similarly, there could be a hassle associated to bringing in any bike from the outside, whether owned or rented.
C) I probably only want it for an hour or two anyway, at a total expense of $10-20. A car is often rented for days at a much greater total expense. People often don’t work so hard to control prices when the total expense incurred is still below some mental threshold. I kind of frugal, so I would think about it, but certainly a smaller number of people think deeply before spending $10-20 than do at $50-100.
Ted Craig
Jul 24 2012 at 11:26am
4. They do get vehicles at a discounted rate. They also have a sophisticated disposal system when they rotate the vehicles out of service. Rental car companies only keep their vehicles for a couple of years and then either sell them back to the manufacturer or wholesale them to dealers and lower-tier rental companies. I doubt the market for second-hand bikes is as robust.
Bryan Willman
Jul 25 2012 at 1:02am
Rental car companies rent mostly normal, standard sorts of cars.
There is no such thing as a “standard” bicycle any more than there is a “standard” shirt. All of the rental bikes I’ve ever seen are (a) clunky and (b) kind of weird. In short, they’re bikes nobody would ever buy new for themselves, and for which the used market is surely zero.
The used market for 1st tier bicycles is very poor as well. They are almost never traded in, rather sold privately or to a special dealer in used bikes, and the depreciation is tremendous.
Bicycles have a relatively short practical range, so even those of us who love bikes can’t use them for many trips because it would just take too long. Thus, bike rentals are for short errands or for touristy activities. Cars are rented for a much wider variety of purposes.
Because of the theft issue, commuters almost always own their bikes and have safe places for them at both ends of the commute. Or they use hyper cheap bikes they got at some auction – often say $50 for a bike to keep until lost/stolen/abandoned. (After which it often gets auctioned off again.)
Ken
Jul 25 2012 at 10:27pm
Strange arguments from libertarians ( the focus is on costs).
By that logic, the government can do things cheaper because there is no profit included in ‘the cost’.
There’s little or no competition in bike rental and the market is too small to draw in competition.
I think the better question is ” how can car companies rent so cheaply?”. Answer: capitalism.
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