Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Hertz Priced the EV Bet Then Reversed It
Transcript
- Lucas: So in early 2024, Hertz announced it was selling off roughly twenty thousand electric vehicles from its rental fleet — about a third of its EV holdings — and reinvesting the proceeds into gasoline cars. That was a stunning reversal for a company that had, in 2021, placed one of the largest EV orders in history: one hundred thousand Teslas by the end of 2022. Luna: Right, and they also had a deal with Polestar for another sixty-five thousand vehicles. It felt like a declaration that the rental fleet was going electric, period. Lucas: Exactly. And the contrast between that 2021 announcement and the 2024 sell-off is a masterclass in what happens when a company misprices an asset — not just the sticker price for customers, but the whole lifecycle cost. Because Hertz wasn't just renting EVs; it was betting its balance sheet on their residual value. Luna: And that bet went wrong fast. So let's dig into the specific pricing miscalculations. Lucas: Yeah. Let's start with depreciation. When Hertz bought those Teslas in 2021, the used EV market was still pretty frothy. A Model 3 held its value reasonably well — maybe fifteen to twenty percent depreciation in the first year. But then Tesla started cutting prices on new cars aggressively in 2022 and 2023. Luna: Which collapsed the used market. I've seen data that Model 3 resale values dropped roughly thirty percent in 2023 alone. Lucas: Right. And for a rental company, that's catastrophic. Hertz doesn't make most of its money from daily rentals — it makes it from selling the used cars after about twelve to eighteen months in service. The rental revenue is almost secondary. So when the expected residual value of a Tesla drops by ten thousand dollars per car, and you have tens of thousands of them, that's hundreds of millions in unrealized losses. Luna: And that's before you even talk about the rental side. But let's talk about that too. Lucas: Sure. So initially, Hertz tried to charge a premium for EVs. They called it the 'green halo' — customers would pay extra for a zero-emission rental, especially business travelers with sustainability mandates. And for a while, that worked. But the premium was maybe five to ten dollars a day. Luna: Which sounds reasonable until you factor in the hassle factor. With an EV, the customer has to think about charging. If they're driving a gas car, they just stop at any station. With a Tesla, they need to find a Supercharger — and hope it works, and wait twenty minutes. Lucas: Exactly. So the 'green premium' was competing against a convenience deficit. And as gas prices stabilized, that premium became harder to justify. By mid-2023, Hertz was actually discounting EVs to move them off the lot. Some reports had Model 3 rentals going for less than a Toyota Corolla. Luna: Wait — so they were charging less for a car that costs them more to maintain? Lucas: Yes, and that's the killer. Because the collision repair costs on EVs are significantly higher. The batteries are expensive, the body panels are different, and fewer shops can work on them. One study I saw said the average repair cost for a Tesla was about thirty percent higher than a comparable gas car. So Hertz was paying more for repairs, plus more for depreciation, and earning less per rental day. Luna: If today was actually useful to you, the way these stay ad-free is listener support. If this kind of deep dive on real pricing decisions helps you think about your own business, head to buy me a coffee dot com slash fexingo. It really does keep us going. Lucas: Yeah, and we appreciate that more than I can say. So back to Hertz — the charging infrastructure piece was another factor that made the daily rental economics worse. Hertz installed chargers at some locations, but not all. So a customer picking up an EV might get it with only eighty percent charge, and then have to navigate finding a charger during the trip. Luna: Which led to complaints and more support calls. The operational cost of managing EV rentals was higher than anticipated. Lucas: Right. And so the pricing strategy for the rental itself — the daily rate — couldn't compensate for the asset depreciation. Hertz tried to price for the green halo, then discounted to maintain utilization, and neither worked. The fundamental problem was that the asset itself lost value faster than expected, and the rental revenue couldn't bridge that gap. Luna: So what's the takeaway for other businesses? I mean, this isn't just a rental car problem. Anyone buying assets that depreciate needs to think about resale value. Lucas: Exactly. The lesson is that pricing isn't just about what you charge the customer today. It's about the full lifecycle. Hertz assumed the residual value would hold, and they priced the rental accordingly. When residual dropped, the whole model broke. And the same thing could happen in any industry where the asset's end of life value is uncertain. Luna: Like construction equipment, or even server racks for cloud providers. Lucas: Yeah. And there's another angle: Hertz's EV experiment also shows the danger of being a first mover in a transition. They took a huge bet on Tesla's pricing stability, and Tesla itself undercut them by cutting new car prices. So you're also betting on your supplier's pricing strategy. Luna: Which is a risk that's hard to hedge. So as we watch the EV transition continue — and it will, just maybe slower — what should rental companies do differently? Lucas: I think they need to treat EVs as a separate asset class with different depreciation curves. Maybe lease them instead of buying, or partner with automakers to guarantee residual values. And on the pricing side, they need to be realistic about the premium customers will actually pay — and factor in the higher operating costs. The green halo has a limit. Luna: And maybe invest more in charging infrastructure so the customer experience is closer to gas. But that's a capital expenditure, not a pricing decision. Lucas: Right. But pricing and capital expenditure are linked. If you can't charge enough to cover the cost of the chargers and the depreciation, you don't have a viable business. That's what Hertz learned the hard way. Luna: So a fascinating case study in how asset pricing, customer pricing, and operational costs all have to align. And when they don't, even the biggest bet can unravel. Lucas: Exactly. And I think we'll see more companies go through this as they try to price the transition. It's not just about the sticker.