When Rent the Runway, a New York start-up hoping to make high-end fashion as accessible as renting a movie from Netflix, first introduced its service in late 2009, it wasn’t clear how successful the venture would be. In the past 18 months, since Rent the Runway came out of its beta testing phase, it has enticed a million members to join the service. Each week, another 40,000 new members sign up, the company said. The company has raised $16.5 million from venture capitalists, and grown from a few employees to 51 staffers, prompting a move to larger offices in downtown New York.

1.  Assume that the company rents two dresses a year to each member.  If the dresses rent for $50 and variable costs are $20 per rental and the company’s fixed costs for the year total $1,620,000, how many dresses must be rented in order for the company to break even? 

2. Assume that during the current year Rent the Runway reported total revenues of $891,640 and profit of $91,486.  Fixed costs were $332,043, and 44,000 dresses were rented.  If costs and prices are expected to stay the same next year, but the company expects to increase rentals to 50,000 dresses, what will be the company’s budgeted profit?

3. From an entrepreneurial standpoint, do you think this plan would work for any other type of product? Explain.

Source:
Fox Business Video (2011). Rent the Runway: Designer Dress Rental Catching On, Fox Business News.com February 8 (Retrievable online at http://video.foxsmallbusinesscenter.com/v/4529267/rent-the-runway/)

Wortham, J.(2011) Rent The Runway Takes Flight, The New York Times, May 2 (Retrievable online at http://bits.blogs.nytimes.com/2011/05/02/rent-the-runway-takes-flight/?ref=business)