Do you ever wonder how car rental companies make money? It seems like a pretty simple process – you rent a car, you drive it and then you return it. And they charge you for the rental.
But in reality, the car rental business model is more complex than that and car rental companies need to be very strategic about how they operate to have a sustainable and profitable business.
So, how do car rental companies make money?
There are, in fact, several ways with which rental car companies can make money from customers. In this article, we’ll review the 5 most common ones.
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How Do Car Rental Companies Make Money?
People rent cars for a variety of reasons. Some people need a car to get around while their own car is in the shop. Others may be going on a road trip or vacation and need a car for a week or two.
Either way car renters present car rental companies with different options with which to make money. So how do car rental companies make money?
Here are the 5 most common ways in which can rental companies make money from customers:
- By Charging for the Rental Itself
- By Charging for Insurance
- By Charging for Mileage and Fuel
- By Charging for Additional Drivers
- By Charging for Extras like a child seat or GPS device
Let’s now look closely at each of these different ways in which a car rental company makes money.
#1. By Charging for the Rental Itself
Car rental companies make money in several ways, but the primary way is by charging for the rental itself. This could be in the form of a daily or weekly rate.
Some companies also charge extra fees for things like late returns or drop-offs outside of normal business hours.
In general, the longer you rent a car, the more it will cost. Car rental companies that charge higher rental fees typically include extra charges in their total rate.
While the base rental rate may seem like a small amount of money, it can quickly add up when you factor in all other extras mentioned below.
Likewise, the model and size of the car you rent will also affect how much you pay. A luxury car will cost more to rent than a small economy car.
Some rental companies also offer discounts for online bookings, advance payments, or for renting during off-peak periods.
#2. By Charging for Insurance
One of the most common ways how car rental companies make money is by charging for insurance. Insurance can be a necessary evil when it comes to renting a car, but it can also be quite expensive.
So, how do car rental companies make money off of insurance? Either they take a set rate for their insurance as part of the total cost or they charge an additional fee per day or per week.
The trick with insurance is the coverage – what it covers and what it doesn’t. For instance, the insurance may have a deductible that you would have to pay in the event of an accident. Or the insurance may not cover certain types of damages, like those to the tires or undercarriage.
And so not only do car rental companies charge for the insurance they also make money when the insurance turns out to be inadequate to cover all the damages.
#3. By Charging for Mileage and Fuel
Charging for mileage refers to how much distance you can drive the car during the rental period. Most car rental companies have a set number of miles or kilometers that you’re allowed to drive for free.
After that, they charge an additional fee per mile or kilometer driven. This is how car rental companies make money on customers who exceed the free mileage limit.
The other way how car rental companies make money is by charging for fuel. In most cases, when you rent a car, it will come with a full tank of gas.
But when you return the car, the rental company will charge you for the fuel that you’ve used. The price per gallon or liter is usually higher than what you would pay at a gas station.
And so, even if you only use a small amount of fuel, the rental company still makes quite a bit of money.
This is one of the reasons why many customers opt for an unlimited mileage plan (if one exists) and always fill up before returning the car.
#4. By Charging for Additional Drivers
Car rental companies make money by charging for additional drivers. This is because each driver presents an additional risk to the company, and thus the company must charge more to cover this risk.
Furthermore, some companies will charge more for young or inexperienced drivers. They may also have restrictions on who can drive the car – such as a requirement that the driver is at least 25 years old.
A car rental company might also have a surcharge for under-25 drivers due to their inexperience and higher accident rates.
#5. By Charging for Extras like a child seat or GPS device
Most car rental companies make the majority of their money by charging for extras. These extras can include things like a child seat, GPS device, late returns, or mileage.
While some of these items may be required by law, others are simply nice-to-haves that can make your trip more enjoyable. Either way, car rental companies typically mark up the price of these items by a significant amount.
So, it’s important to be aware of what you’re being charged for. For example, if you’ll be driving with a kid in the car and you ask for a child seat, then expect to pay extra on top of the rental fee.
Conclusion
So how do car rental companies make money? In this article, we discussed 5 different income sources for car rental companies.
The most obvious of these is charging for the rental itself. The rate varies based on region, the type of car, and the duration of the rental.
Next comes charging for insurance which all car renters are required to purchase. Many car rental companies will offer upgrades to full insurance which covers most risks. This gives renters peace of mind but also earns car rental companies more money.
Car rental companies also earn money by charging for mileage and fuel, charging for additional drivers, and charging for extras like a child seat or a GPS device.
