Solution providers to the Rental Industry in Western Canada.
Tip # 7 - How should I pay my rental sales reps? (Posted Feb 12th, 2017)
Paying sales reps has always been an issue in the rental industry. The variety of formats are as numerous as the number of rental companies. I'll review some of the more common pay structures and the pros and cons of each. No structure is perfect for all. Hopefully you can pull something from this tip that will allow you to build the right program for your company.
Base and commission
One of the most common pay structures in the rental industry. The aggressiveness of ownership or management dictates the size of base and commission percentage.
The best way to determine your base and commission percentage is working backwards from your desired sales rep remuneration.
Let's say you want to pay your sales rep around $100,000 and their territory should bring in $3M in revenue.
For an aggressive sales rep you could go with a base of $2000/month and commission of 2.5%. Annually that would be $24,000 base plus $75,000 commission for a total of $99,000.
A less aggressive example would be a base of $4450/month and commission of 1.5% or $45,000 potential for a total pay of $98,400.
This is not as common in rentals, but is a fit for sales reps that are long term and proven reps with a solid base of customers and loyalty to the company. As opposed to variable pay with a commission structure, you are paying that rep the same in good times and bad. You are not flexing with your companies revenue. There are reps that don't want to roller coaster with the economy and see a straight salary as their best option.
Straight Salary with Bonus
In between base with commission and straight salary is salary with bonus. Simple math of performance based bonus paid on achieving targets. You can pay on monthly, quarterly or annual basis. The most common metric used is revenue, but you can also pay bonuses based on numbers of calls, new accounts or new/used sales. Or even a combination of several metrics.
If you have a safety based culture in your company (which you should ... see future TIPS) you can base bonus on safety metrics. Driving record, safety training sales, tool box talks, even safety walk-arounds on sales vehicle.
Other factors to consider:
- Commissions on revenue streams other than rental revenue. If you want to drive sales on items like consumables or damage waiver, pay a higher commission on those items. You know you have more margin available, get your reps to push it more. Do you need to liquidate older fleet? Bump up the commission on specific high houred pieces.
- When to pay commission? Should you pay at invoice? Or should you pay when the company gets paid? Keep this in mind, you hate to have to claw back a commission on some bad debt (or eat it as most people do).
- Do you want to reward higher rental rates? Consider a tiered commission structure. If the rep gets 90% of book rate they may get a 2.5% commission. If 80-89% the commission drops to 2%. Under 80% only 1%. Some rental companies have even dropped commission all together if discount goes too low.
NOTE: If you decide to try this structure make sure to the "secret discounts" are considered. Free freight, extra set up days, free fuel should be watched to make sure they are not substituted for discount.
- Commissions for other employees. You all know outside sales reps get the customer, but the counter, drivers and in some cases mechanics keep them. Some rental houses pool a smaller commission and split it among certain staff. This allows you to pay your a people a bit more when they are working harder. (Counter reps .... you can buy me a beer if your owner/manager starts doing this!)
No matter what structure you decide on, make sure it fits your company and the type of sales rep you want representing your company. If you believe in having a sales rep "Eat what they kill" then you want a small base and big commission. If you believe in "slow and steady wins the race" then go with a straight base. If you have an initiative you are trying to achieve (sell more sandpaper or propane) then use a salary with performance bonus.
One additional tip is to always discuss the structure with your sales rep. Set expectations together annually and I always recommend putting it in writing. It makes both of you more comfortable.
I hope to see you all at the ARA in Orlando or the CRA Prairie show in Edmonton. I'd love to show you some new lines I've picked up.
CRA is March 11th at the Expo Centre in Edmonton.
Together, let's make our industry better.
Tip # 4 - Time Utilization and Apples and Oranges (Posted July 7th, 2016)
So I can see some of you are asking "What do apples and oranges have to do with time utilization?"
More than you think.
Everyone has heard the term "compare apples to apples".
The term applies to one of the most used rental metrics in our industry. TIME UTILIZATION.
Depending on who you talk to, time utilization or TU can be loved or hated. In future tips we will discuss why there is such a range of emotions regarding TU. In this tip, we will focus on how TU can be different from rental house to rental house.
