Is a car rental business profitable?

Despite the negative impact of the COVID-19 pandemic on the global economy, many business sectors have shown stable growth since 2021. The car rental industry is no exception. The sheer number of companies providing car rental services is growing annually in different regions of the world, revenues are increasing and consumers are showing a rising interest in such services. Currently, the car rental industry is one of the most dynamic and rapidly growing service industries.

The demand for vehicle hire is rapidly increasing in major cities and tourist regions due to the recovery of the tourism industry and the increasing mobility of the population.

In big cities, residents are increasingly opting to rent vehicles instead of buying their own due to the cost-effectiveness of renting compared to saving or lending a significant amount of money to purchase a car. Renting a car can help you avoid the regular financial costs and hassles associated with parking, refuelling, maintenance, and car insurance.

These factors contribute to the growing potential of the car rental business, which can open up a wide range of opportunities for entrepreneurs to increase profits and develop their own brand of vehicle rental service. However, success in this industry requires careful consideration of market conditions. This article explains how to develop a profitable strategy in the vehicle rental industry.

Market research

In 2023, the global car rental market reached nearly $82 billion in sheer volume. IMARC Group forecasts suggest that this figure could rise to $105 billion by 2032, with a compound annual increase of 2.7 percent. This market is growing steadily and dynamically, driven by several major factors. Here are some trends to consider if you want to create a successful car hire business:

1. Increasing demand. The middle class is developing among the population in different countries, and there is a growing need for flexible, cost-effective and short-term car ownership options that would provide customers with more mobility and independence.
2. Technological advancements. Scientific advancements, introduction of innovative technologies, development of GPS systems, mobile applications, cloud services and dedicated car rental software have fuelled the rapid development of the industry. They help to improve service quality, optimise business operations and increase profitability.
3. Interaction with other business sectors. The opportunity to rent a car is of great benefit not only to individuals, but also to companies from different business sectors: they rent cars for tourism, business trips, freight transport and other purposes.
4. Global urbanisation. The number of urban population is dynamically increasing, cities are scaling up, forming megacities and agglomerations. This leads to a steady increase in demand for various types of short-term car hire, including carsharing.
5. Increased competition. Due to the rising number of players in the market, car rental companies are fuelling even more dynamic development of the industry. Car rental services are introducing new car rental formats, using artificial intelligence capabilities, offering customers additional services, bonuses and benefits.
6. Environmental factor. In recent decades, both consumers and companies are paying more and more attention to the environmental impact of business. The number of electric cars is growing, carsharing is reducing carbon emissions, and businesses are increasingly adopting sustainable practices in their operations.

These factors, combined with the rise of subscription-based car rental models, the focus on contactless rental services, and the improving capabilities of online booking platforms, are driving the growth of the car rental industry.

Sources of income

Profitability is a key measure of success for any enterprise. In the automotive propane industry, companies can generate income from multiple sources simultaneously.

Undoubtedly, the primary source of revenue is the fee paid by customers for car rental. The rate of this fee depends on the type of rental, its duration, the class and brand of car rented and other factors. For instance, in the short-term rental or car-sharing model, the fee is frequently charged per hour or per day of car use, while long-term rentals are more likely to charge per week, month, or even year of rental.

Meanwhile, subscription-based car rentals are becoming increasingly popular. Customers can use the car at any time during the subscription period, and companies can also profit from additional fees charged on top of the rental fee. For instance, customers may pay extra for fuel, exceeding a set mileage limit, or failing to return the car on time after the rental period ends.

Additional services can significantly increase the cost of the rental for customers. For instance, clients can request a GPS navigation system, satellite radio, a child car seat, or car decorations for a solemn event for an extra fee. Car rental companies also profit from partnerships with other companies, such as hotels, restaurants, travel agencies, airports, taxi, or courier services.

Insurance packages can be a source of profit for car rental services. When paid for, the customer is protected against any unforeseen losses related to damage to the rented car. Income from insurance can make up a significant share of the company’s total profit. Additionally, dynamically developing companies often renew their car fleet and can get additional profit by selling outdated cars. Plus, companies can integrate fleet electrification into their strategy to enhance profitability and provide environmental benefits, while also appealing to eco-conscious customers.

