Rental management: Raising prices
11 June 2020
Given the rental industry’s challenges in the face of Covid-19, perhaps now is a good time to address the topic of rental prices.
What should the rental rate be, and how should it be calculated? Financial analysts have provided some rules of thumb: for commercial aircraft, the annual rental revenue should be approximately 7% of the capital cost; for tool hire it should be over 100%; and for mid-sized plant - anything requiring a truck for delivery - it should be around 40%.
My own background is in aerial platform rental, and it was often said in the past that the rule was to have the weekly rental rate at 1% of the capital cost of the machine. If you consider a time utilisation of approximately 75%, the old 1% per week rule aligns with the financial analysts’ 40% suggestion.
This percentage is what the American market calls Dollar utilisation, and what many other markets call financial utilisation, and is typically calculated by dividing the annual rental revenue generated by a piece of equipment by its new replacement cost. Financial utilisation is therefore a function of the rental rate and time utilisation.
Theory versus reality
Theory is one thing, but reality is something different. In an established rental market like that of the UK or Central Europe, where there are multiple suppliers of the same or similar equipment, competition determines rental rates. As the theory suggests, the rental rate should relate to the cost of the equipment, but manufacturers apply different pricing policies in different territories, and furthermore the larger international rental companies buy new equipment at prices that are significantly different to smaller, regional players.
That means comparing the financial utilisation of companies may not always be very insightful. Even so, financial utilisation remains the most important KPI for a rental company and should be monitored on a per machine basis.
In the car rental industry, most rental companies keep the age of their fleet under one year; meaning that the quality and specification of the cars is quite similar across the market. However, in the plant and equipment rental industry, significant differences exist in the age profiles of rental fleets, often meaning that there are also differences in the machine specifications.
Every good sales training course will instruct sales people to leave the price discussion until very late in the conversation with the customer, and to focus on selling quality, selling additional services, promoting the fact that you have ‘one of the newest fleets’ in the market, and anything else you can think of to justify asking a higher price. In practice, however, it is difficult to substantiate such claims and differentiate your company.
Today, if you asked anybody in the rental industry what was dragging rental rates down, most would reply that there is too much equipment in the market, especially in aerial platforms. Yet, in a recent rental rate survey, 41% of AWP rental companies said they had experienced a drop in rental rates during 2019, yet 52% also said they increased their fleets in 2019, and 69% were planning to increase their fleet in 2020.
Perhaps one justification for increasing fleet size is the belief that a company can achieve some economies of scale, decreasing labour input relative to turnover, or reducing overheads, resulting in an improved EBIDTA %. Yet an analysis of a sample of UK rental businesses over the past four years shows that, on average, wages and salaries as a percentage of turnover actually increased over the period, by as much as 9%, and for the same companies, EBITDA as a percentage of turnover did not improve either.
At the same time, why is it that a rental company with multiple accreditations - IPAF Rental+, FORS Silver or Gold, CLOCS, or ISO standards - cannot achieve higher rental rates than those without?
The sales process
In my view the role of the salesperson is crucial in this discussion. A sales manager I once worked with told me that what struck him most about the rental industry was the fact that there was no clearly defined bottom limit on pricing.
An effective sales process requires, among other things, a structured pricing strategy and discipline. My view is that many salespeople often possess neither. Some are guilty of dragging rental rates down, pricing deliveries and collections at a loss, and underselling other services. It is my view that salespeople in the rental industry have too much discretion when it comes to pricing.
Unless there is a service level agreement in place with the customer, which is not actually very common, every job tends to be priced individually, and often with little or no advance notice. Typically, the entire process is carried out through a series of telephone conversations: the customer calls the sales person, the sales person calls the hire desk to check availability, and in many cases the hire desk has to call the workshop to see if a machine just back from another hire can be turned around in time.
When the order does finally come, quite often it is only verbal, initially at least. Too often, not all the necessary information is collected at the time of taking the order: the contact details on site, site access details, and even the exact delivery address.
If there is a technical problem with the machine, or if the customer wants to off-hire the machine, the salesperson is usually the first port of call, and everything is typically communicated via telephone. If at the end of the rental cycle the invoice is queried, everyone is on the phone again.
Nowadays in many industries – hotels, car rental – there is little or no flexibility in the price discussion for frequent transactions. The reality is that the people supporting these systems have little or no discretion with the price, and you regularly hear people say, “Sorry, that is what the system says”.
While some of the larger international rental companies are certainly investing heavily in digitalisation, the vast majority have been slow to adopt the concept. I am reliably informed by some of the larger European rental companies that the revenue coming through their apps is growing significantly, and that the conversion rate of searches via their apps is also very high.
So why is the industry so slow to adopt the same approach?
Business is of course about people, and about building relationships, but the dynamic of those relationships is changing. In business terms, being there now means being online and being digitalised. Being relevant means displaying what the customer expects to see. Being optimised means being able to deliver what the customer wants when they want it. Good quality service is what brings the customer back, and this requires operational excellence.
I am not suggesting that rental companies should put everything online today and dismiss the entire sales team. However, I am saying that it is about finding a balance between the traditional ways of doing things, and the more modern way. I am also saying that the role of salespeople needs to change, and that their discretion on pricing needs to be replaced by technology, and by data driven pricing.
When the industry finally reaches the tipping point, it will seem sudden to those that have not tried to move with it, but to those that get an early start, they will already be equipped with the capabilities they need.
Some are concerned that moving the industry online will commoditise the industry. However, an effective sales process requires a structured pricing strategy, and discipline. If you tell a sales team to put prices up, their first reaction will always be the same; “If we put prices up, we will lose customers”. What they fail to realise is that if you put prices up and do not lose customers, it would only mean you did not put the prices up enough. How much to put prices up should be a data driven decision.
A good customer app can allow customers to find the machine type they need, calculate an appropriate rental and transport fee, place an order, and enter all the information required to execute a delivery. In addition a customer app can provide the rental company with an up-to-date credit rating of the customer, process a credit card payment or charge it to their account, facilitate checking the condition of the machine at the beginning and end of the rental with supporting photographs, and allow the reporting of breakdowns where the customer can add photographs to help describe the issue.
Using an app, every step of the process from the initial search through to the off-hire is time-stamped, and provides the rental company useful information, including details of enquiries that were not actually converted into orders. Having such an app will improve the customer experience, and the day-to-day efficiencies of the rental companies, thus freeing up time for salespeople to hunt for more customers.
Given that Covid-19 restricts what we can do, maybe now is a good opportunity for some rental companies to take a little time out to plan their pricing strategy.