Once, renting was considered a distant second to the kudos of outright
ownership. Today, however, the rental economy is growing at more than 30 per
cent annually and many young consumers consider possession to be an almost outmoded concept. They prefer the flexibility of renting, not to mention the cost benefits. As renting becomes increasingly on-trend, businesses are scrambling to adapt.

ANALYSIS

Last year, nearly 6 million people in Europe belonged to a car-sharing service, music streaming services attracted 68 million global subscribers and tens of thousands around the world opted to rent clothes rather than buy them. Ownership, once considered the highest consumer aspiration, has lost its favoured status. This is particularly true for millennials – those born between 1980 and 2000. These young adults are interested in the same consumer goods as previous generations, including music, high-end clothes and entertainment. Unlike their parents, however, they do not aspire to keep these things forever. They prefer to be ‘life-lite’ – valuing access over ownership and preferring limited upfront investments over expensive, long-term commitments.

Umbrella term

This generational shift in consumer attitudes is often referred to as the new ‘rental economy’, a term sometimes used interchangeably with ‘the sharing economy’, which includes peer-to-peer asset-sharing through tech companies, such as Airbnb. While it is difficult for economists to agree on a common definition, rental economy is generally understood to be an umbrella term, comprising three main sectors that are disrupting traditional ownership models. 

Three's company

First is the productive service systems model, which covers companies whose assets can be loaned to customers for temporary use. Examples include French company Zilok, which started out renting household items, and American company Zipcar, which offers hourly access to company cars. The second sector is focused on redistribution – individual consumers are provided with a platform they can use to pass on or trade things they already own. The website ThredUp, for instance, connects people selling used clothing. And today Zilok falls under both sectors, as the site allows for peer-to-peer rentals as well as rentals from corporations.The final piece of the rental economy pie is generally referred to as the collaborative lifestyle sector, where people offer temporary usage of their skills, including tech expertise and handiwork, usually for hourly rates they set themselves. 

Soaring growth 

Each of these areas is slightly different, but they are all experiencing rapid growth. According to a recent study by PwC, for example, global rental economy revenues are expected to soar from $14 billion in 2014 to $335 billion by 2025.North America has been at the forefront of the sharing economy, but Europe is not far behind. Rental economy revenues are projected to grow at roughly 35 per cent a year in Europe – at least 10 times faster than the economy as a whole. Existing businesses continue to broaden and deepen what they offer, while new apps and websites are launched on an almost daily basis, testing just how far customer enthusiasm for the rental model can be stretched. 

Getting hitched

Many consumers, for example, would blanch at the thought of renting a wedding dress. But enough people love the idea that multiple companies have cropped up just for that purpose, including One Night Affair and Borrowing Magnolia. How about borrowing a pet? It may sound bizarre, but it is perfectly possible to order a dog for a walk and return it the same day, through BorrowMyDoggy.

 

 ANALYSIS

The

borrowers

The borrowers

Once, renting was considered a distant second to the kudos of outright ownership. Today, however, the rental economy is growing at more than 30 per cent annually and many young consumers consider possession to be an almost outmoded concept. They prefer the flexibility of renting, not to mention the cost benefits. As renting becomes increasingly on-trend, businesses are scrambling to adapt.

What's the difference?

Dr Kurt Matzler, a professor at Innsbruck University’s department of strategic management, notes that the rental model works particularly well for expensive items that have “high utilisation differentials”. If your car sits empty 95 per cent of the time, for example, an option such as Turo – where car owners rent out their vehicles – can be attractive. Other objects with high utilisation differentials include jewellery and designer clothes. The US service Rent the Runway, for instance, allows customers to rent a $700 designer dress for $100. The dress would probably have been worn just a few times if bought at full price: now it can be rented for a fraction of the cost, enjoyed fully once and returned, with wardrobe space to spare and the option of trying out another dress next time.Importantly too, the experience of wearing the dress can be fully documented on social media, where followers neither know nor care how the wearer came by their outfit. ​