Here are some of the different methods of measuring time utilization:
- UNITS ON RENT divided by UNITS IN FLEET
- UNITS ON RENT divided by AVAILABLE UNITS (on rent and green tagged only)
- DOLLARS ON RENT divided by DOLLARS IN FLEET
- DOLLARS ON RENT divided by AVAILABLE DOLLARS OF FLEET
- sometimes referred to as dollar utilization
- The above measurements can also be calculated using units over a certain dollar value (under $5000 not included)
Considering these different methods of calculating time utilization, you can see how all the "apples" may not be "apples".
How this can affect you as a rental person depends on how the measurement is being used.
I recently spoke with a rental branch manager who was getting pressure from his owner that he was not getting as high a time utilization percentage as a publicly traded company. The publicly traded company was reporting a number that did not include units under $5000 or units that were hard down, red tagged or being transferred to other branches. The branch manager was working with a number that included ALL units in fleet. This was like comparing apples to oranges.
So often, the larger companies also throw around DOLLAR UTILIZATION numbers which basically focus on big ticket equipment. With pressures from investors and the stock market on return on invested capital, you can see that they are more concerned with "the big stuff getting out". In the meantime, the smaller player is counting every unit. A $150 grinder counts the same to the TU percentage as a $200,000 boom lift.
So make sure you understand how you are measuring TU and if being compared to another rental house, make sure you know how they measure it. Especially if you have a bonus program based on TU.......
If you have any questions on TU or any other commonly used rental metrics feel free to give me a call or email. Or feel free to make contact through my website.
Together, let's make our industry better.
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Tip # 5 - Is your physical counter set up driving away customers? (Posted Oct 11th, 2016)
How is your customer counter set up at your store? Could you be losing business based on a piece of furniture?
This is a question that not many rental stores ask. The reality is, your counter is your first impression for many customers. How it drives customer interaction is just as important as a website or delivery fleet.
Most counters are set up in two basic formats. I classify the styles as "stand up" or "sit down". Stand up is what you commonly see in the banking industry. Fairly high counter height with stools in front and back for customers and employees. The "sit down", as the name implies, has employees sitting in standard chairs behind the counter, lower than the customer.
If you have a sit down counter, watch your employees next time a customer comes in. The natural reaction is to "hide" behind the counter and have the customer wait to get your attention. Customer and employee are not at eye level. The employee is typically looking at paperwork, terminal or phone behind the counter. It almost feels like you need a bell on the counter to ring to get the employee to look up. Not very friendly and the customer's experience is starting on the wrong foot.
If you have a stand up counter, the employee and customer are at eye level as soon as they walk in. In most cases, recognition is instant. Great first impression. You have the customers attention and you show you want their business.
For those who have a stand up counter, here are some quick tips to make the experience even better. First, make sure monitors are on top of the counter (again at eye level). I would even recommend to remove employee stools. This will keep employees upright and eyes higher. If you read any information on "sitting disease", this could also help employees with their fitness.
Positioning of the counter is also important. The counter should naturally be the first place a customer walks to. Not off to one side, not in a corner, not past rows of equipment. Information is at the counter. Don't make a customer walk a maze to find that information. (The same should apply to your website - something the author of this tip is working on - due to some recent customer feedback).
Your counter should also be clean and uncluttered. I'd also recommend a well defined area to place rental returns. Mostly to avoid customers throwing equipment on top of counter, but also for customer safety.
So take some time in the next couple days and watch how customers react to your counter. Some simple changes could improve your overall customer experience and make you more money.
If you would ever like a second set of experienced eyes to give an opinion on how your counter is set up, give Five Bo Inc a call. We have rental professionals with 25-30 years of experience who would love to come by and talk rentals.
Together, let's make our industry better.
Tip #1 - Sell equipment coverage (Posted April 1st, 2016)
It has been called damage waiver, rental equipment coverage, rental protection, fire theft and vandalism coverage, and many other clever descriptors. To be clear we never call it "insurance". That would just get us simple rental folk in a lot of trouble.
One fact is, no matter what you call it, it can help your organization recover lost costs and generate extra revenue.
The concept is simple, offer optional coverage at an additional cost (usually a percentage of the rental between 7 and 14%). Coverage is described in your contract language and can be as generous or constricting as you wish. My advice is to be lenient but with restrictions. Offer coverage for the basics of accidental damage, theft, fire and vandalism. Restrict coverage for intentional misuse or abuse (gas in a diesel engine). Also remember to only cover theft and fire if a formal report is filed with local authorities. You should also include a deductible to limit costs of large claims. A suggestion would be 10% of repair or replacement to a maximum dollar amount (industry ranges from $1000-$5000).
