The 5 Keys to Rate Control

April 1, 2003
Low rental rates are probably the most important issue facing the rental industry today. My partner, Fred Hageman, and I spend a lot of time in the field

Low rental rates are probably the most important issue facing the rental industry today. My partner, Fred Hageman, and I spend a lot of time in the field visiting rental companies. Every market we visit, we hear similar stories, “We try to hold our rental rates, but Company X or Company Y has been putting equipment out too cheap.” Another common story is “We had a reach forklift out for $2,400 per month, but Company X came out and replaced our unit for $1,800 per month. Can you believe they left $600 per month on the table?”

The entire rental industry needs to address unrealistically low rental rates. This poses a real challenge, especially to the stronger companies who are perceived as leaders in their markets. They are the ones who must be at the forefront of this issue. Selling on price misses the mark and dramatically affects the bottom line. Rental companies must have the confidence to sell their value and service; of which price is only a component. A fair rate that gives a rental company a fair return is not a crime, it is merely a proper and equitable trade for providing a good product and service. Make sure that your customers understand that low price many times means inferior service and support. As an owner or manager of a rental company, start with these steps and explain them in detail to your employees.

Set realistic book rates.

The market has changed drastically in recent years, has your book rate pricing? We've seen rental companies with obscenely high book rates that are rarely, if ever, realized. Inside sales people answering the phone are forced to make a decision — either quote the unrealistically high rate and risk the customer hanging up or quote a lower, discounted rate that may be arbitrary or inappropriate to the situation.

With your book rates too high, you have set the tone for all of your employees to discount. Survey customers and competitors and see what the actual rates really are in your marketplace from top to bottom. This should be an ongoing process, including filtering out of misinformation from your customers, competitors and your employees. Set a realistic, attainable book rate that your employees know is competitive, can feel good about quoting and still gives your company an acceptable return. Give your book rate integrity that doesn't set your employees up for a discounting mentality. Make sure your company is prepared to stand behind the price with quality products, service and support.

Set guidelines about who can discount and by how much.

Make sure you have a discounting hierarchy. For example, counter people should have the authority, only when needed, to discount from 5 to 10 percent from your realistic book rate, sales people 10 to 15 percent, with manager or owner approval for anything above these amounts. Whoever has the ultimate authority needs to be accessible and reachable at all times; don't leave your employee waiting to respond to a live customer. Another word of caution — train your employees to discount in increments. In other words, if they have authority to discount 10 percent, many will have the tendency to give the full amount all at once when only a small reduction is needed.

Beyond the discounting hierarchy, Fred and I have a commandment that we are inflexible on: Thou shalt not discount daily rentals. With most customers, this is not even an issue; most are not going to beat you up over a $5- to $10-a-day difference. Remember, you have set realistic rates and realize that daily rentals (if not discounted) should be a high return item. Also remember, even a daily rental takes time and administration; taking the order, checking the machine in and out, delivery (or loading), and various other costs. There is little or no room for error on a daily rental. Don't turn what can be a very profitable area for your business into a break-even or loss by discounting. Profitable daily rentals help offset less profitable returns on more competitive longer term rentals.

Set a “walk away” rate on all machines.

Set realistic minimum rental prices on all machines — no less than 3 to 3.5 percent of original cost on a monthly basis. Remember, this is an absolute minimum, and only for situations or customers you feel strongly about. Be ready (and don't be afraid) to walk away from the rental if the rate falls below these ranges. Some rentals are best left to the competition. Save your units for a higher return rental that will inevitably come. Remember that low rates dramatically reduce your overall fleet utilization and ROI, so you should only have a fraction of your fleet out at these discounted numbers.

Also note, this walk-away number may be different for different machines. You may have a lower walk-away on a low maintenance electric scissor lift than a high maintenance trencher or ground engaging machine. Also, your walk-away may vary depending on the number of units available. If you have 10 units on the yard you may want to take a lower rental rate rather than holding firm on your last available unit. Seasonality and other factors can also come into play here.

Monitor your actual to book realization rates.

Frequently check your open rental tickets or recently closed tickets to see how the rental rates actually charged compare to your book rates. Use a random sample of 10 to 25 tickets using customers big and small, daily, weekly and monthly rentals and small and larger equipment. Compute an overall discount by totaling all tickets at the actual rate vs. what the charges would have been at book rate. (Some software programs may have the capability to run a similar report, however, we urge you to do this manually as well to help gain a better understanding of your actual results.)

Your goal is to have an actual realization rate 90 percent or greater than the book rate. If you are at 85 percent or greater, keep monitoring and fine tuning to get to 90 percent or above.

If you fall below 85 percent, you need to do an in-depth analysis of customers, machine categories and rental rates to determine your problem areas.

Consider who your customer is.

Before giving a large discount take a look at all the information on the customer. What is his annual volume? Does he pay his bills on time? What is the potential for future business with this customer or with other customers on the same job? Does the customer have a reputation for maintaining the equipment or does it come back damaged? Is the machine in a high time/high stress application or is it used for only a few hours per day?

Make sure the customer history, loyalty and performance warrants the rate you are giving him. Be careful of giving large discounts to low volume customers or customers who don't pay on time. Look at all your customer data before giving blanket or large discounts.

Take a stand on your rental rates. You can't control the rates of other companies, but you can certainly take charge of your own. Hold yourself and your employees accountable. When you give discounts, make sure you are doing it for the right reasons. Become the reasonable voice — part of the solution — in your marketplace. Be a leader, not a follower.

Gary Stansberry is a partner in the consulting firm of Hageman, Stansberry & Associates. HS&A specializes strictly in the rental industry, offering operational consulting, mergers & acquisitions and valuation services. Stansberry can be reached at (817) 563-6882 or by e-mail at [email protected].

About the Author

Gary Stansberry | Founder and president

Gary Stansberry is president of The Stansberry Firm LLC and specializes in business sales, fair market business valuations, operational consulting and positioning businesses to increase their value.