IRN SEPTEMBER-OCTOBER 2013
51
RENTAL MANAGEMENT JEFF EISENBERG
discipline
airport concession fee? Re-fueling charge sold at a
huge profit?
The Ratchet effect
In economics, much is made of the ‘ratchet effect’ by
which prices and wages tend to rise in an inflationary
manner, but not fall, like the ratchet in a tool box
which turns one way and not the other.
In the rental industry, we seem to have to have the
opposite. In markets with multiple rental company
competitors, especially where they have similar
equipment, oversupply can lead to steady rate
declines. Rates are often hard to get back up even
when demand again exceeds supply.
Discounting and ‘Last machine in
the yard’ argument
The incremental sale argument can be tempting. If
a rental company has enough business to cover its
fixed overheads, then renting the ‘one more machine’
contributes immensely to profit, even at a discount.
After all, goes the logic, the rent for the depot is
only paid once, so that even if you have to give a
discount, the last rental is extremely profitable, on
an incremental basis.
The problemwith this argument is lack of discipline.
Everyone’s incremental sale is someone else’s core
business. Where the rental companies and their sales
managers have run out of features and benefits then
only the thing left to discuss is discount, rather than
having the discipline to leave the machines standing
in the yard waiting for better pricing.
This discipline is so very hard to keep in rental
companies. If the short term revenue target is more
important than keeping the rental rates high for
the long term, then competitive discounting will
continue. Only rarely do enough of the industry
tool hire companies are particularly good at this;
■
Delivery charge recovery – try to make a profit;
it is incredible that delivery charges for 7 tonnes
of equipment can be less than a taxi ride for the
same distance;
■
Equipment cleaning charges;
■
Environmental charges;
■
Damage recovery – many rental companies never
get paid adequately for repairs, paint sprayed on
machines, etc.
■
Insurance – sometimes the rental associations
can help here, more later;
■
And many more.
Keep in mind that as rental companies try to raise
rates that were unsustainably low, the customers
will see that they are going to get a worse deal than
before. How come the customer has to pay more for
less? This is as true with charging for extras.
The customer’s own business may be under
extreme pressure, and paying more for renting the
same equipment compared to last year will not help
them one bit. But if the rental company can use new
ideas, or becomes more efficient, that’s another
story.
As the airlines have taught us, there is a balance
between the annoyance factor of extra charges,
especially new charges, and the extra revenue they
generate. A customer’s bureaucratic purchasing
department can delay payments on invoices that
players show the willingness to leave equipment in
the yard rather than take the discounts for the short
term revenue.
Discounting in the rental industry recalls Abraham
Maslow’s law of the hammer, where ‘if all you have is
a hammer everything looks like a nail’.
Renting equipment to customers who already
understand the features and benefits, and where
most competitors have acceptable service and
quality, pushes customers to ask for discounts and
sales managers to give ever larger discounts, even
for decreasing volumes.
How low can rental rates go?
In competitive markets where there is no shortage
of equipment, it seems logical that the lowest rental
price cannot go below the unit’s depreciation and
interest costs (or maybe the monthly finance
payment), to have any hope of making any small
contribution to overheads.
However, certainly since the 2008 crisis began,
there are ‘zombie companies’ that are not paying for
their equipment (or servicing their debt) that are just
renting to recover the variable cost, which is usually
transport, repairs and fuel. Often, truly desperate
companies are just trying to make enough revenue
to keep the lights on and the employees paid.
If walking dead or zombie rental companies -
which are not and have no prospect of paying for
their equipment - are dominant in a market, then it’s
time to look for another market (or at least another
market segment).
The problem with so many zombie rental
companies post 2008 is that their creditors have
not forced them to restructure or liquidate, which
eventually will help rebalance supply and demand.
In the US Great Depression of the 1920s and 30s,
one collapsing retail store famously said “we lose
money on every sale but make it up on volume”.
That might be true also of some of the zombie rental
companies, particularly in Southern Europe.
What can rental companies do to
raise rental rates?
Remember, rental companies operate with relatively
narrow net profits, post 2008 crisis. United Rentals,
made a net profit of $75 million on revenues of $4.12
billion, which is 1.82%. That means a 3% change
in rental rates up or down can change everything;
most of that rental rate change goes straight to the
bottom line. On a scissor lift that rents for €30 per
day, 3% is less than €1.
So how do you raise rates? There are numerous
techniques, including:
■
Raise rental prices, explain this professionally to
customers, hope the competitors follow;
■
Charge for weekends, out of hours coverage;
■
Charge premium rates for shorter rentals; the UK
¬
A Nationwide Platforms boom. The typical payback period for
mid-sized equipment is from one to five years.
Rental companies with international operations can seek out the
best rates for their equipment. This is a JCB backhoe working in
Dubai, UAE.
As the airlines have taught
us, there is a balance between
the annoyance factor of
extra charges, especially new
charges, and the extra revenue
they generate. A customer’s
bureaucratic purchasing
department can delay payments
on invoices that have unexpected
or unwanted charges, hurting
rental company cash flow.