Example: ABC Construction rents a tamper for $100. Coverage costs them $10 (at 10%). The unit is stolen from site and a police report is filed by customer. Retail replacement cost is $2000. The customer would pay 10% ($200) deductible.
You may look at the example above and say "How does that make my rental house more profitable? I'm losing $1800!". It may look that way at first, but in reality, you have earned $100 for rent, $10 for coverage, $200 in deductible for a total of $310. Your depreciated value of a 2 year old piece is probably around $1000. So your one time loss is $690.
Looking at the BIG picture, your additional revenue will more than cover any of these losses. To keep it simple, if your rental house does $1 million in pure rental, and if you sell coverage on only half your transactions, you will generate $50,000 in extra revenue (based on 10% coverage cost). That more than covers the $690 loss on the single transaction.
You will also find that you get very few claims. From my personal history, the numbers were around .15% or $1500 for every $1M in revenue.
When you do have to honour a claim, make sure to market it. Your customer will let others know. You should as well.
I'd like to give a personal example of a customer who had a skidsteer stolen from his site. He was extremely upset with his "assumed" cost of $40,000. When informed that he only owed $2500 (deductible), he was ecstatic! He also told three other customers about the coverage in the same week.
Many of the tips I plan on sharing will apply more to smaller rental houses, but this one applies to all. The larger players all understand this concept and offer it at their branches. Where they can improve is by "selling" it. Start friendly competitions between branches and sales reps, sell the value to account customers, and market "big wins" for customers.
Thank you for your time and attention, I hope you watch for new tips I'll be posting on a regular basis.
Together, let's make our industry better.
Tip # 6 - When should I buy used for my rental fleet? (Posted Jan 3rd, 2017)
Buying used equipment has always been an option for rental houses. Most of the larger national players prefer to buy new, but privately held companies need to understand when the time is right to buy used equipment.
There are several factors to consider when looking at used fleet.
Market price isone of the biggest factors when considering buying used fleet. Prices move with the market. In a downturn, prices go down. As the economy ramps ups, prices rise. No great revelation there! The key is understanding how to take advantage of the market. Saving 25-30% on a piece can bring you a lot of profit later on.
Two sources of market price are Rouse Analytics and Ritchie Brothers Auctions. Rouse offers a service that analyzes trends in equipment prices for a cost. www.rouseservices.com. Ritchie Brothers tracks prices on pieces sold at their auctions. You can find this information for free by signing up to their website. www.rbauction.com.
You need to keep in mind your source when checking prices. Ritchie Brothers is an auction or "liquidation" price. As a result prices are usually lower. Rouse pulls more data. Both auction and sales from larger companies. Their prices are usually higher than Ritchies.
When buying used, make sure to always have the new price to compare to. As a simple calculation, take 20% off the new price per year. Of course, factors such as hours and extreme wear and tear must be considered.
Seasonality can also come into play regarding price. An example would be buying heat in the early spring or compaction in the winter. When time utilization is down due to season, the price may be reflective. The problem in this case is you have to sit on some fleet until the season comes back.
How does technology come into play when buying used equipment? I'll use one of the most recent examples of technology to demonstrate. I'm sure you have heard of Tier IV diesel engines. At present, there are many rental houses intentionally stretching the average age of some of their non Tier IV fleet. Other rental houses are buying used units in their market instead of Tier IV. By taking advantage of some grandfathering and re power regulations, they can stay with the older engines longer. Of course, your local laws and regulations will have to be considered in making a decision on Tier IV.
Technology also comes into play in the training of your employees. Sales and mechanical staff may require new training to sell and maintain new equipment. I wouldn't use this as the only reason not to buy new, but it may be a small part of your decision.
Sometimes the deal is just too good to pass up! It may be a customer looking to liquidate some fleet and you get first crack at it. Or a competitor deciding to liquidate some fleet in order to improve some year end metrics. It could be an equipment dealer looking to reduce their balance sheet and sell off some trade ins at a loss? If the deal makes sense, sometimes you have to jump at it.
In this case, make sure to do your research and get new and used prices to compare. Don't let emotion drive the decision.
