Whenever I speak with independent rental business owners, I ask about their competition, but not necessarily what they think about their competitors, particularly if they are up against the nationals in their respective markets. That’s because it’s likely I’ll get an earful about how they believe those companies cut rates to get business and how long it has taken the industry to stabilize what gets charged for what equipment so that it’s profitable.

In our current economy, however, the temptation to cut rates to generate revenue can be overwhelming. For every business person I’ve met who thinks cutting rates is a good idea, there are hundreds if not thousands who know it’s a bad idea. Cutting rates is a slippery slope that can turn equipment rental into a commodity with little or no margin if you just compete on price.

The topic of rates recently reared its ugly head as a big concern in what some would think of as an unlikely place — RSC’s first-quarter conference call. In the May 7 call, RSC’s CEO, Erik Olsson, chided another national rental company, without naming names, for allowing its rental rates to decline by 11.5 percent in the first quarter of 2009. Olsson seemed upset to have to tell analysts in his conference call that RSC’s rates had dropped 4.1 percent in the quarter.

In case you haven’t read or heard about Olsson’s comments from the call, here are some of the highlights related to rental rates:

“We are very disappointed to report a 4 percent rate decline in this quarter. We are doing everything we can to hang on to the rates we have achieved using the industry-leading value we provide customers as the line of defense,” Olsson said.

“However, when the biggest player on the market dropped rates by 12 percent, following multiple quarters and years of reported decline, and other significant players appear to be following suit, there’s only so much we can do. Some players within our industry are lacking the pricing discipline we would have expected, significantly amplifying the pressure on rental rates,” he said.

“There are regional players participating in the race to the bottom, too, but their scope is more geographically contained. There seems to be a widespread misconception that lower rates will stimulate demand. A customer rents equipment when there is a need and with equipment rental being only 2 percent to 3 percent of a construction project cost, lower rates won’t change a thing in terms of the economics of the project, other than start a race to the bottom for the same slice of the rental pie. Mismanagement of rates puts the credibility of the entire industry at risk,” he said.

“We have the price competition, and our choice to defend rates by sacrificing some volume has meant that we have lost some customers. We have competitors that come in and undercut us by 25 percent or more in order to get the business. There have been several or numerous examples of where we have let the customer go to a competitor for that reason, where we will not play that game, and the customer has come back to us a couple of weeks later or a month later and said, ‘We can’t work with competitor X. Their service level is just so bad. So, we would like you to come back to us.’ We’re comfortable in that we’re focusing on the right things and we’re making the right decision prioritizing rental rates over volumes and letting our service be the differentiator to our competitors,” Olsson said.

Michael Kneeland, United Rentals’ CEO, in his first-quarter conference call, said his company also has walked away from unprofitable deals or deals that would set the “wrong precedent,” yet he expects the company’s rates will decline further before they turn around. Stay tuned.