Behind the Zipcar-Flexcar Merger

The two leaders in the car-sharing business, Zipcar and Flexcar, are merging, in what looks very much like an acquisition of the latter by the former: the Flexcar name is disappearing, while the Zipcar CEO and headquarters are remaining in place. If Zipcar is smart, however, they'll import Flexcar's customer service team, since having happy customers should be their biggest goal moving forwards.

This is a natural merger, for many reasons. For one thing, while both have a pretty large footprint, they only actually compete directly in two markets, Washington DC and San Francisco: the two companies are naturally complements rather than competitors. Meanwhile, real competition, from the estabished car-rental giants, is heating up: Enterprise, Hertz, and U-Haul are all now offering hourly rentals. And on top of that there's a whole raft of non-profits such as City Car Share in San Francisco, Philly Car Share, and I-Go in Chicago, eating into the for-profit business model, which means that Zipcar and Flexcar need to get economies of scale as quickly as they can.

One very positive effect of the merger is that Zipcar will take on Flexcar's insurance plan. The official Zipcar announcement is a bit disingenuous on this point:

One benefit that goes along with being a bigger company is we have more leverage when it comes to working with third parties—like insurance companies. So we're happy to tell you that beginning November 1, 2007, for Zipcar members 21 years of age or older, our insurance coverage consists of a combined single limit of $300,000 per accident.

In fact, this has nothing to do with being a bigger company and everything to do with the fact that Zipcar's insurance situation was by far the worst in the industry – a fact they tried to bury as deep as possible. (See old blog entries of mine here, here, and here, for much, much more on this.)

Going forwards, Zipcar will no longer have the problem that its customers feel betrayed whenever they find out the truth about its insurance offering. That's important, because as the big car rental companies start getting in on the game, it starts becoming necessary for the incumbent companies to they build and maintain their present feeling of being a car-sharing community, rather than a big company providing a service. Flexcar and the non-profits have been doing that all along, offering generous insurance packages and responsive and helpful customer support. Zipcar, by contrast, was much more opaque, and generally unloved on internet message boards: it needed to work on its reputation, and its customer-friendliness. It's not enough to just be green any more, since any car-sharing company is as green as the next.

The moral of this story, then, is that a company with a great product can grow fast while staying unloved if it doesn't have much competition. But when the competitive landscape changes, the company has to change as well. Just ask the big US airlines, or Detroit's carmakers.

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