Don't forget your customer! You may have a customer that prefers an older model due to performance or familiarity. By actively searching for the "preferred" model or year, you may drive more business. This should also be considered when you decide to sell off some of your older units. It never hurts to ask your customer.
Try this next time you look at selling off a bigger piece of equipment. Look up the three biggest users of the piece and give them each a call to get their opinion. You may decide to keep in your fleet a bit longer. Or you may stumble into an opportunity to sell the piece to that customer?
Buying used is an option that should always be considered in rentals. A mix of new and used can greatly increase your profitability and cash flow.
If looking for new or used fleet, be sure to give us a call at Five Bo Inc. Or check out our NEW AND USED EQUIP DEALS section of this website.
Together, let's make our industry better.
Tip #2 - Re Rental is NOT failure - 7 reasons to Re rent (Posted April 12th, 2016)
"You are FAILING as a rental store if you have to rent a piece of equipment from a competitor!"
This was a comment I recently heard from a veteran counter person. They felt that having to offer someone else's equipment to their customer was equivalent to losing the order!
In my opinion, the comment couldn't be further from the truth.
Re renting (AKA sub renting) is a legitimate strategy for everyone from new start ups to stalwarts of the industry. By renting at a discounted rate (typically 20%), you can satisfy demand and still realize profit.
So when would a "re rental" make good business sense:
#1 - CASH or CAPEX is limited or restricted
It happens to every rental house at some point.
For a privately held company, cash is needed for other expenditures and not available for a big purchase.
For a publicly traded company, your budget or CAPEX has been maxed out.
By re renting you can still provide a solution.
#2 - No technical expertise
You know what piece of equipment is the right solution but you don't have the mechanic, parts or training to provide the level of service your customer deserves. Re renting allows you to supply the piece with the support of the other rental house.
This is usually true for rentals from specialty rental houses. An example might be a Poly B Fusion welder or a large tent rental.
Get a pro in your corner. Your customer will appreciate it.
#3 - Try before you buy
It is one of the same reasons we tell our customers to rent. Get familiar with a brand, make or model before you spend.
Trying to decide between three different tracked skidsteers? Why not try one of each and ask your customers what they think?
Research pays off. Take your time and get the right machine.
#4 - Peak shaving
Landing that big order is a thrill we all live for. What happens when you only have half the product required. The key is always knowing how much to buy. Buy what you are comfortable with and re rent the rest. The re rental fills in the peak of the demand curve.
#5 - Education
How better to learn about a new category of equipment then handling it?
Maybe you are looking at offering shut down tools or party rentals but not sure of the labour required to supply professionally.
By re renting some items you can test your system, people and facility while learning what you need to "rent it right".
Most rental people are "hands on" and learn by touching, loading, cleaning and renting the product. Re renting gives you that opportunity while still making some profit.
#6 - Another form of finance (RPO)
Many manufacturers offer Rental Purchase Options on their new equipment. This may be a bit of a stretch from the typical re rental but it is still renting from another company to satisfy demand. It gives you the flexibility of sending the equipment back to the manufacturer if not satisfied or if demand has dried up.
(Watch for more on RPOs in a future JIMBO's RENTAL TIPS)
#7 - Rental rate research
How better to research rental rates of your competitor than by renting from them? You get book rates and also see how low they are willing to go on discounts. You can guarantee that whatever discount they offer you they will offer most larger customers or long term orders. No guessing. Hard facts in black and white.
Hint within a tip: Make sure to communicate with your rental source as soon as the unit is off rent. An extra two day charge could eat up any of your margin.
Don't feel bad about having to rent from another source to provide a solution. Embrace it! it may be the best solution for your business.
Together, let's make our industry better.
Tip # 9 - HEATER RENTALS - From hot rocks to magnetic heat (Posted Dec 11th, 2017)
Heating technology has come a long way in the past 50 years. As with many construction products, the rental industry has been one of the primary drivers and innovators.
Manufacturers have relied on the advice and marketing channels of rental companies to bring their new ideas to market.
Out here in Western Canada, many of us have grown up with stories of parents warming up rocks before long sleigh rides or tucking rocks under blankets at the foot of their beds.
The rental industry was a little more advanced, but for years our temporary heat was basically a tiger torch in a tube.
We now have natural gas heat, propane heat, diesel heat, kerosene heat, radiant heat, hydronic heat, flameless heat, steam heat, electric heat, magnetic heat, friction heat, direct fired, indirect fired, open flame and I'm sure many more I have missed.