Car rental companies often use specialised software to carefully control all of their revenues. For instance, Rentsyst’s software helps to maintain documentation, invoicing, order tracking, and payment acceptance in one convenient system. This enables the company to track, optimise, and increase its budget.

Cost structure

The net profit of a business is directly dependent on its expenses. Therefore, it is crucial to anticipate and calculate these expenses during the business planning stage. This will enable the business to forecast potential earnings, avoid unforeseen expenses, and optimise the budget to meet the actual needs of the business.

The following expenses should be considered in the expenditure structure:

• Setting up a company — the costs include conducting quality market research, creating a detailed business strategy, registering the company, obtaining all necessary permits and other documents required by the legislation of the country in which you intend to launch your car rental business.
• Vehicle purchase is a significant expense for any car rental company. The number and type of vehicles in the fleet depends on your budget, target audience, number of potential customers and projected demand.
• Vehicle maintenance — these are operational costs that relate to vehicle registration and insurance, as well as regular vehicle inspections, repairs, refuelling, washing and dry cleaning. Being aware of blown engine symptoms can help rental businesses avoid costly repairs and maintain their fleet more effectively.
• Staffing costs — your budget should also include the cost of maintaining a staff of employees, including salaries, necessary equipment, office furniture and miscellaneous administrative costs.
• Advertising and marketing — an important part of your cost structure to help promote your business, build brand awareness and attract new customers. You can set up an in-house marketing department or contract with an advertising agency that has experience and expertise in promoting car hire services.
• Renting premises — you will need to purchase or rent office space for your staff to work in, as well as budget for parking or a separate car park for your fleet.

When planning expenses, it is important to optimise expenditure in order to spend less without compromising the quality of the service. A dedicated car rental system can also help you with this task.

Many developers offer multi-functional customised software to suit your business needs. For instance, software products from Rentsyst, Easy Rent, HQ Rental Software, and other companies are currently in demand on the market.

Profitability factors

In addition to income and expenses, several additional major factors affect the profitability of a business. Here are some of them:

1. External factors. The economic situation in the region, market trends, seasonal fluctuations in demand, peculiarities of local legislation, as well as other external factors can affect the success of the business and its profitability, and therefore they should be taken into account by car rental companies.
2. Business strategy. It is very important to take into consideration all the details at the planning stage: conduct market research, form a portrait of the target audience, detail the company’s budget, regularly monitor the activities of competitors and develop a successful marketing strategy. All this will help to avoid financial losses and increase profitability.
3. Location. Features of the region, country and even the city in which the car rental service operates, play a key role in the profitability of the car rental business. Moreover, it is also relevant exactly where the car rental car parks are located, as this determines the demand for car rental services and the availability of the service.
4. Quality of service. Obviously, good service attracts more potential customers and helps retain their brand loyalty. It is important to provide consumers with flexibility in the choice of cars and payment methods, promptly respond to feedback, provide additional services, expand the loyalty programme in order to meet the demands of the target audience and receive consistently high profits.
5. Online technologies. The use of mobile applications, online booking platforms and cloud technologies directly affects the profitability of car rental services. Companies such as Rentsyst help create personalised software to manage, control, optimise and increase the revenue of a car rental business.
6. Analytics. The market situation, as well as customer needs, can change quite dynamically. That is why you need to constantly monitor and analyse statistics on key parameters in order to adapt to changes and stay competitive.

Conclusion

The car rental market has been steadily growing in recent years. Starting a business in this area can yield substantial profit. To achieve success, a car rental company needs to analyse the market in depth, taking into account all potential costs and revenues.

Tracking statistics and analytics, implementing a quality marketing strategy, and regularly improving service quality can also increase profitability. Modern technologies, including mobile applications, online booking platforms, and specialised software for managing car rentals, are gaining ever increasing levels of relevance.