PRODUCT LIFE AND AUTO RENTAL SALES Samuel K Moak Virginia by eddie22


Samuel K. Moak, Virginia State University J. LaFayette Toles, Virginia State University John Tsalikis, Virginia State University ABSTRACT This paper presents a statistical relationship between the change in product life and auto rental business. There is a significant negative correlation between the product life and the rental sales of automobiles in the Ugly Duckling Rent-A-Car in the city of Petersburg. As the product life of new automobiles used by the rental manager becomes shorter, the consumers tend to lease the automobile more. This study implies that the rental business in general will increase as the business competition and population expand in the economy. The shorter life span also implies that the price of most products will rise, as production cost and initial investment tend to be heavy. Non-price competition is also intensified in the rental business. INTRODUCTION The subject of services marketing has received increasing attention among academicians as well as the business community in recent times. This is rightly so, because our society is becoming a service-oriented economy. This is obvious in the employment pattern where nine out of every ten new jobs created in the economy are engaged in the service sector. A large portion of our personal expenditures is composed of spending for services. Rising average family income with the complexity of economic life and more leisure time have generated a greater demand for services in our economy [12]. Services marketing is diverse and complex in its structure and management. It includes a wide range of activities from medical and tax services to rental businesses of every stripe [2]. Service markets are characterized by intangibility and perishability of their products, inseparability between production and consumption, and heterogeneity [5] [10]. It may require a different marketing strategy tailored to meet the need of each marketing variable. The traditional marketing strategy may not be applied to the service sectors of our economy, as they are highly specialized in their field as well as more subjective in the decision-making process [9]. This emphasis on services marketing becomes even more important as we consider the international trade where a growing volume of export is composed of services [14]. The purpose of this paper is to ascertain a relationship between the change in product life and auto rental business. The auto rental activity is a part of services marketing. Every product goes through the life stages such as market introduction, market expansion, market maturity, and eventually declining stage of its products. It is generally accepted that the product life has become shorter over the years, as the rate of technological change has been accelerated in our economy [6] [7]. The competitive nature of our business environment has also shortened the life span of many products [3]. International competition has fueled pressure for producing new and better products for consumers.

This pressure is particularly conspicuous in highly technological products such as computers, electronics, military hardware, space and medical technology, as well as household appliances [13]. Likewise, in the field of auto rental business, managers tend to change the products as new and better products become available to them for renting. In the case of automobile rental business, the produce life can be measured by the number of months the new automobile has been used by managers for rental purpose. As expected, the time the automobile is used for rental purpose has declined over the years. Price competition in auto rental firms tends to be quite stiff, since they offer essentially the same service to customers. Many auto rental firms face a difficult problem of demonstrating dependability and creativity in management. Therefore, firms have attempted to overcome this difficulty by price cutting, such as offering low introductory rates to new customers [8]. However, the new models of automobiles used for renting can provide some degree of dependability of service in the auto renting company. Consumers tend to place a greater confidence in new automobiles than in old ones. New models for automobile renting tend to enhance the image of the rental company, as it represents a better service to the customers. A good image of service is even more important to a rental company than to a company that sells tangible products. Non-price competition becomes intensified in rental firms [4]. New models with comfort and dependability are of critical importance to the customers, as the auto rental business is personal service marketing. Consumers tend to choose a rental company on the basis of good image and reputation, as most customers use rental vehicles infrequently [11]. Because of the cost-oriented pricing strategies of most auto rental companies, the rental companies attempt to adopt a low contact system to minimize personnel and office costs [1]. Auto rental companies emphasize using marketing strategies designed to meet low contact personal strategies, as it is more economical. For example, automated rental procedures with a minimum personal contact can be considered in its management. A few past studies include research work on the characteristics and behavior of the product life cycle, consumers' attitude toward product and marketing strategies [13]. However, no previous study has been published concerning a relationship between the product life and the auto rental activities. Therefore, this study should be not only useful to many local marketing managers, but also applicable to many small towns, similar to Petersburg in size and demographic characteristics. The main hypothesis of this study is that the car rental sales increases significantly when the product life decreases. The statistical methodology of this study is first examined. STATISTICAL FRAMEWORK AND RESULTS This study is based on primary data obtained from a local rental automobile firm, Ugly Duckling Rent-A-Car, Petersburg, Virginia. The product life is measured by the duration (months) of new automobiles used by this firm. The dependent (rental sales) and independent variables (product life, population, income) were obtained from the Ugly

