We're going to start a new module, module 4, which is going to be focusing on rental rates. Now rental rates are closely tied to the products portion of what we are trying to attract customers with, because we can actually have the right machines, but if we don't have them priced correctly, it makes our offering kind of fall apart. So we want to delve into the science, or is it art? That's the two pictures on your screen there, because some people think that setting rental rates is a science and that it's a math equation, and just give me the formula to figure out the rates. And other people are a little bit more abstract with it, and they find their way into the market and they take into consideration a variety of influencers, and then they establish rates, and there is not a formula that's directly tied to how they came up with it. So I want to describe to you some strategies for setting rental rates, and also debunk some myths associated with rental rates. So let's take a look at some of these. Some dealers have thought that I can buy a machine and pay whatever, and that I add my overhead costs in there, and I create my gross profit margin that I'd like to get out of rental, and therefore pops out the rental rate. Another thinking is that as long as I make positive cash flow, so if my payment is $1,000, then let's charge $1,500, because I'm really focused on trying to make positive cash flow and that'll work for me. And then this one's probably been around for decades, is that dealers, especially with heavy equipment, have been told for years and years and years that the rental rate should be about 5% of dealer net. And some people think that rental rates are always related to the machine cost, and that customers, all customers, interpret rental rates the same, and that rental rates are an exact formula. Facts and myths, okay? So I want to just go back through these. A customer doesn't really care whether you've got a really expensive building and overhead and big acreage and brand new pickup trucks and all that kind of stuff to pay for. The customer does not want to pay for your extravagance in terms of your overhead costs. So if you think you can roll all of that up into a cost and then spit out a rental rate and somebody's going to pay for that, I think you'll find otherwise. In terms of making positive cash flow, in this particular scenario, it doesn't take into consideration anything about supply and demand and competition. And so it would be very short-sighted to price something according to whether you were making a spread over what your payment was because you're really not taking into account competitive forces in the market or maintenance and repair and those types of things. And then the idea that the rental rate should be 5%. If you use that as a rule of thumb, I would suggest to you in some cases you're going to leave money on the table because somebody would pay more. And in other cases, you're going to get laughed at because you're not competitive because as we saw in the last session, some of the rental rates might be down around 3% or 3.5% of what a machine costs. So they would look at you as being a bit foolish. Rental rates are not always related to the machine cost. True or false? Well, I'll use an example of why would somebody be willing to pay more money for something and really it doesn't really matter about what the machine costs. So let's just take a situation, an emergency situation where somebody's got water flooding a job site or something. The last thing on that person's mind when they call to see if you've got a pump is what is the value of that pump. They could really care less about that. What they really want to do is get rid of the water and if you can get it there, they'll pay a very reasonable price for that. And so dealers oftentimes think that customers do all of this math in their head and they figure out, gee, I'd be better off buying that. Well, those days are a long time ago. Customers actually don't always consider what does that item cost or do they even have an interest in potentially owning something. They're more interested in short-term use. I use it for what I need it to do and I give it back to you, the dealer, and you have to manage it and you're the one that takes the risk. And customers interpreting rental rates the same. So let's just take an industrial operation where you've got a professional purchasing agent who's very cognizant of competitive prices out there and then you take somebody that is a job site superintendent for a privately held business and their sophistication about pricing or in some cases the industrial guy might be willing to pay more because he knows that if his operation stops that he's at high risk and so it would be very expensive for him to make a mistake. Whereas the smaller guy may not value his time the same way. So you can take the same product and you can rent it in one application and a customer will pay you in some cases maybe 30 or 40 percent more for the same exact item that you were going to rent to another guy in a different type of market because they don't value things the same way. And rental rates are an exact formula. False. They're not. There is a lot of I'll say freelancing with rental rates. And in today's marketplaces as competitive as things are I think you should really be in tune with looking for opportunities to adjust your rental rates. Not across the board like a wholesale change of all your