Hopefully you weren't reading this article to find the right heat for you. I don't believe there is a perfect heat but would like to give you a couple simple tips on taking advantage of options available to you.
Stay up to date on technology
Take advantage of the various rental magazines, trade shows, you tube videos, manufacturers and other rental houses. Ask questions of your heat suppliers. Most good suppliers are trained on their heat and their competitors heat. Make sure to ask questions that can be answered with measurable data. If a manufacturer cannot answer one of your questions and back it up with hard numbers, ask more questions. Measurable numbers regarding heat include btus, cfm, degrees, fuel capacity and consumption.
Never be afraid to ask for references from rental houses outside your market.
Keep in mind the safety of your customers. Heaters and torches burn down a lot of construction sites. You don't want your heater to be the ignition source of a fire. Make sure your suppliers can offer you training on use and maintenance of their heaters.
Understand local bylaws and regulations
Stay up to date on what regulations are in place and potential changes to bylaws. There is nothing worse than buying a new product and finding out it is not allowed on construction sites in your trading area in the following season. Your local construction association is a great resource for rules and upcoming changes.
Ease of maintenance
A new technology can be the most efficient and safe heat available, but if you can't fix or maintain it when it comes off rent or breaks down on site, it is not much good to you. Your people will naturally select the unit out of your fleet if they don't understand the technology or have the tools to work on it. Also consider availability of parts. If your parts have to come from Florida and you are in Alaska - reconsider.
P.S. If the heaters are built in Florida, you may have more questions to ask!
Calculate overall cost - not just rental rate
Figure out how much the unit will cost your customer per hour including fuel and power required. Take into account maintenance and manpower to refuel. This will also allow you to get a higher rental rate on a more efficient piece of equipment. In our local market, we are seeing a lot of customers requesting natural gas over diesel heat to realize the overall savings.
Roll the "well researched" dice
After asking the questions and getting the answers you need, take a chance and be the first to market. I was lucky enough to be one of the first players in Western Canada in the Hydronic Heat market. By jumping in early, our organization realized 150% return on investment in the first season. Plus customers saw us as "innovators" or "ground breakers" in the equipment industry.
Do remember that you once everyone else jumps on the bandwagon you may need to reduce rates. Take that into consideration when calculating the risk. The premium rate will not last forever.
Hopefully these simple tips will allow you to make a better decision on your heat needs.
If you are looking for a "pro" to talk heat, give us a call and we can put you in contact with some great specialized temperature control professionals.
You can call us at 780-405-3173 or email at email@example.com
Together, let's make our industry better, safer and warmer.
Tip # 8 - SAFETY = PROFIT at your rental store (Posted May 22nd, 2017)
I know what you are thinking! Safety is nothing but a cost to a rental store.
I'm hoping I can change your mind and prove to you that safety can improve your bottom line.
Before we dive into examples of how safety can generate you more dollars, let's keep in mind what the objective of safety should be.
A well designed safety program has the ultimate goal of allowing you, your employees, your customers and your suppliers to go home in the same physical, mental and emotional condition they came to work in. A truly great safety program may even transfer that culture home, allowing you to keep family and friends of employees safe.
If you are looking for help with your safety program at your rental store, feel free to contact Five Bo Inc. We can help you reach that next level in safety and make it part of your culture.
So back to making money with safety..... Here are just some examples of how you can use safety to increase profit.
This first example is an obvious one. Offer operator training to your customers.
Courses run $175-250 per person and courses typically max out at 10-12 people. $3000 a day for a course that costs you only time.
Not only is this a great revenue stream, it also fulfills your requirement to ensure your customer is competent to operate the equipment they rent from you. If you don't offer or ask if the operator is competent, you are putting yourself at risk!
So not only can you generate revenue, you can also reduce the risk of liability.
Courses are not limited to aerial work platforms. Skidsteers, excavators, wheel loaders, forklifts, telehandlers, heaters, power distribution, trench shoring and ATV products all offer opportunity to train.
Injured employees are not as efficient and healthy employees. Even small injuries can affect how well an employee does their job. A twisted knee or strained back can put a driver, mechanic or wash bay attendant out of commission. That forces you to find another employee, give someone else overtime or use an untrained person in that role.