Conserving resources

Not only does this model make economic sense, it also appeals to millennials’ desire to consume in line with their values – in this case, resource conservation. “Sharing is thought to be eco-friendly because it is assumed to reduce the demand for new goods or the construction of new facilities,” says Schor. But the rental model can still be daunting for traditional businesses, whose revenues are based on ownership. Matzler set out to accommodate any such concerns, with the help of researchers at the Sloan School of Management at the Massachusetts Institute of Technology. They set out specific steps that any business can take to help diversify their offering and prepare for a post-ownership world.The first suggestion is simple but effective: companies can begin to sell the use of a product as well as outright ownership. Daimler successfully did this when it created car2go in 2008. Based on the success of this rental model, other traditional car companies, including BMW, have followed suit.

Cautious approach 

According to research by Boston College sociology professor Dr Juliet Schor, who is leading a six-year study on this new phenomenon: “The sharing economy emerged from the wreckage of the 2008 financial collapse,” as young people, hard hit by the downturn in global employment markets, adopted a more cautious approach to buying.  Frequently at an early stage in their careers, these consumers may already be suffering from salary setbacks, having started out during a downturn. A considerable number have never found permanent employment and work on a freelance basis. Perhaps not surprisingly, therefore, they are more likely to rent their homes than own them. And with both home and work life based around uncertain, short-term models, they are effectively already rental economy natives, which might explain why they account for 68 per cent of it.

Digitally primed

Schor believes that social trends play a key role, too. “Many of these consumers have been ‘digitally primed’ by years of sharing music and other cultural products,” she says. “Their value system is distinct from that of their parents, who were raised on the dream of accumulating assets as the path to success.” She describes this shift as “a real twist on where values, sensibilities and culture have been”.Even if grim economics pushed younger consumers towards the rental economy, what started as a necessity is now emerging as a preference. According to a 2016 study from US think tank the Pew Research Center, 72 per cent of Americans said they expected to participate in the sharing economy over the next two years. And, of course, there are benefits to being a non-owner. Renting avoids the stresses of ownership, such as upkeep, depreciation or, in the case of expensive consumer goods, simply growing tired of what once seemed a must-have item. Proponents of the sharing economy say it enables them to have the lifestyle they want without any of the pressure or commitment that comes with ownership. 

Adapting to change

Companies can also adapt to the rental economy by creating a platform to redistribute their products. In 2010, IKEA launched a website in Sweden allowing customers to resell their used IKEA goods. American outdoor gear company Patagonia created a similar offer for customers to resell equipment and clothing. Some companies worry that this approach – and other rental tactics – may cannibalise their own sales. In the case of IKEA and Patagonia, however, branching out just increased their customer base. Matzler and his colleagues believe companies can also benefit from exploring unused resources and capacities. In Germany, for example, the agricultural association Maschinenring identified that the costs of farming machinery were prohibitive for many individual farmers, so it created a sharing system, allowing farmers to pool their resources and reduce costs. In Switzerland, Kuhleasing was launched when a Swiss farmer – facing rising costs – decided to lease his cows to customers, promising cut-price cheese to anyone who rented a cow. Within a year, he was leasing 150 cows to customers all around the world.​

Ripple effects

While there are many advantages to the sharing economy, some economists and strategists suggest that ownership should not be wholly discounted. A recent report from market strategists at the Convergex Group warns that if everyone adopted the rental model, the ripple effects could be “catastrophic”. It says: “Everything interesting in economics happens at the margin, so if the nth consumer chooses to rent an apartment instead of buying a house or makes do with a car-share programme instead of purchasing a new vehicle, then demand for new houses and cars drops.”Other analysts have expressed concern for a generation that may arrive at mid-life with few assets and regret their life-lite style. “Let’s not delude ourselves that it’s a panacea,” says sharing economy expert April Rinne in a World Economic Forum opinion piece. “Historically, many people held their wealth in what they owned: their homes and possessions. These assets also served as cushions in time of hardship. As we enter an era of ‘asset lite’ lifestyles and fewer physical possessions, this doesn’t negate the need for other forms of wealth in times of strife.”It is still too early to judge whether the rental economy is a temporary phenomenon or a more permanent shift in consumer behaviour. For now, however, it is expanding at pace, so companies that are willing or able to adapt to the ‘life lite’ model may find sales and profits following suit 

