As anyone who has stood behind a rental counter or talked with customers in the field will tell you, competitive rates play a critical role in winning new business.
The popular word on the street lately is that overall rates are declining, leaving large and small companies no choice but to reduce their own rates if they wish to continue doing business in our changing rental world.
Well, as the old song says, "It ain't necessarily so." The most interesting part of the current "state of the rate" situation is that this gnawing price erosion is inevitably blamed on "that other guy" across town or a major consolidator who is moving in and taking market share. For some reason the source of the problem never seems to be facing us square in the mirror each morning as we go off to battle in the modern rental wars.
The equipment rental industry has enjoyed double-digit annual growth rates during the past 15 years, and you would be hard pressed to find an industry insider who doesn't believe this outsourcing trend is still in its infancy. This favorable environment has brought new large national players and public investors into the industry, leading, some say, to the detriment of overall rental rates.
Many people believe that larger companies can operate at lower average costs, enjoy a reduced cost of capital, maintain younger fleets and increase utilization by shuttling equipment between branches. Fueled by these operating advantages and a strong desire for growth, some theorize that these large rental companies will inevitably be driven to offer increasingly lower rental rates to woo potential customers. This reasoning is flawed in two very important ways.
First, it entirely dismisses the most important factor driving the strategy and success of any rental company, large or small: the customer. Rental customers, like all consumers, demand a lot of things. Service, selection and of course, price are considerations.
However, a recent survey by Manfredi and Associates placed favorable rental rates third, behind equipment availability and quality/condition as the most important reason why customers rent from a particular company. As you reread that last sentence, think about your own business and your best customers, and then ask yourself why they rent from you. Better yet, ask them directly why they choose you as a business partner and what they value most. Like the survey results above, your own findings may be eye-opening.
When assessing the impact of consolidation on rates, it's important to remember that all rental companies have shareholders and/or owners who monitor financial results and are interested in maximizing and growing their profitability. Prudent owners must look at both volume and margin results and trends to help assess their business strategy. Inevitably, every public and private company faces a balancing act between offering competitive rates and maintaining profitability.
The positive news is that the hype about falling rates may be just that. A study last year by Merrill Lynch of more than 100 rental companies found that nearly three-fourths (72 percent) were seeing stable or increasing rental rates during 1998, and a slightly larger percentage (74 percent) expected a similar steady-to-higher pricing environment this year.
It's critical to make strategic pricing decisions based upon the large picture as opposed to the isolated incident that is often more emotionally involving. (Does "I heard Dollar Dan has put out a 20-foot scissor at $250 a month - I guess we'll have to price that way too" sound painfully familiar?).
Effective strategic pricing requires you to separate hype from fact. Talk with a good salesperson. For every story about the rental contract lost to a competitor's lowball rate, you will hear another about the customer who called back for help after a lowballing company couldn't deliver the equipment or service the customer needed.
The general economics supporting equipment rental are very compelling. As former equipment buyers become more and more dependent on rental to meet their equipment needs, price alone will not get their business. Imagine telling a contractor who missed his construction deadline because of your equipment breakdown or delivery delay that at least he's still getting a good rate on the item.
A small price difference has just become irrelevant, and you'll find your number quickly replaced on the contractor's speed-dial with one from your many competitors who are scrambling to differentiate themselves and push you to the side.
The conclusion is that, although it's often the easiest route to offer a low rate to win new business, low price/low service is probably not a workable long-term strategy in a service industry such as ours. After all, who really wants to find the cheapest brain surgeon or brake mechanic?
The next time you wonder who's driving your business strategy and who's responsible for lower rates, first take a long, hard look in the mirror. Are you acting responsibly by promising and delivering what your best customers are truly asking for, or are you simply falling back on low price to generate a continuous stream of new business?
The message and implications are clear. Listen to your customer. If you provide outstanding people, equipment and, above all, service at a fair price, you will be able to wake up and see a smile in your mirror each morning. More importantly, you will see a friendly smile on your customers' faces each time you show up at the jobsite.