Experienced and trained employees do their job faster and keep your customers happier. If they don't get hurt, you don't have to sacrifice customer service.
Safety supplies and equipment
Most rental houses offer gloves, dust masks, ear plugs, safety glasses and goggles for sale. In most cases, this is an add on to an existing rental and your success is dependent on your counter staffs ability to sell and your skill at displaying 'point of sale' product.
Why not try and sell pre-packaged bundles of these safety products? A bag consisting of a couple pair of gloves, glasses, masks and some ear plugs. Set it up in your system under one part number and only charge the customer for what they use. It may result in only a pair of $5 gloves being sold, but it may also earn you $20 on the entire package. Plus you may save your customer a cut, scrape or piece of debris in the eye.
Remember to also make the more expensive safety equipment available for sale or rental. Items like chainsaw chaps, hard hat with visor an ear protection, fire extinguishers, hose whip checks, wheel chalks, hard hats, ATV helmets, aluminum ramps and safety harnesses.
Be aware of safety trends and legislation
I can think of three lines of equipment that became huge rental opportunities as a result of safety issues which translated into legislation.
Trench shoring is a growing market for rental houses. The days of 'two by fours' and plywood are going away. Engineered trench shoring is required in almost every jurisdiction in North America.
Construction safety fencing is another product that has evolved from plastic to steel self supported 8 x 10 panels. Construction companies want to keep the public out of their sites but also block off open excavations.
A final example is light towers and lighting in general. Years back in Western Canada, a fire and fatality at an oil rig resulted in legislation which required 4 times the amount of light needed per rig. Overnight the light tower market increased dramatically.
Those who understood the new requirements took advantage.
Several years ago I spoke at the ARA Rental Show Seminars. Our session was titled something close to "Regulatory Compliance in the Rental Industry". The title didn't draw a huge crowd, but message is an important one.
In many states and provinces, your safety record is requested before you are allowed on a customers site. This typically applies to larger industrial sites but some smaller contractors with a strong safety culture are starting to require a low injury rate of suppliers.
I personally know of rental houses that were disqualified from bidding on rental packages because their LTI or TRIF was too high. In other words, the customer felt the rental house was "too dangerous" to be on their site.
So by having a poor safety rating, you can lose business.....
Sell your safety culture
If your company lives a culture of safety, why not sell that as a competitive advantage. If there are two rental houses in your town and your company has gone 3, 5 or 10 years without a recordable injury, let your customers know. Construction companies appreciate the effort it takes to keep employees safe. Even cash customers will frequent your business if they feel safer renting from you. It could be in how clean and tidy your yard is or how well your counter staff explains how to use the tool. It all adds to you safety culture.
Insurance coverage savings
A lower injury rate can also reduce your cost of insurance coverage. The example I use is Worker's Compensation Board premium rebates given in the form of a cheque for good performance in parts of Canada. It is a great surprise to get a cheque back for keeping your employees safe.
Safer employees don't only keep their bodies safe, they also don't damage as much equipment. Safe work practices, training and common sense can reduce equipment accidents and damages. Less damage means lower cost of doing business. Biggest example involves your delivery and sales vehicles. One vehicular accident can cost you $5000-50000.
Of course, their is always a cost to building a safety culture, but I hope I have demonstrated how that investment can help your returns.
Ultimately, you want to make sure your employees leave their place of employment able to play with their kids, participate in their favourite sport/activity or just enjoy their life away from work.
If looking for help to get your rental company to the next level - give us a call at Five Bo Inc.
Together, let's make our industry better and safer.
Tip # 3 - Are rental purchase options (RPOs) right for you? (Posted May 10th, 2016)
Did you know there is a secret weapon that is available to any rental house that chooses to use it?
A Rental Purchase Option allows the customer to apply rent to the purchase of the piece they are renting. There are a variety of structures that have different percentages of rent to apply. The structure is up to you and can be flexible depending on type of equipment, season or even length of term. We will detail potential structures later in the TIP.
As with most secret weapons, there are positives and negatives to the use of them. We will go through the reasons for and against from the eyes of different rental people.
RPO Example: A customer rents a 2 KW generator for $200 per 4 weeks. The rent extends to 5 cycle bills and the customer realizes he has spent $1000 in rental. His project is going to run another couple months so he asks if he can purchase the generator. For simplicity, let's set a price of $2000 and allow 100% to apply to purchase. The customer would pay an extra $1000 and own the unit.