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Proponents of the sharing economy say it enables them to have the lifestyle they want without any of the pressure or commitment that comes with ownership”​

Last year, nearly 6 million people in Europe belonged to a car-sharing service, music streaming services attracted 68 million global subscribers and tens of thousands around the world opted to rent clothes rather than buy them. Ownership, once considered the highest consumer aspiration, has lost its favoured status. This is particularly true for millennials – those born between 1980 and 2000. These young adults are interested in the same consumer goods as previous generations, including music, high-end clothes and entertainment. Unlike their parents, however, they do not aspire to keep these things forever. They prefer to be ‘life-lite’ – valuing access over ownership and preferring limited upfront investments over expensive, long-term commitments.

Umbrella term

This generational shift in consumer attitudes is often referred to as the new ‘rental economy’, a term sometimes used interchangeably with ‘the sharing economy’, which includes peer-to-peer asset-sharing through tech companies, such as Airbnb. While it is difficult for economists to agree on a common definition, rental economy is generally understood to be an umbrella term, comprising three main sectors that are disrupting traditional ownership models. 

Three's company

First is the productive service systems model, which covers companies whose assets can be loaned to customers for temporary use. Examples include French company Zilok, which started out renting household items, and American company Zipcar, which offers hourly access to company cars. The second sector is focused on redistribution – individual consumers are provided with a platform they can use to pass on or trade things they already own. The website ThredUp, for instance, connects people selling used clothing. And today Zilok falls under both sectors, as the site allows for peer-to-peer rentals as well as rentals from corporations.The final piece of the rental economy pie is generally referred to as the collaborative lifestyle sector, where people offer temporary usage of their skills, including tech expertise and handiwork, usually for hourly rates they set themselves. 

Soaring growth 

Each of these areas is slightly different, but they are all experiencing rapid growth. According to a recent study by PwC, for example, global rental economy revenues are expected to soar from $14 billion in 2014 to $335 billion by 2025.North America has been at the forefront of the sharing economy, but Europe is not far behind. Rental economy revenues are projected to grow at roughly 35 per cent a year in Europe – at least 10 times faster than the economy as a whole. Existing businesses continue to broaden and deepen what they offer, while new apps and websites are launched on an almost daily basis, testing just how far customer enthusiasm for the rental model can be stretched. 

Getting hitched

Many consumers, for example, would blanch at the thought of renting a wedding dress. But enough people love the idea that multiple companies have cropped up just for that purpose, including One Night Affair and Borrowing Magnolia. How about borrowing a pet? It may sound bizarre, but it is perfectly possible to order a dog for a walk and return it the same day, through BorrowMyDoggy.

It’s no stroll in the park

Like any nascent economy, the rental economy is not immune to growing pains. One common obstacle faced by peer-to-peer sharing services is balancing supply with demand, particularly when it comes to assets for which there is no market precedent. 


Take the case of BorrowMyDoggy. Founded by Rikke Rosenlund in 2012, the company aims to connect pet owners who need a break with pet lovers who cannot commit long term. The company’s subscription model (£44.99 annually for owners and £12.99 for borrowers) has attracted thousands of members, but the matching is not always totally smooth. In population-dense markets, borrowers can outnumber owners, leaving one London woman who joined in 2016 to give up after pursuing several dogs. “We didn’t receive a reply or they had a regular borrower already,” she notes, “exactly like a dating app.” 

