Want to Try the Online Rental Business? 4 Things to Know
Traveling? Need a bike? You can rent one online--from a person, not a shop.
Online rental businesses of one form or another seem to be on the rise. There's Rent The Runway, which lets women rent designer clothing for special occasions. Another company, Le Tote, offers a subscription fee wardrobe service: $49 a month for three garments and two accessories. Interested in something other than clothing? Artsicle offers a try-before-you-buy model for fine art: Pay $50 a month to keep something as long as you'd like, swap it, or buy something outright.
Rental models have a lot to be said for them. Just ask companies in the rent-a-tuxedo business or a successful costume shop. You can probably get more than the price of the goods through multiple rental fees and there are probably some good tax strategies for depreciating the goods and reducing your exposure.
Although it's a type of business model that sounds good on the surface, it's also something that could blow up in your face if you're not careful. There are a few questions you have to ask yourself.
How much capital will it need?
You can satisfy people over time, buying goods when you need them. But for rentals, you may need a fair amount of products within a short amount of time, particularly if the business becomes popular. The more expensive the products--good fine art, designer clothing--the more money you're going to need up front.
How easy are logistics?
There are many ways you could go wrong running a rental business. Learning the quantity you'll need of an item will take good analytics. Fine goods might certain types of storage and warehousing, which might rule out many outsourced facilities. How easily can goods get damaged in transit? Are the particularly large, heavy, or otherwise in need of expensive shipping that will discourage many customers? How do you keep enough goods in circulation and still have plenty to satisfy new orders, especially early on when you haven't had much opportunity to learn how customers will behave and how long they're likely to keep something? What kind of cleaning or processing do you need to do when something comes back before it's ready to head out again?
What's the replacement cost?
There will be times when you don't get products back, or they get damaged on the trip back. A company like Netflix, focusing on the older DVD rental business, can replace any one item for a recently small sum. Designer dresses? Not necessarily cheap.
Can you get enough stock to scale?
DVDs you can get by the truckload. Designer goods may be more difficult to source, unless you can operate like a small Target and have designers create products that you have manufactured, but then you need a lot of scale. Fine art? One-of-a-kind items are, by their nature, rare. It doesn't mean a business offering them won't work. Look at the success Etsy has seen. But it's still a consideration.
The reach of the Internet could make many rental business models possible that otherwise wouldn't fly. You have a much bigger potential market which, if you work out the potential problems, could be enough to enable your concept. Just be sure that you consider some of the big questions that should be immediately concerning.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.