Stop Rate Erosion

Feb. 1, 2002
Practically every rental company owner throughout America has been bemoaning the continual rental rate decline of recent years, in an industry that, in

Practically every rental company owner throughout America has been bemoaning the continual rental rate decline of recent years, in an industry that, in many instances, used to provide a minimum 5 percent per month return rate of the original acquisition cost (OAC). Now returns exceeding 5 percent OAC are generally realized only on specialty products, particularly the ultra-light, high-wear product segment.

Why has our industry made such a costly downturn, and why does it appear to be nearly impossible to turn the situation around? We have read and listened to United Rentals CEO Brad Jacobs continually discuss raising rental rates. We have watched several national rental companies face declining fortunes, and, in one instance, file for bankruptcy protection. Why?

Some companies have suffered from poor management, severely declining rental rate returns, product-saturated markets and dramatically increased competition. The rapid growth of the Cat Rental Store network and the imminent involvement of Volvo's dealers in the rent-to-rent arena only crowd the field further. Companies of this stature have the resources to provide their dealers the assistance needed to be successful in the long term.

During my travels throughout America, and discussions with rental operators, I found that almost every small market is serviced by at least three rental companies. Slightly larger cities are very crowded. Fresno, Calif., for example, a city with a population of about 500,000 and no manufacturing industries to speak of, has more than 12 rental locations. In Fresno, United Rentals has two branches and such major players as Hertz, Prime, Sunbelt, Ahern Rentals, and Northridge Rentals are all there.

Fresno is typical of metropolitan markets throughout America with an abundance of rental locations. The rental customer is clearly in the driver's seat, dictating what he is willing to pay for rental rates.

What's the answer? What can be done to increase rental rates to acceptable levels that will provide profitability and allow this industry to grow?

Looking at the industry historically, rental company entrepreneurs managed their rental fleets to provide themselves with an adequate annual income, the ability to pay their bills and grow their companies. Many of these owners, who, essentially, only reported to themselves and to the bank on an annual basis, are now gone from the American rental market and are enjoying their leisure. They have little or no motivation to return, having moved on to other interests. One major entrepreneur I spoke with surveyed the industry, looked at the rental rates, estimated operational profitability and decided he could not make the return he would need and so has gone on to other opportunities.

If you look at the national companies, where are the rental rate directions coming from? Do they have a minimum rental-rate schedule? Is it mandatory to charge for the loss and damage waiver, or environmental impact costs? What about delivery and pick-up? Can the store manager make those decisions or must he defer to a regional sales or operations manager? Are the rental rates set locally, regionally or nationally? How are the rates determined? Is a minimal acceptable financial return set for the product segment, mandated by the corporate office? Does the head office mandate certain utilization percentages on a monthly, weekly and daily basis, regardless of the rental revenue dollars? Obviously there are many intangibles that affect what a rental company can invoice.

One of the most critical components of the rate equation starts with either of two individuals, the counter person or the field rental salesperson at the customer's location. Both have the ability to quote the appropriate rates. This is the starting point to increasing rental rates.

Playing inside

Let's discuss the inside salespersons' role. First, have you given any real sales training to your sales staff? Do these important employees have the time to focus on the customers' requirements? Have they been trained or is their education simply tribal culture? Are they quoting prices based on a knowledgeable planned approach or is it just a continuation of the way the company has always quoted prices?

The rental business has become far too competitive not to have your inside staff trained on the key products and given quality sales training. Give them the training on how to negotiate a higher rental rate, on how to explain the value of renting from your company and the mandate to emphasize that your company offers prompt delivery, quick operational training, and the ability to provide jobsite support in two hours maximum. Provide product and sales training for your inside sales team, along with the checklist of the proper questions to ask the customer about particular job applications.

Provide the inside sales staff with a rate sheet that clearly spells out the rates you expect in return for your services. Make sure sales staff members charge appropriately for sales of loss and damage waiver, delivery and pickup. Lastly, furnish this critical component of your team with a compensation program that enhances their income potential if particular rental rate levels and store volume are attained. Utilize the base salary component with bonus percentage points for rental revenue increases, and reward them with actual dollars for charging damage waiver and delivery.

Post the results on a weekly basis. Inside sales staff should have the opportunity to share in quarterly bonus pools if financial goals are met or exceeded. Elevate this very essential team in their importance for your company. With ever-improving computer technological capabilities, these programs should be relatively easy to develop and utilize.