 

In an interview last summer, Rosenlund said that balancing supply and demand was one of her biggest challenges. The needs of owners and borrowers are different and the risks of participation are uneven. Bringing in equal numbers of users on both sides can be like marketing two businesses at once. To overcome imbalances, Rosenlund created a ‘Kanine Council’, where employees report member feedback that they can react to in real time. Insurance, a 24-hour vet hotline and online testimonials are also provided, all designed to reassure owners and borrowers equally, even if one side of the equation can outnumber the other at times.

Proponents of the sharing economy say it enables them to have the lifestyle they want without any of the pressure or commitment that comes with ownership”​

Cautious approach 

According to research by Boston College sociology professor Dr Juliet Schor, who is leading a six-year study on this new phenomenon: “The sharing economy emerged from the wreckage of the 2008 financial collapse,” as young people, hard hit by the downturn in global employment markets, adopted a more cautious approach to buying.  Frequently at an early stage in their careers, these consumers may already be suffering from salary setbacks, having started out during a downturn. A considerable number have never found permanent employment and work on a freelance basis. Perhaps not surprisingly, therefore, they are more likely to rent their homes than own them. And with both home and work life based around uncertain, short-term models, they are effectively already rental economy natives, which might explain why they account for 68 per cent of it.

Digitally primed

Schor believes that social trends play a key role, too. “Many of these consumers have been ‘digitally primed’ by years of sharing music and other cultural products,” she says. “Their value system is distinct from that of their parents, who were raised on the dream of accumulating assets as the path to success.” She describes this shift as “a real twist on where values, sensibilities and culture have been”.Even if grim economics pushed younger consumers towards the rental economy, what started as a necessity is now emerging as a preference. According to a 2016 study from US think tank the Pew Research Center, 72 per cent of Americans said they expected to participate in the sharing economy over the next two years. And, of course, there are benefits to being a non-owner. Renting avoids the stresses of ownership, such as upkeep, depreciation or, in the case of expensive consumer goods, simply growing tired of what once seemed a must-have item. Proponents of the sharing economy say it enables them to have the lifestyle they want without any of the pressure or commitment that comes with ownership. 

Companies can adapt to the rental economy by creating a platform to redistribute their products. In 2010, IKEA launched a website allowing customers to resell their used IKEA goods”​

According to a recent study, global rental economy revenues are expected to soar from $14 billion in 2014 to $335 billion by 2025”​

According to a recent study, global rental economy revenues are expected to soar from $14 billion in 2014 to $335 billion by 2025”​

What's the difference?

Dr Kurt Matzler, a professor at Innsbruck University’s department of strategic management, notes that the rental model works particularly well for expensive items that have “high utilisation differentials”. If your car sits empty 95 per cent of the time, for example, an option such as Turo – where car owners rent out their vehicles – can be attractive. Other objects with high utilisation differentials include jewellery and designer clothes. The US service Rent the Runway, for instance, allows customers to rent a $700 designer dress for $100. The dress would probably have been worn just a few times if bought at full price: now it can be rented for a fraction of the cost, enjoyed fully once and returned, with wardrobe space to spare and the option of trying out another dress next time.Importantly too, the experience of wearing the dress can be fully documented on social media, where followers neither know nor care how the wearer came by their outfit. ​

A Swiss farmer decided to lease his cows to customers, promising cut-price cheese to anyone who rented a cow. Within a year, he was leasing 150 cows to customers all around the world”​

Conserving resources

Not only does this model make economic sense, it also appeals to millennials’ desire to consume in line with their values – in this case, resource conservation. “Sharing is thought to be eco-friendly because it is assumed to reduce the demand for new goods or the construction of new facilities,” says Schor. But the rental model can still be daunting for traditional businesses, whose revenues are based on ownership. Matzler set out to accommodate any such concerns, with the help of researchers at the Sloan School of Management at the Massachusetts Institute of Technology. They set out specific steps that any business can take to help diversify their offering and prepare for a post-ownership world.The first suggestion is simple but effective: companies can begin to sell the use of a product as well as outright ownership. Daimler successfully did this when it created car2go in 2008. Based on the success of this rental model, other traditional car companies, including BMW, have followed suit.

