Shortly after founding Zipcar, Robin Chase made a pricing miscalculation that nearly sank the company. The only way to deal with the problem, she realized, was to tell her customers the truth.
We launched in June of 2000. I had spent months on the business model, calculating what we should charge for the annual fees, the deposit, the hourly and per-mile rates.
By the end of September, we had about 12 to 15 cars on the ground and 400 members--enough that I could finally see if my business model was working like I thought it would. I put the information into spreadsheets and took a look. It turned out that, because of a miscalculation on my part, our daily rental rate was way too low.
I was just two weeks from closing a Series A round of funding for $1.3 million. When I realized my mistake, I shut the door and cried. I thought, Oh, my God, this is a house of cards! I worried I was selling a lie and that my reputation was going to be tarnished.
After a couple hours, I pulled myself together and started looking at the numbers again. I realized we would have to raise our rates. Some people on my staff argued, "But what about the 400 people who signed up? Some may have sold their cars. We made a promise to them!" But I knew this was a fatal error.
So I wrote an email to all our members that basically said, "I'm sorry; I screwed up. My daily rate was way too low. We have to raise the price 25 percent." I was very direct. I told them we couldn't afford it. I remember I pushed the Send button on the email that evening, and I walked into work the next morning with such dread.
When I opened the door to the office, one of the employees flashed me the thumbs-up. We had 21 replies. Nineteen of them said, "You know, we thought it was way too cheap. We love the service--don't worry about it." Two people wrote angry letters. I called both of them up, apologized, and explained that the company could not survive at those prices. Neither one quit. One even went on to become one of our biggest champions and did a lot of PR for us.
As an entrepreneur, you are constantly in sales mode--you are selling to customers, investors, the people who work for you. But you have to be honest when things aren't going right, and you have to fix them as quickly as you can. These were key issues for us that we had to solve or die. Had we not increased the rates, I'm not sure that we could ever have reached profitability.
Age when she got started: 42
Early capital: $75,000 from angel investors
How much Avis agreed to pay for Zipcar: $491 million