rental rates but on individual items where you think you can adjust the weekly or the four week rate or potentially adjust the daily rate and make a little bit more money because of competition in the marketplace or because of your logistics. So I'm going to give you some examples of things to consider when you're thinking about raising your rental rates or even establishing them. So you want to think about this particular item that I'm about to price. How is it commonly used? Is this typically a daily rental item? Is it a weekly rental item? Do people generally rent this by the month or longer? And what kind of customer uses this item? And how much does time mean money to these people? I mean some customers are willing to drive 20 miles to save $10 and other customers their time is worth a lot more to them than that. So you need to think about if the customer values time and money then they will pay you a little bit more for extraordinary service and reliable equipment. And then think about the machine itself. How much does this really save the customer in terms of time and labor or maybe safer work environment? Because if you think about if you were to offer a new machine to a customer that could actually eliminate a worker, what might that be worth to them per day to use your machine and have one less person standing out there? So again, that has nothing to do with the purchase price of the machine. What it has to do with is thinking about the time savings that you're offering the customer and will they consider that in terms of what they'd be willing to pay for a rental item. You also have to think about machines that have a lot of wear and tear items. Anything that's a grinding machine that's got potentially carbide teeth that is very labor intensive as far as changing the teeth out or high wear and tear, you might want to consider that when you are establishing the rental rate for that item. And then another idea to think about is how many of these are in the general market that I'm serving? Do I have the only one or are there dozens of them? And so I may not have much of an advantage. The rate's already basically been set for me in the market. But if I am a relatively new type of product, you get to be the trendsetter and you establish the rental rate for this type item. And then lastly, is this a commodity item? Meaning that everybody has one and my product's not really going to stand out and so I just have to get in the game and I'm going to be forced to match probably everybody else's rental rate. But what I'm hoping to do is be able to lure them into some of my other machines because I've got these common items. So let's take a look at how different types of equipment tends to rent for different periods of time. Most people in the rental business have a daily price, they usually have a weekly price, and they have a four-week or a monthly price. But very few of the products that we rent actually rent equally in all of those time periods. They tend to work in two of the three, sometimes only one. But let's take, for instance, backhoes. Those are machines that are generally rented by the week or the month. Can you rent a backhoe by the day? Yes, some people do. But primarily the kind of work that they're going to do, it's going to be for a week or a month. In contrast, look in the other column, electric tools or concrete equipment. Oftentimes that stuff is daily and weekly. Some of your items, if you continue down that list, you might see skids and minis, and yes, they all operate in the daily, weekly, and monthly time frames. And so the concept that we have to get here is that if you've got an item that mostly rents, let's just say by the week and the month, then your daily rate, the customer almost doesn't really care because they don't ever rent it during that time period. So if you've got three rates to try to get right in the marketplace, what you really have to do is make sure that you get the main rate correct. I'll use the example of milk at the grocery store. If you go into the grocery store, the most common size of milk container everyone's buying is a gallon. But you can buy milk in the gallon, the half gallon, the quart, the pint, and the half pint. Well, if you were to go in the store and to buy the half gallon, it's almost as much as the full gallon. And the reason they can do that is because the person that's buying the half gallon does not want a gallon. They don't want to throw it out, and maybe they can't store the balance of the milk, but they have purposed to buy a half a gallon because that's all they need. So a half gallon is not 50% of what a whole gallon is. It's not even 60%. It's upwards of 75% to 80% of what a full gallon of milk is. The grocery store has figured out that there is no direct relationship between the package price and what the biggest unit might be. So a gallon, a half a gallon, is not half the price. A quart is not half of the half gallon. And so rental rates work somewhat the same. You can have a weekly rate that in some cases people might think that it should be exactly one-fourth of the monthly rate. Well, it doesn't work that way. It might be one-third of the monthly rate. Or it might be a little bit less than that even. So rental periods are really important to understand when you are trying to get your pricing correct, which is ultimately your offering for customers.

rental rates

set formula

customer demand

market demand

rental periods