It’s no stroll in the park

Like any nascent economy, the rental economy is not immune to growing pains. One common obstacle faced by peer-to-peer sharing services is balancing supply with demand, particularly when it comes to assets for which there is no market precedent. 


Take the case of BorrowMyDoggy. Founded by Rikke Rosenlund in 2012, the company aims to connect pet owners who need a break with pet lovers who cannot commit long term. The company’s subscription model (£44.99 annually for owners and £12.99 for borrowers) has attracted thousands of members, but the matching is not always totally smooth. In population-dense markets, borrowers can outnumber owners, leaving one London woman who joined in 2016 to give up after pursuing several dogs. “We didn’t receive a reply or they had a regular borrower already,” she notes, “exactly like a dating app.” 

 

In an interview last summer, Rosenlund said that balancing supply and demand was one of her biggest challenges. The needs of owners and borrowers are different and the risks of participation are uneven. Bringing in equal numbers of users on both sides can be like marketing two businesses at once. To overcome imbalances, Rosenlund created a ‘Kanine Council’, where employees report member feedback that they can react to in real time. Insurance, a 24-hour vet hotline and online testimonials are also provided, all designed to reassure owners and borrowers equally, even if one side of the equation can outnumber the other at times.

Companies can adapt to the rental economy by creating a platform to redistribute their products. In 2010, IKEA launched a website allowing customers to resell their used IKEA goods”​

Adapting to change

Companies can also adapt to the rental economy by creating a platform to redistribute their products. In 2010, IKEA launched a website in Sweden allowing customers to resell their used IKEA goods. American outdoor gear company Patagonia created a similar offer for customers to resell equipment and clothing. Some companies worry that this approach – and other rental tactics – may cannibalise their own sales. In the case of IKEA and Patagonia, however, branching out just increased their customer base. Matzler and his colleagues believe companies can also benefit from exploring unused resources and capacities. In Germany, for example, the agricultural association Maschinenring identified that the costs of farming machinery were prohibitive for many individual farmers, so it created a sharing system, allowing farmers to pool their resources and reduce costs. In Switzerland, Kuhleasing was launched when a Swiss farmer – facing rising costs – decided to lease his cows to customers, promising cut-price cheese to anyone who rented a cow. Within a year, he was leasing 150 cows to customers all around the world.​

A Swiss farmer decided to lease his cows to customers, promising cut-price cheese to anyone who rented a cow. Within a year, he was leasing 150 cows to customers all around the world”​

Ripple effects

While there are many advantages to the sharing economy, some economists and strategists suggest that ownership should not be wholly discounted. A recent report from market strategists at the Convergex Group warns that if everyone adopted the rental model, the ripple effects could be “catastrophic”. It says: “Everything interesting in economics happens at the margin, so if the nth consumer chooses to rent an apartment instead of buying a house or makes do with a car-share programme instead of purchasing a new vehicle, then demand for new houses and cars drops.”Other analysts have expressed concern for a generation that may arrive at mid-life with few assets and regret their life-lite style. “Let’s not delude ourselves that it’s a panacea,” says sharing economy expert April Rinne in a World Economic Forum opinion piece. “Historically, many people held their wealth in what they owned: their homes and possessions. These assets also served as cushions in time of hardship. As we enter an era of ‘asset lite’ lifestyles and fewer physical possessions, this doesn’t negate the need for other forms of wealth in times of strife.”It is still too early to judge whether the rental economy is a temporary phenomenon or a more permanent shift in consumer behaviour. For now, however, it is expanding at pace, so companies that are willing or able to adapt to the ‘life lite’ model may find sales and profits following suit 

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Bridgepoint  |  The Point  |  May 2018  |  Issue 33