For years, th

e airline and hotel industries have had industry-wide policies requiring customers to prepay for their flight or room and accept a financial penalty if they broke their reservations. Yet the concept of guaranteed reservations was never widely adapted in the car rental industry.

Recently, however, the car rental industry has seen progress with prepaid reservations, viewed as a customer-friendly alternative to guaranteed reservations. The prepaid reservations model is catching on, though still small as a percentage of overall revenue.

While major car rental companies such as Hertz and Avis have had forms of prepay for a few years, this option is now prominent in their bookings process. Now, franchised and independent companies are offering prepaid reservations, facilitated by new technology in car rental operating systems and online travel agencies (OTAs).

CarRentals.com is now accepting credit card prepayment for a 10% discount. At the time of its bankruptcy filing, Advantage had $13.9 million in bookings in prepaid business. ACE now offers prepaid to its affiliates through its reservations system.

Overcoming the Hurdles

One hurdle is perfecting the model, which entails a daily balancing of utilization with the right discount to attract customers while maintaining a profit margin.

“Early data shows that a 5% discount is enough to get people to move,” says Kevin Stutz, business manager for ACE Car Rental Reservations. That savings may only be a couple of dollars per day, says Stutz, however, “Other times it’s not. It’s a learning process to understand the breaking point by car class.”

Random checks of prepaid offerings from Hertz and Avis show discounts ranging from 7% to 15% and varying by car class, but not necessarily increasing with rental rate. This suggests that a determining factor in setting the discount is utilization in a particular class at a location.

An over-fleeting situation would be a reason to increase the discount, though this must be balanced against the threshold of eroding profits, Stutz says.

Another issue is fraud. When a customer prepays for the entire rental through the Internet, counter procedures to verify the renter must be extra stringent. Some companies state the renter must use the booking credit card at the counter while others just ask renters to verify their identity.

Stutz says ACE was able to recover a car from a renter who used a stolen credit card to prepay for a convertible for 20 days.

“[Prepaid] adds a new dynamic when you’ve already taken the money upfront,” Stutz says. “For a lot of agents, it’s human to want to OK it, especially if the reservation is for a $1,000. You have to be more vigilant with policy.”

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Stutz says that in the first months of prepaid, the company held fast to its cancellation policy. But the result was a customer service department that was spending too much time dealing with upset customers. ACE now offers a voucher toward a future rental if a customer cancels. The new ACE policy has resulted in a dramatic drop in complaints, Stutz says.

The Avis website states that customers will receive a full refund less $25 if they cancel more than six hours before their reservation. Those that don’t show up are charged $100. Hertz rules state: “Cancellation fees apply for prepaid reservations. No refunds or credits for unused rental days.”

Analyzing the Metrics

If the desired outcome with prepaid reservations is to decrease no-show rates, ACE offers compelling metrics. Stutz reports that the total no-show rate in the 24 months prior to launching prepaid on channels — that would eventually participate in prepaid — was 21%, while the combined no-show and cancellation rate was 38%. “It was not uncommon for ACE to observe a no-show rate in the 50% range in certain locations on certain channels,” Stutz says.

In the 24 months following the launch of prepaid, the total no-show rate declined to 11% — a 48% decrease — on those same channels. The combined no-show and cancellation rate dipped to 25%, or a 34% decline. Those numbers improved in 2013. Last year, 40% of the reservations had some form of collection on these channels, with a no-show rate of 5%, Stutz reports.