setting rental rates is a balancing act: how can your computer help?
DESCRIPTION
Setting rental rates is a balancing act: how can your computer help?. CRA Rental Rally, San Diego October 27, 2004. Bill Veneris & Chris Redfern Alert Management Systems. “The economy is improving, the rental business is buzzing, but what about those RATES?” - August 2004 - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/1.jpg)
CRA Rental Rally,
San Diego
October 27, 2004
Setting rental rates is a
balancing act:how can your
computer help?
Bill Veneris & Chris Redfern
Alert Management Systems
![Page 2: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/2.jpg)
“The economy is improving, the rental business is buzzing, but what about those RATES?” - August 2004
“Most of the large rental companies report they are raising rates -- but with caution” - September 2004
“Setting the right rental rates demands fine-tuning of time and dollar utilization” - October 2004
![Page 3: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/3.jpg)
“We’ve always been able to get good rates until the consolidators came in and cut them, which meant I had to cut rates in order to compete and keep the business. What was I supposed to do, give them my customers?”
- Don Ahern, Ahern Rentals
![Page 4: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/4.jpg)
”When the consolidators came in, it was all about market share and becoming the biggest. They overpurchased on fleet and flooded the market, upsetting the supply and demand balance. Pricing was not a primary concern. The industry was chasing time utilization and exposure at the expense of rate.”
- Graham Hood, Neff Rental
![Page 5: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/5.jpg)
”If the question is, can we return to rates that existed prior to consolidation, my answer would be no. Once commoditization begins in an industry . . . . it’s very difficult to
reverse the trend..”
- Willie Swisher, Stephenson’s Rental Services
![Page 6: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/6.jpg)
“In many equipment categories we are actively sacrificing utilization in favor of higher rental rates…”
- Chuck Miller, Sunbelt Rentals
![Page 7: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/7.jpg)
“Without computerization, you’re just drawing straws in the dark.”
- Fred Hageman, partner with Hageman, Stansberry & Associates
![Page 8: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/8.jpg)
What’s your pricing strategy?
![Page 9: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/9.jpg)
The five components of price
• price objectives• cost• competition• demand• legal considerations
![Page 10: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/10.jpg)
price objectives
![Page 11: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/11.jpg)
The goal of our pricing strategy is
to maximize profit.
![Page 12: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/12.jpg)
Cost-Plus Model
Net Cost+
LTD Maintenance Costs+
Share of Operating Costs+
Profit---------PRICE
![Page 13: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/13.jpg)
Cost-Plus ModelTotal Cost = Net Cost + Maintenance Cost (Life) + Share of Operating Cost + Profit
Rental Days 80Rental Rate 185
(Operating Cost - Maintenance Cost)/Gross Profit 76.73% Profit/Gross Profit 5.60%
Original Equipment Cost 17,500 Net Cost 5,500Equipment Sales Price 12,000 Maintenance Cost (Life) 5,000Life (in Years) 5 Operating Cost 56,777Maintenance Cost Per Year 1,000 Estimated Profit 4,144Year's Revenue/Original Cost 0.85 Total Cost 71,421Year's Revenues 14,800 Total Revenues 74,000
Total Profit (Life of the Machine) 6,723Variance 2,579 3.49%
![Page 14: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/14.jpg)
Fine-tuning the revenue side of the model
• Damage Waiver
![Page 15: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/15.jpg)
Fine-tuning the revenue side of the model
• Damage Waiver• Sales Tax
![Page 16: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/16.jpg)
Rate calculation methods
• Prorate vs. Fixed Rate
![Page 17: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/17.jpg)
Rate calculation methods
Rental Rate Prorated Fixed Rate Hour $10 $6 $10 Day $60 $48 $60 Week $240 $240 $240 8Day/ 1Hr Rental $294 $310
![Page 18: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/18.jpg)
Flexible rates and demand
![Page 19: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/19.jpg)
Customer-specific rates
Targeted rate discounting
![Page 20: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/20.jpg)
Cost-Plus Model: Skid Steer Dealer
Total Cost = Net Cost + Maintenance Cost (Life) + Share of Operating Cost + Profit
Rental Days 80Rental Rate 185
(Operating Cost - Maintenance Cost)/Gross Profit 60.00% Profit/Gross Profit 10.00%
Original Equipment Cost 16,000 Net Cost 500Equipment Sales Price 15,500 Maintenance Cost (Life) 2,000Life (in Years) 2 Operating Cost 17,760Maintenance Cost Per Year 1,000 Profit 2,960Year's Revenue/Original Cost 0.93 Total Cost 23,220Year's Revenues 14,800 Total Revenues 29,600
Total Profit (Life of the Machine) 9,340Variance 6,380 21.55%
Profit for general rental store was $6,723.
![Page 21: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/21.jpg)
Cost-Plus Model: Skid Steer Dealer
Profit for general rental store was $6,723.
