Profit pools: A fresh look at strategy

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Throughout the early 1990s, U-Haul, Ryder, Hertz-Penske, and Budget waged a fiercely competitive battle in the U.S. consumer-truckrental business. U-Haul, long the dominant player in the industry, appeared to be at a disadvantage. With its older fleet of trucks, it had higher maintenance costs than its rivals, and it charged lower prices. Barely breaking even in truck rentals, it seemed fated to fall from industry leader to industry laggard.

But the numbers on the bottom line told a different story. U-Haul was actually the most profitable company in the industry, its 10% operating margin running far above the industry average of less than 3%. Ultimately, in fact, the number two competitor,

Ryder, abandoned the consumer rental business, selling off its fleet in 1996 to a consortium of investors.

What explains U-Haul’s success? Answering that question requires us to step back and examine not only U-Haul’s strategy but also its industry’s profit structure. U-Haul prevailed because it saw something its competitors did not. By looking beyond the core truck-rental business, it was able to spot a large, untapped source of profit. That source was the accessories business, consisting of the sale of boxes and insurance and the rental of trailers and storage space – all the ancillary products and services consumers need to complete the job that has only begun when they rent a truck.

The margins in truck rentals are low because customers shop aggressively for the best daily rate. Accessories are another matter altogether. Once a customer signs a rental agreement for a truck, his propensity to do further comparison shopping ends. He becomes, in effect, a captive of the company from which he’s renting the truck. Because there is virtually no competition in this piece of the value chain, the accessories business enjoys highly attractive margins.

Recognizing the true profit structure of its business, U-Haul seized first-mover advantages in accessories. For example, it scooped up the cheapest storage space in key locations before its competitors could react, gaining a sizable cost advantage. And, since control of the accessories business was tied directly to the volume of truck rentals, U-Haul deliberately kept its daily rental rates low in order to attract more and more customers to whom it could sell more and more high-margin accessories. Its competitors, in contrast, set their prices in a way that would maximize their returns from the core truck-rental business.

U-Haul’s strategy redefined the consumer truck-rental business, giving the company control of a large share of its industry’s profits. U-Haul recognized that while the core rental business represented the vast majority of the industry’s revenue pool, accessories provided a large share of the industry’s profit pool. By crafting a strategy to maximize its control of the profit pool, U-Haul was eventually able to dictate the terms of competition within the industry. Its rivals learned a valuable lesson the hard way: there are many different sources of profit in any business, and the company that sees what others do not – namely, the profit pools it might create or exploit – will be best prepared to capture a disproportionate share of industry profits.

Read the full article on Harvard Business Online.