Outside shots

The most critical component for every rental company is the outside sales team. This is the rental company's first line of offense with the ability to positively impact increased rental rates and profitability. When the entrepreneurs ran their companies, this group maintained controlled and focused rate plans with relatively little rental rate digression. Basically it was “here's the price, get the deal.” The owner, without a complex rate/profitability computer analysis, made the decision whether to accept or decline rental rates that the customer attempted to negotiate.

However, that key component, the owner/entrepreneur, is no longer in the pricing equation. Add the situation we see in so many rental companies today — pressure for equipment utilization on a monthly basis, minimal if any real sales training, a lack of additional financial compensation and minimal direct sales management — and decisions on rental rates will essentially flow like water — downhill.

It is easier to make the store manager, the sales manager, and the regional operations managers happy by keeping the iron out and on rent and beating the competition. Sadly that is how many salespeople evaluate their own achievement and value to the company. Rarely are they aware of their true individual operating costs or their benefit and profitability for the company.

They think: “What's one deal at a low price when we are a $100-million-plus company?” Unfortunately this group has never really been shown the impact rates have on the company, not to mention the entire industry.

At this time, the entire rental industry is going through a classic business repositioning. New start-up rental companies are falling apart at warp speed. United Rentals, Hertz and RSC are surviving, but not prospering. Sunbelt Rentals continues to grow through acquisition and green starts.

Nations Rent has suffered from excessive debt and lack of focus forcing a Chapter 11 filing in December. Clearly its business model was not capable of providing the required operational revenues and reduced management overhead costs to sustain the business. Neff Rentals continues in a similar direction. Survival for both companies is precarious at best.

Interesting is the acquisition of Brambles rental division by NES. The purchase price is a steal, as the Brambles team is solid and well-managed, good locations with long-lasting customer relationships. This should be a relatively simple “tuck-in” for both management teams. Both companies are well staffed with experienced management at all levels.

The top regional rental companies: Sunstate, Ahern Rentals, Star Rentals, Briggs Equipment, for example, continue to do reasonably well in their respective trade areas. Downward rental rate pressures are still a huge negative, but these well run companies have made the adjustments to meet the market demands.

Most of these rental companies are aging their fleets at the expense of the supplying manufacturers. Numerous manufacturers have disappeared, sold out, gone into bankruptcy or dramatically reduced costs, all as a result of the lack of business, reduced rental rates and rental company profitability. Research and development expenses have been reduced or eliminated, so innovation at this time is stalled. No groundbreaking “must have” products are being presented. Most are simply enhancements presented as new products.

A key to improving this situation is to increase rental rates. Here are some steps you can take:

Direct sales team information

Provide detailed information directly to each salesperson, including base salary, commissions, benefit costs, auto/phone/insurance costs, entertainment expense and management overheads as related to the sales department. With this breakdown, each individual can see his actual true cost to the company. This can be broken down monthly, even weekly and updated monthly or quarterly. Statements should be provided individually and as a team on a timely basis, so each individual can easily assess his financial position, rank in the sales team, cost versus profitability, territory growth, trend analysis and key account information.

Rental rate program schedule

Segment your rental fleet into key segments, such as small compaction, plumbing, small tools, generators, light towers and aerial lifts. Following this new structure, develop a graduated rental rate schedule from high to low (no more than four steps, depending upon the product segments). Rental rates should be pegged to commission rates. Highlight areas with special incentives to increase sales focus. For example, if delivery/pick-up is a problem, add $15 to every deal if a specific amount is charged.

Compensation program

This is the most difficult part to institute because no salesperson accepts change readily. A corporate commitment should be made to keep this program in place for a minimum of 24 months, with only positive financial improvements as required if necessary. The program should consist of a base salary component, commission component and a bonus component.

Commissions should be paid monthly. Percentages will vary depending on the product segment, rental term, and credit worthiness. The higher the rental rate, the higher the commission percentage. The bonus package is a group program to enhance location profitability and teamwork within the sales group. A dollar value is placed quarterly and if the rental sales team achieves that target the pool is divided among the team. However, a component could be included ranking the rental rate percentages with a heavy weighting toward the higher rates — 50 percent of rental rates at the top level, 30 percent mid level, 10 percent low level, 10 percent discretionary. Essentially convey to the sales team the importance and company focus on rental rate revenue improvement. A factual, accurate, confidential and consistent informational stream is mandatory.

Management's commitment

With any program, if the top-level management does not fully endorse it and work within the guidelines, it will fail, causing further rental rate erosion and worsening the return for our industry. The rental companies hold the assets, and pay the operational costs. Why provide your customers with the products you have paid for at a potential loss to your company?

Frank Scarborough is a veteran of more than two decades in senior level management in the aerial industry. He can be reached at [email protected].