Duckling Rent-A-Car for the period of 1974 through 1985, as shown in Table 1. The rental sales and household median income have been adjusted by the Consumer Price Index published by the U.S. Department of Labor to obtain the real values. Multivariate regression techniques were used to estimate the equation for the rental sales of Ugly Duckling Rent-A-Car in the City of Petersburg, Virginia. The general expression used for predicting Y, rental sales of automobiles were Y(i)= b(o) + b(i)X(l)(j) + b(2) x(2)(j) + b(3)X(3)(j) + u(j) Where there are three independent variables (product life, population, and household median income) as described above, with 12 observations of each associated with an observed value of the independent variable Y. Thus, i(th)= 1, 2, n; bi is the coefficient of the ith independent variable; Y i is the ith independent variable. In this equation, uj is a random component assumed to be normally distributed with the mean at zero and the variance at 2/a. In all sampled cases, all available data were used, and no attempt was made to determine whether some subset might be found essentially equal to the predictive value of the full set. Hence, each regression coefficient in any given equation is understood to be adjusted for all intercorrelations among the independent variables in that set. TABLE 1. Rental Sales, Ugly Duckling Rent-A-Car, Petersburg,Virginia Years 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 Rental Sales* $ 75,650 84,243 96,884 105,781 114,865 121,376 130,249 148,408 171,084 194,005 210,981 234,716 Product Life Population 4.0 3.8 3.6 3.4 3.2 3.2 2.9 2.8 2.7 2.6 2.5 2.4 38,103 38,500 39,103 39,603 40,103 40,503 41,055 41,050 41,034 41,030 41,000 41,000 Household Median Income* $11,036 12,073 13,376 14,118 15,044 15,471 16,435 13,040 22,066 24,200 26,317 285,459

*These figures are deflated by Consumer Price Index.

Sources: U.S. Bureau of the Census, General Population Characteristics, Vol, Part 48 (Washington, D.C.: Government Printing Office, 1982). p. B-1. Knapp, John L. and Cox, Robert W., Median Family and Median Household Income in Virginia's Counties, Cities, MSAs, and Planning Districts. Taylor Murphy Institute, University of Virginia (Charlottesville, Virginia). 1986. U.S. Department of Labor. Monthly Report on Consumer Price Index. Bureau of Labor Statistics. 1974-1986. Table 2 presents the results of the rental sales equation. The coefficient of multiple determination (R2) resulting from the equation for the Ugly Duckling Rent-A-Car is 0.99434 with F being 233.572, which is significant at the 99 percent probability level. The product life of renting automobiles is negatively and significantly correlated with the rental sales. As the product life decreases, the rental sales increases significantly. As noted, the population in the City of Petersburg has slightly decreased in recent years. The population in the city of Petersburg is negatively correlated with the rental sales with no significant relationship. As expected, household median income is positively correlated with the rental sales with no strong evidence for significant relationship. As shown in Table 1, the rental sales increased from $75,650 in 1974 to $234,716 in 1985 in the Ugly Duckling Rent-A-Car, while the product life decreased from 4.0 years in 1974 to 2.4 years in 1985. Therefore this study accepts the hypothesis that the car rental sales increased significantly when the product life decreases. CONCLUSIONS AND IMPLICATIONS This study demonstrated that there is a significant negative correlation between the product life and the rental sales of automobiles in the Ugly Duckling Rent-A-Car in the City of Petersburg. As the product life of new automobiles used by the rental manager becomes shorter, the consumers tend to lease the automobile more. Therefore, the hypothesis of this study was accepted. A shorter life span of a product tends to reduce an economic and psychological incentive for consumers to purchase the product. The value of ownership may be less than the value of the product. The concept of break-even analysis may be applied implicitly to the extent that a consumer will decide to rent a given product if the cost of purchasing exceeds the rental value of the product. This study implies that the rental business in general will increase as the business competition and population expand in the economy. As the society becomes a more service-oriented economy, rental activities are projected to expand. The rental market outlook for selected products such as garden equipment, sporting,goods, especially ski equipment, computer hardware and software, home computer, rental property such as

apartments, second houses, trailer houses, selected dressware such as tuxedos, wedding dresses, special occasion dresses and baby equipment should be attractive. The shorter life span also implies that the price of most products will rise, as production cost and initial investment tend to be heavy. Marketing firms attempt to recover the initial investment as well as expected profits from sales. These interacting forces tend to raise the price of products. The promotional strategy tends to be intensified for the products of a shorter life. The promotion should be both for primary as well as secondary demand. The distribution channel of service markets tends to be more direct as the sellers transact the services directly to the buyers as in cases of medical and tax services, rental services, and educational services. The quality of service is of critical importance to service marketing, as the quality affects the good image of the service firms. Therefore, marketing strategy should combine the appropriate strategy of selecting the target market as well as the marketing mix to generate the best possible marketing program for service markets. Price competition in an auto rental company is severe, as most rental firms offer the same service to customers. Non-price competition is also intensified in the rental business. Building a good image of auto rental firms is essential, as consumers decide their preference of a rental company on their perceived quality and good image of the company. Many customers utilize auto renting rather infrequently. Service transactions usually take place before a buyer can evaluate the quality, as the defective services cannot usually be returned to the seller. Services marketing is significantly different from products marketing, because of intangibility and perishability of the products, inseparability of production and consumption, and heterogeneity of its products. Therefore, new marketing strategies needs to be designed to meet the needs of the new marketing variables. TABLE 2. Analysis of Factors Influencing the Rental Sales in Ugly Duckling Rent-A-Car(a) Independent variable Coefficient Beta Standard error F -----------------------------------------------------------------------------------------------------------Product life (X 1) - 135817.05 -1.3853 27283.35 24.781* Population (X 2) - 32.13 -0.6782 9.38 11.735 Household Median Income (X 3) 2.04 0.2368 1.02 3.981 Constant 1815358.88 (a) The multiple coefficient of determination for the equation is 0.99434. * Significantly different from zero at the 0.01 level.

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[14]Thomas, Dan R.E. (1978), "Strategy Is Different in Service Business," Harvard Business Review, 56 (July-August), 158-165.

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