Approach Rates Creatively

Establishing rental rates has always been a strategic challenge for rental store operators. It's a constant balancing act between providing rates that are competitive with the rental center down the street with the desire to maximize the return on your rental inventory and make a healthy profit.

Over the years, computerization of rental stores has created a new dynamic in the rate-setting game. In addition to providing more flexibility in making inventory-wide adjustments to rental rates, rental software allows you to determine how rental rates should be calculated.

How does your computer system calculate rates?

When rental was in its infancy, a rather complicated method of calculating rental rates became the standard method used throughout the industry. This method provides a prorated rental rate for longer-term rentals. Using this prorate method, if a rental item is out for a week and a day, then the daily rate for the eighth day is calculated as 1/5 of the weekly rate. Similarly, the hourly rate is calculated as 1/40 of the weekly rate.

With the emergence of national rental chains, an alternative method for calculating rates has become more prevalent in the industry — fixed rates. A fixed rate calculation means that if a rental item is out for a week and a day, the eighth day is charged at the normal daily rate, not a discounted, prorated amount.

Table 1 shows the effect of using prorated versus fixed rate calculations. Using the same hourly, daily, and weekly rental rates, an eight day plus one hour rental earns 5 percent more rental revenue if charged using the fixed rate calculation.

Table 1: Comparison of Prorate vs. Fixed Rate Calculations
Rental Rate Prorated Fixed Rate
Hour $10 $6 $10
Day $60 $48 $60
Week $240 $240 $240
8Day/1Hr Rental $294 $310

While some stores have tried to market prorates as cheaper and fairer to the customer, these efforts have been largely unsuccessful. Fixed rate calculations are simpler for customers to understand. And, interestingly, in our experience, rental stores switching from prorates to fixed rates have had no significant complaints from customers.

Using creative rental rates to compete and attract business

As rental software has evolved, new features for calculating rates have come into being. One of these features is called “flex rates.” Flex rates are rental rates designed to change according to customer demand. For instance, a rental rate for a heater may be set higher in winter months than in summer months. This seasonal flex rate allows a rental store to adjust rates to reflect demand for a particular item.

Another kind of flex rate takes into account variation in demand during the week. Most rental stores experience a lull in rental activity in the middle of the week and peak during the weekend. Thus, equipment is typically under-utilized in the middle of the week and inventories are stretched to their limit during the weekend. A flex rate can be used either to increase rates during high demand days (i.e. weekend days) or to provide discounted rates in the middle of the week. Both have the effect of encouraging more mid-week rentals. By diverting weekend rentals to the middle of the week, utilization increases and profits go up.

A rental store in Texas recently found a creative approach for boosting mid-week rentals. Faced with a weak economy and falling revenues, the company promoted mid-week rentals by offering 10 percent off all rentals on Wednesday. The result, shown in Figure 1 (page 98), was a flattening of revenues throughout the week. Although revenue was down overall from 2001 to 2002, during the eight-month study period, Wednesday rentals moved from 87 percent of average daily revenue in 2001 to 95 percent of average daily revenue in 2002. Clearly, the company was able to boost mid-week rentals. What remains unclear, however, is whether this mid-week boost occurred at the expense of rentals during other days of the week.

Many independent rental center owners complain that they can't compete with big box hardware chains that are not only open longer hours, but also open every day of the week.

A store in Florida decided to use a creative approach to compete with a big box chain that opened a nearby location. The store used the fact that it was closed on Sunday as an advantage, providing special “weekend rates” that allow customers to pick up a rental item on Saturday and return it Monday, thus having both weekend days to complete their project or job. After aggressively advertising its weekend rate in print and radio advertising the store had a dramatic increase in weekend rentals.

In analyzing a five-month period in 2002 versus 2001, we found that this creative approach to marketing weekend rentals resulted in an increase of more than 19 percent in rentals booked on Friday and Saturday, while over the same time period rentals booked Monday through Thursday grew by about 6 percent (see Figure 2).

These are just two examples of how rate calculation software features can be useful tools for increasing business and being more competitive. If you don't yet know about the features available in your software for using rates creatively in your business, contact your rental software vendor. Find out how you can use creative rate strategies to win more customers and make your rental operation more profitable.

Bill Veneris is president of ALERT Management Systems, Colorado Springs, Colo.

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