Many American Rental Association (ARA) members around the country have found it difficult to raise rental rates over the last few years. They say sales are down and they don’t want to lose more sales by raising rates for such reasons as “because my competition’s pricing is lower” or “my customers will complain.”
Cutting payroll and other expenses may help the bottom line when revenue is decreasing. If certain expenses have gotten out of hand, money may be saved by managing these expenses better. However, as sales increase, expenses also will increase.
As our expenses increase annually, so should our rental rates. Most of us have seen increases in resale merchandise, new rental equipment purchases, wages, insurance premiums, fuel, shop and office supplies, credit card processing and the list goes on. The cover story in this issue discusses the implications of Tier 4 on rental businesses. Most equipment you purchase manufactured under Tier 4 will have a higher cost and potential increased maintenance expenses. So, if we have exactly the same revenue with all these increased expenses and our rental rates remain the same, our bottom line cannot help but suffer and an already thin margin could become nonexistent.
So let’s consider the reasons rental stores think they will lose sales by raising rates:
n My competitors’ rates are lower. It is always a good policy to know what your competition is doing and factor that in. However, each rental business must set rates based on the cost of doing business, customer base and marketing strategy. Someone has to be the leader and I would rather be the first in line when it comes to profit.
n If I raise rates, I will lose customers. Most customers will not even notice price changes when done gradually in small increments instead of waiting too long and having to raise them in a more noticeable way. Rental rates should be fair to the customer and the rental operator.
Other factors in determining rental rates include:
n Utilization. Is a rental item always out of stock? Should I buy more or raise the rates and leave the inventory rate the same?
n ROI. Is it taking too many rentals to achieve my desired return?
Gas and oil companies raise their rates with every little fluctuation in the market. Health insurance companies pass on large rate increases year after year. The economic triggers for price sensitivity vary among sectors, but each must evaluate how to compete in today’s marketplace. Rental companies should consistently evaluate their economic position to keep pace with their rising costs as well.
To help better understand how what you are doing compares to you peers, check out ARA’s Cost of Doing Business Report and participate in the Cost of Doing Business surveys. This will give you a good idea of where you stand in comparison to similar businesses and guide you to where your price is for profit.
Stay well informed regarding trends within the industry and in your market area. ARA publications let you know “the news of day” as well as management information to incorporate into your business. The ARA Rental Market Monitor™ member subscription service forecasts the economic outlook nationally down to your metro area in your state, so it has a wealth of economic information to help you project your profit potential. ARA’s Rental Market Metrics™, accessed through your software provider, can provide an invaluable analysis tool for your rental business regarding financial performance.
The economic outlook for our industry is favorable. We are currently outperforming the growth of the economy four times over in rental revenues. Rental has the opportunity to increase market share in the current economy. The opportunity to increase our profit potential also exists within this environment. To me, it’s all about building our businesses for the future and for the long-term, and I suggest that pricing for profit will serve you well as a business owner.
Mike Flesher, owner, Taylor Rental Center, Vestal and Ithaca, N.Y., is the 2012 president of the American Rental Association. He can be reached at 607-729-7167 or firstname.lastname@example.org.