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Will Prepaid Reservations Catch On?

Prepaid reservations might be the new guaranteed reservations; though perfecting the model to balance customer service, utilization and profits is an enormous challenge.

February 5, 2014

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Somewhere along the line, airlines and hotels were able to implement industry-wide policies requiring customers to prepay for their flight or room and accept a financial penalty if they broke their reservations. The concept of guaranteed reservations never caught on in the car rental industry, despite the flare-ups of indignation and handwringing that things must change. Perhaps they never will.

But a funny thing happened along the way — the industry has recently seen some progress with prepaid reservations, a customer-friendly alternative to guaranteed reservations.

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The majors have had various forms of prepay in place for a few years, though this option is now front-and-center in their bookings process. The technology is in place on car rental systems and OTAs to allow franchises and independents to jump onboard.

CarRentals.com is now accepting credit card prepayment for a 10% discount. Advantage was doing $13.9 million in prepaid business in the 45 days preceding its bankruptcy filing. ACE now offers prepaid to its affiliates in every vehicle class. Look for another discount brand to begin offering prepaid reservations very soon.

Prepaid business is catching on, though still small as a percentage of overall revenue. How much can it grow?

One hurdle is perfecting the model, which entails constantly balancing utilization with the right rate discount to attract customers and still maintain a profit margin.

“Early data shows that a 5% discount is enough to get people to move,” says Kevin Stutz of ACE, even though the savings may only be a couple of dollars per day. “Other times it’s not. It’s a learning process to understand the breaking point by car class.”

Random checks of prepaid offerings from Hertz and Avis speak to the behind-the-scenes thought process. Discounts ranged from 7% to 15%, varying by car class and not necessarily increasing with rental rate. This suggests an adherence to the utilization of the particular class at a location.

Certainly, a situation of over-fleeting would be a reason to increase the discount, though some serious numbers need to be crunched to determine at what point it begins to erode profits.

Another issue is fraud. When a customer prepays for the entire rental through the Internet, counter procedures to verify the renter need to be extra stringent. Some companies state that the renter must use the booking credit card at the counter while others just ask renters to verify their identity.

Stutz says ACE was able to recover a car from a renter who used a stolen credit card to prepay for a convertible for 20 days. “When the police drove by the address that ACE had on file, this person had also rented a car from Enterprise,” he says. “It looked like they had a plan.”

“[Prepaid] adds a new dynamic when you’ve already taken the money upfront,” Stutz says. “For a lot of agents, it’s human to want to okay it, especially if the reservation is for a thousand dollars. You have to be more vigilant with policy.”

On the customer service end, the reason prepaid has a fighting chance is because it presents the customer with a money-saving opportunity. But careful consideration must be given to when the customer breaks the rules.

Stutz says that in the first months of prepaid, the company held fast to its cancellation policy. But the result was a customer service department that was spending too much time dealing with upset customers. ACE now offers a voucher toward a future rental if a customer cancels. The new ACE policy has resulted in a dramatic drop in complaints.

The Avis website states that customers will receive a full refund less $25 if they cancel more than six hours before your reservation. Those that don’t show up are charged $100. Hertz rules state: “Cancellation fees apply for prepaid reservations. No refunds or credits for unused rental days.”

The end game with prepaid reservations is to decrease no-show rates. And, at least in the case of ACE, this has generated the most compelling metrics. Stutz reports that the total no-show rate in the 24 months prior to launching prepaid on channels that would eventually participate in prepaid was 21%, while the combined no-show and cancellation rate was 38%. “It was not uncommon for ACE to observe a no-show rate in the 50% range in certain locations on certain channels,” Stutz says.

In the 24 months following the launch of prepaid, the total no-show rate declined to 11% — a 48% decrease — on those same channels. The combined no-show and cancellation rate dipped to 25%, or a 34% decline. Those numbers improved in 2013. Last year, 40% of the reservations had some form of collection on these channels, with a no-show rate of 5%, Stutz reports.

The car rental industry finally appears to be addressing the no-show problem with a customer-friendly initiative, though it remains to be seen how much this can grow.

The topic of prepaid reservations will be addressed at the 2014 Car Rental Show by a closing keynote panel that will address the issue from an operational, IT, OTA and GDS connectivity, revenue management, customer service and card policies perspective.

Comments

  1. 1. Carlos Flores [ February 06, 2014 @ 03:34PM ]

    The prepaid reservations benefits are undeniable. Kevin makes a good point about no- show control which improves forecasting and utilization. In addition to that prompt cash flow is also a key benefit. it takes discipline to educate the majority of customers to follow the same process like when booking a hotel room or buying an airline trip.

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Author Bio

Chris Brown

Executive Editor

Chris is the executive editor of Business Fleet Magazine and Auto Rental News. He covers all aspects of the fleet world.

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