Why Charge More for a Pre-Paid Rental Car?

A reader named Gerald Andriole writes in with a small but interesting puzzle:

I’m a student at Georgetown working on a project about the rental-car industry and came across the attached pricing structure on Budget’s website. I don’t understand why they would charge a prospective renter more to pay right now than if payment was delayed until picking up the car. This seems to go against every bit of the time value of money theories drilled into me. One possibility I can think of is Budget knows corporate renters have to pay with company funds when making the arrangement, but I’m not too comfortable with that explanation.


Here’s what the offer looked like, with three of the four options cheaper at the counter than in advance:

DESCRIPTIONSee something strange in this picture?

I cannot think of a satisfactory answer either, other than perhaps that pre-paying guarantees you a car on site, and so if the company cannot fulfill your reservation (as we all know sometimes happens), it cannot be held liable. But that’s not a very satisfactory answer either.

I suggested that Gerald contact Budget directly to ask about this pricing riddle. The reply wasn’t very useful:

From: Budget Customer Service
Date: Tue, Nov 30, 2010 at 4:34 PM
Subject: Re: Car Reservation Questions (KMM3597611V28190L0KM)
To: Geraldandriole@xxxxxxxxx.com

Dear Mr. Andriole,

Thank you for contacting the E-mail Customer Service team, I apologize
for the delay in responding to your email inquiry.

I am sorry for any concerns in this matter. This is not an error on the
web site’s part as the “Offer Codes” section states “you may save”. To
some people it is an advantage to prepay for their rental in advance and
to some they prefer to pay at the location.

If we can be of further assistance, please let us know.

Tena Klamm
Budget Customer Service
Fax: xxx-xxx-xxxx

Can anyone explain this puzzle?


Ben Sauer

Theory: pre-paying customers are much less willing to be upsold services. So to discourage pre-paying they make it more expensive?

Mike Fuellbrandt

Never attribute to malice that which is adequately explained by stupidity.
- Hanlon's razor

Greg

That's easy.... It's because if u pay in afvance they won't be as able to sell u all the extras at the counter which is where all the profit is...

Mihir S.

Wow...it seems that was a mistake. They've changed it on their site: 'Pay Now' option is cheaper than 'Pay at Counter'.

Seems like Budget Customer Service guys had no idea what they were talking about in that email. :)

Justin

A bigger riddle is why we continue to give our money to companies who seem to value our time and interest so low that they can't bother to have their employees actually answer questions instead of just copy & pasting crappy canned answers that obviously don't even really apply to the question being asked.

Rick

It's a kind of premium service; the people who prepay can avoid standing in line at the counter.

flymoon

saves you time?

Joel Schwartz

I wonder if they know that people are more likely to get upgrades at the counter than they are on the website. By agreeing to pay at the counter, you open yourself up to the forceful persuasion in person that you wouldn't face from the website. Knowing that people are more likely to relent and get the upgrades at the counter, they can make you think you'll pay less by paying at the counter.

I think the question is if having to be badgered with the sales pitch for upgrades is worth the amount you save by paying at the counter.

AaronS

It is almost certainly a premium paid for a guarantee that your rental WILL be in stock. You can pay now and KNOW you'll have a car (or even an upgraded car)...or you can pay at the counter IF the car if available.

That is the only valid reason I can think of. You are basically paying carrying charges (i.e., the rental company does not rent out that car--or ensures that it or a better one is on hand--in order to fulfill your order).

Consider this: If you go to a musical and take the chance of paying at the door, you pay more than if you purchase in advance. BUT if they are out of tickets you may have to resort to buying scalped tickets at a premium.

Basically the rental company is selling you a scalped ticket in advance, hoping you will not want to risk showing up and finding that there are "no more tickets," er, Toyotas.

At least that's how I see it.

mbstone

Mr. Andriole has stumbled upon one of the eternal secrets of the IT business. Budget wanted one of those newfangled dynamic-pricing-model web sites where the price that you are quoted depends on the web site's reading the 296 cookies stored on your computer, and then factoring in your shoe size, Zip code and FICO score to determine what you are willing to pay for a rent-a-car (and, of course, whether you are spending your own money or someone else's). Budget's IT department evidently received a specification for such a web site, concluded management was nuts, and came up with a workaround. The site would be programmed to charge all comers $65/day + $10 per car class upgrade, plus or minus a number chosen by a random number generator. This is how Dynamic Pricing is implemented in the real world.

Andy O.

I just went to Budget's site and was taken to a page that told me I could save up to 35% by paying now. It seems that they are doing some pricing experiments.

Matthew

They don't expect anyone to pre-pay, but by providing that option it makes the pay at counter option seem like a better deal so you are more likely to sign up and stop comparison shopping because you feel like you are getting a deal just from their site.

Brian

I would guess that you are more likely to add on options (insurance, fuel, etc.) if you pay at the counter. If the average revenue per transaction is lower for prepays than for counter pays; so Budget increases the price of prepays to compensate / dissuade users from prepaying.

Turbo

I would wager it's a function of inventory, which is why when you price cars online you sometimes see cheaper rates for bigger cars. I think as they yield manage their inventory, the smallest cars - the most popular - are units they may likely move for higher average rates by closer-in bookers. In order to keep that inventory of smaller cars higher in order to win those higher average bookings, you can put price controls in place that will move the "pre-paid" bucket prices up higher. That pricing shifts pre-paid demand to bigger cars, while keeping the inventory of smaller cars available for more last-minute books. It may also be an unintentional pricing metric - like airlines, rental car companies know that even slight differences in prices through GDS services will actually move business one way or another. The "pre-paid" bucket probably doesn't show up on GDS comparisons, and may be behind some of the pricing quirks here. Shorter answer: It's yield management at work. :)

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kevin

Could it be because they have various options to sell at the counter (GPS, insurance etc...) and they are more likely to convince people to purchase those high-margin upgrades if the person has to go to the counter and pull out their card?

Steve

Assuming this is not an pricing algorithm gone wrong, I can see two possibilities: 1. a counterintuitive and ingenious price discrimination scheme OR 2. an inventory pooling method allowing a lower price at the counter along with the chance that you drive a yugo for the day. Someone in the industry would probably know why this is happening though as it probably has to do with an odd nuance we aren't taking into account.

Swashbuckler

One possibility: I know in my group at work if we have extra money at the end of quarter we try to prepay travel for the next quarter so we use the funds and don't lose them. In that scenario we aren't as price sensitive as at other times because we have extra money.

If prepaying for this reason is common perhaps the rental car company is taking advantage of that.

Kuwaiti

What I think of as an explanation for this issue is the following. When the customer pre-pays for an "x" model car, the rental company is responsible for providing the "x" model car for the customer based on his reservation. Therefore there is a possibility of costs caused by the loss of rental time that could have been gained from renting the same "x" model during the time period between booking and pick up time.

Edward Howl

It looks like a 'convenience charge'. Though I would believe that it is far more convenient for a company to process orders online (instead of wasting man-hours to interact with customers and process payments), there is generally a charge passed on from the processing company.

Since they are paying the employee anyway, it is no loss to the company to have you come in so that they can avoid that online processing fee.

I would like to assume this to mean that the employees (at least the ones arranging rentals and processing payments) are under-worked. If there was a constant line out the door you could bet your shiniest nickle that the online price would be substantially lower.

Eileen Wyatt

Does using the "pay now" option change the pick-up procedure -- for instance, by allowing the renter to print key documents at home (like Southwest does with boarding passes) and go straight to the car lot upon arriving at the destination? That might justify a small premium.