How Profitable are Car Rental Businesses?
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If you are planning to start a car rental business, you may want to know how much profits you can make with this business. In other words, you must know how much revenue you must generate to reach break-even and make profits.
With a market size of $54.2 billion and 17,287 businesses in the US, the average car rental company has an annual turnover of $3,120,000..!
What does this mean for your business? How much revenues can you expect to generate? More importantly: how much profits can you realistically make with a car rental business?
In this article we’ll look into the average revenues and profit margins of car rental companies in the US. We’ll also look into how you can accurately forecast your turnover and break-even point. Let’s dive in!
What is the average turnover of a car rental business?
As explained just now, the average turnover for a car rental business comes down to $3 million a year. That’s simple math: a $54.2 billion market size divided by 17,287 businesses.
However, that’s an average value and you must understand that larger companies earn more.
Sales vary significantly from one shop to another. It mostly depends on the fleet size, the number of hours for which the cars are provided for rent in a year, and the types of cars provided for rental (e.g. economy vs. premium cars).
What is the average profit margin for a car rental business?
Car rental companies have rather low profit margins on average. Even large companies like Hertz consistently had net profit margins of around 0% to 5%. This is due to a number of factors: competition, high variable & fixed costs, etc.
We have identified car rental companies can reach net profit margins of around 5% to 10% for the most profitable businesses (see more on that below). Let’s now have a look at how much exactly it costs to run a car rental business.
How much does it cost to run a car rental business?
There are certain recurring costs involved in running a car rental business and they include:
- Rent: You must pay rent for the yard where you will be housing your car fleet
- Fleet maintenance: You must keep servicing your car fleet every month to ensure that they stay functional and profitable
- Staff salary: To maintain your fleet of cars you will need employees and you must pay salaries to them
- Marketing: You must spend on marketing and advertising your business for acquiring new customers
- Utility bills: You must pay for electricity, water, gas, internet, etc., that you will use to run your business effectively
In general, it costs between $53,500 and $62,500 per month to run a small car rental business with 30 vehicles in the US. For more information on how much it costs to run a car rental business, read our article here.
See below the example of a sales to net profit cost breakdown for a car rental company with $3,600,000 sales per year (~10% net profit).
As you can see, D&A expenses are with salaries the most important expense category for such businesses. It doesn’t mean these businesses generates high cash flow either: they most likely use the vast majority of this cash to repay the loan they took to acquire the vehicles.
How to forecast profits for a car rental company?
In order to calculate profits for a car rental company, you must first forecast revenues and expenses.
Profits = Revenue – Expenses
Forecasting revenue for car rental businesses
Forecasting sales for such a business requires a few assumptions:
- the number of vehicles
- the average price per rental
- the utilization rate (how often a vehicle is rented)
For example, we can forecast the turnover of a car rental business as follows:
Revenue = Vehicles x Utilization rate x Average price per rental
For example, if you have 50 vehicles, used 50% of the time and at an average rate of $100 per day per vehicle, monthly revenue is ~$75,000.
For more information on how to build financial forecasts for a car rental business, read our article here.
Forecasting expenses for car rental businesses
There are 2 types of expenses for a car rental business:
- Variable expenses: these are the COGS as explained earlier. They grow in line with your revenue: if your turnover increases by 10%, variable expenses grow by 10% as well
- Fixed expenses: salaries, rent, debt interest (or leasing) costs to acquire the vehicles, marketing and all the other operating costs listed above
Calculating profits for car rental businesses
When we refer to profits, we usually refer to EBITDA (Earnings before interests, taxes, depreciation and amortization) as it represents the core profitability of the business, excluding things such as debt interests, non cash expenses and other non-core expenses.
In order to get to EBITDA, we use the following formula:
EBITDA = Revenue – COGS – Operating Expenses
We’ve included below the illustrative profit-and-loss of a car rental business (from our financial model template for car rental businesses).
Whilst EBITDA margin is about 45-55% at scale depending on the business, net profit margin can go up to 10% for the most profitable businesses (in line with the industry averages discussed above).
How to calculate break-even for a car rental business?
Break-even is the point at which total costs and total revenue are equal. In other words, the breakeven point is the amount of revenue you must generate to turn a profit.
Because you must at least cover all fixed costs (that aren’t a function of revenue) to turn a profit, the break-even point is at least superior to the sum of your fixed costs.
Yet, you also need to spend a certain amount for every $1 of sales to pay for the variable costs.
As we just saw, car rental businesses typically have a ~80% gross margins. Indeed, most expenses actually are fixed costs (salaries, D&A, marketing, etc.).
The break-even point can easily be obtained by using the following formula:
Break-even point = Fixed costs / Gross margin
Using the same example earlier, let’s assume your car rental company makes $75,000 in turnover per month and has the following cost structure:
|Operating cost||Fixed vs. variable cost||Amount (per month)|
|Fleet maintenance||Variable cost||$15,000|
|Utility bills||Fixed cost||$3,000|
The break-even point would then be:
Break-even point = Fixed costs / Gross margin %
= $49,000 / 90% = ~$61,000
In other words, you need to make at least $61,000 in sales per month to turn a profit. Assuming the average price per rental is $100 per day, and the average rental is 3 days, your break-even is ~200 car rentals per month (4 rentals per car per month on average).
How to increase profits for a car rental business?
There are various strategies to increase the profits of a car rental business such as:
- Loyalty programs: They tend to increase customer loyalty and increase the customer lifetime value
- Corporate clients: Get corporate clients who require cars for business trips or cars for incoming business associates
- Marketplaces: Register with car rental marketplaces to increase bookings through those websites
- Customer service: Improve your customer service and offer excellent service so that customers keep returning
- Arrange driving & safety campaigns: Arrange driving and safety campaigns for the local community to spread awareness about safe driving and road accidents. You can also teach people to drive. These steps can increase awareness
- Organize automotive events: Organize automotive events and invite automobile companies, dealers, and customers to establish brand awareness
- Offer discounts: Occasional promotions and discounts can help to attract new customers and retain existing customers
- Mobile app: Develop a mobile app to let people book cars from your company directly from their mobile phones
- Digital marketing: Spend on digital marketing such as social media marketing, search engine marketing, etc. Have your business listed in Google My Business