Total Cost = Net Cost + Maintenance Cost (Life) + Share of Operating Cost + Profit
Rental Days 92Rental Rate 155
(Operating Cost - Maintenance Cost)/Gross Profit 60.00% Profit/Gross Profit 10.00%
Original Equipment Cost 16,000 Net Cost 500Equipment Sales Price 15,500 Maintenance Cost (Life) 2,000Life (in Years) 2 Operating Cost 17,112Maintenance Cost Per Year 1,000 Profit 2,852Year's Revenue/Original Cost 0.89 Total Cost 22,464Year's Revenues 14,260 Total Revenues 28,520
Total Profit (Life of the Machine) 8,908Variance 6,056 21.23%
![Page 22: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/22.jpg)
Cost-Plus Model: Skid Steer Dealer
Profit for general rental store was $6,723.
Total Cost = Net Cost + Maintenance Cost (Life) + Share of Operating Cost + Profit
Rental Days 80Rental Rate 145
(Operating Cost - Maintenance Cost)/Gross Profit 60.00% Profit/Gross Profit 10.00%
Original Equipment Cost 16,000 Net Cost 500Equipment Sales Price 15,500 Maintenance Cost (Life) 2,000Life (in Years) 2 Operating Cost 13,920Maintenance Cost Per Year 1,000 Profit 2,320Year's Revenue/Original Cost 0.73 Total Cost 18,740Year's Revenues 11,600 Total Revenues 23,200
Total Profit (Life of the Machine) 6,780Variance 4,460 19.22%
![Page 23: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/23.jpg)
Rental is a volume-sensitive business
Volume 1.00 1.05 1.10 1.15 1.20 1.25Pricing 1.00 1.00 1.00 1.00 1.00 1.00Number of Tickets 13,333 14,000 14,666 15,333 16,000 16,666Dollars/Ticket 75 75 75 75 75 75Revenue 999,975 1,049,974 1,099,973 1,149,971 1,199,970 1,249,969
Cost 945,975 945,975 710,002 733,226 756,450 779,675Fixed Cost (%) 60Fixed Cost 567,585 567,585 567,585 567,585 567,585 567,585Variable Cost 378,390 377,991 395,990 413,990 431,989 449,989Variable Cost/Ticket 28
Profit 54000 104,398 136,397 168,397 200,396 232,395Fixed Cost 60% 5.4% 9.9% 12.4% 14.6% 16.7% 18.6%
![Page 24: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/24.jpg)
Elastic vs. Inelastic demand
![Page 25: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/25.jpg)
A B C D EVolume 1.00 0.90 1.10 0.90 1.20 1.30Pricing 1.00 1.10 0.90 1.00 0.90 0.90Number of Tickets 13,333 12,000 14,666 12,000 16,000 17,333Dollars/Ticket 75 83 68 75 68 68Revenue 999,975 989,975 989,975 899,978 1,079,973 1,169,971
Cost 927,576 903,577 978,241 903,577 1,015,574 1,052,906Fixed Cost (%) 60Fixed Cost 567,585 567,585 567,585 567,585 567,585 567,585Variable Cost 359,991 335,992 410,656 335,992 447,989 485,321Variable Cost/Ticket 28
Profit 72,399 86,399 11,734 -3,599 64,399 117,065% 7.2% 8.7% 1.2% -0.4% 6.0% 10.0%
Volume, Price, and Competition
![Page 26: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/26.jpg)
Volume, Price, and Competition
A B C D EVolume 1.00 0.90 1.10 0.90 1.00 0.90Pricing 1.00 1.10 0.90 1.00 0.90 0.90Number of Tickets 13,333 12,000 14,666 12,000 13,333 12,000Dollars/Ticket 75 83 68 75 68 68Revenue 999,975 989,975 989,975 899,978 899,978 809,980
Cost 927,576 903,577 978,241 903,577 940,909 903,577Fixed Cost (%) 60Fixed Cost 567,585 567,585 567,585 567,585 567,585 567,585Variable Cost 359,991 335,992 410,656 335,992 373,324 335,992Variable Cost/Ticket 28
Profit 72,399 86,399 11,734 -3,599 -40,932 -93,597% 7.2% 8.7% 1.2% -0.4% -4.5% -11.6%
![Page 27: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/27.jpg)
Benchmark is 65% Dollar Utilization
Daily Rate Var Cost # of Rentals Total Revenue Var Cost Total Net Revenue
$150 $37.50 78 $11,700 $2,925 $8,775 $135 $37.50 87 $11,745 $3,263 $8,482 $165 $37.50 71 $11,715 $2,663 $9,052
![Page 28: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/28.jpg)
Dollar vs. Time Utilization
Daily Rate # of Rentals Total Revenue Var Cost Total Net Revenue Time Utilization
$150 78 $11,700 $2,925 $8,775 25% $135 87 $11,745 $3,263 $8,482 28% $165 71 $11,715 $2,663 $9,052 23%
![Page 29: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/29.jpg)
Effect of rental term on time utilization
Term # Days $150/ day $135/ day $165/ day Day 1 25% 28% 23% Week 4 38% 42% 34% 4-Week 12 50% 56% 45%
![Page 30: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/30.jpg)
Predictive modeling is an art, not a science.
![Page 31: Setting rental rates is a balancing act: how can your computer help?](https://reader030.vdocuments.us/reader030/viewer/2022032414/56813401550346895d9af7c4/html5/thumbnails/31.jpg)
CRA Rental Rally,
San Diego
October 27, 2004
Setting rental rates is a
balancing act:how can your
computer help?
Bill Veneris & Chris Redfern
Alert Management Systems