Those in favour
RPOs can give you a competitive advantage over small and large competitors in your market. As a result, most of those in favour of RPOs are on the sales side of the business. Dealership based rental houses and rental houses with a "new fleet" philosophy tend to utilize rental purchase options as well.
Dealership based rental houses need to sell equipment and increase market share. RPOs are a natural fit for them to increase number of units in the market and also re stock their rental fleet. By offering RPOs, they can convert a rental customer into a parts and service customer. For dealerships, the real profit is in the parts sales.
Some rental houses have a strategy of offering the newest fleet in the market. These rental house want to turn or replace their fleet in 30 months. By selling through used sales and RPOs, they can bring in newer or more advanced product sooner.
Most sales reps LOVE rental purchase options. Why? Because good sales reps want to solve customers problems and RPOs give them a larger suite of offerings to satisfy needs. Another WHY? Because customers are asking for RPOs.
It also doesn't hurt if the sales rep is paid on commission. If they can double their commission by renting and then converting to sale, their wallet gets thicker. (See SALES REP COMPENSATION in future JIMBOs RENTAL TIPS).
There is another business case that encourages RPOs. When a rental house needs to liquidate fleet due to economic slowdown or completion of a large project, RPOs can help you sell off fleet more profitably than auction and quicker than retail used sales.
In my experience, those opposed to rental purchase options are found in three groups. Accountants, capital expenditure restricted managers, privately held startups and RENTAL ONLY stores.
The reasons for these groups to be opposed are more than valid.
Accountants (not all, but most) tend to want structure to asset allocation. In other words, they want a basket of rental equipment, basket of new assets (consumables and retail) and a basket of used equipment for sale. Bouncing the assets between groups on the balance sheet can add work to both accountants and your rental system. Depreciation must also be adjusted.
Accountants (typically in larger organizations) are also concerned with potential "accounting losses". This occurs when the depreciated value or net book value (NBV) is lower than the selling price, resulting in negative margin. From the accounting side, this is a loss. In reality, the overall transaction is still profitable from a cash perspective, if done correctly.
Another accounting concern is the recognition of revenue over year end. RPOs that take place in two different fiscal years can cause even more confusion on your balance sheet and income statement.
In many larger publicly traded organizations, capital expenditure is set at budget time and your ability to exceed this spend is limited. Managers working in this environment may be unable to replace fleet if sold on RPO. Especially if the sale happens late in the year. If you can't replace fleet, you may have to say 'no' to customers.
Owners of new start ups are more concerned with getting every order they can. They are justifiably focused on satisfying customers and not losing rentals. If they sell a piece, they may lose a future rental if they have to wait for replacement. They would much rather lose a sale than a future rental.
Finally, some owners have a strategy of being a RENTAL ONLY store. They may want to build their fleet for an eventual retirement and asset sale. Every piece adds to their retirement fund. This can be tricky and timing is critical, but is a very common business model.
Here are a couple RPO structures that have been used in the rental industry.
100% to apply 1% per month carrying charge
In this model, all the rent is applied to the purchase price, but a 1% per month charge is deducted from the purchase price. There is usually a maximum number of months to apply (6 months in most cases). It is important to remember that the 1% is calculated from the quoted purchase price, NOT a declining balance.
Sliding percentage based on term
This structure reduces the percentage applied by month rented. An example would be 100% 1st month, 80% 2nd month, 70% 3rd month, and so on. A carrying charge or fee is applied as well. Some will use a declining balance while others use the original purchase price. In most cases, their is a limit on months to apply.
There are a variety of models available, but most are based on a version of the above structures.
- You may have RPOs available on all units?
- You may just offer on the fleet you want to sell?
- You may want to offer only to some customers?
- You may limit months to apply to purchase?
The important thing is to tailor a model that fits with your organization.
One structure that accountants will suggest is a pre-determined signed contract stating the unit will be purchased at a defined date. They may argue that this is a RPO but in reality, this is a RENTAL PURCHASE (RP). I would argue this is merely a short term lease. It removes the flexibility (or OPTION) for the customer. Of course, leases should always be available, but I would suggest you "sell the paper" or in other words, use an external leasing company.
Most importantly, your customers want the ability to take advantage of the equity they have built up in through the rental. If you are listening to your customers, you should consider some form of a RPO.
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