Setting rental rates is a balancing act: how can your computer help?

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

“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

“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

”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

”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

“In many equipment categories we are actively sacrificing utilization in favor of higher rental rates…”

- Chuck Miller, Sunbelt Rentals

“Without computerization, you’re just drawing straws in the dark.”

- Fred Hageman, partner with Hageman, Stansberry & Associates

What’s your pricing strategy?

The five components of price

• price objectives• cost• competition• demand• legal considerations

price objectives

The goal of our pricing strategy is

to maximize profit.

Cost-Plus Model

Net Cost+

LTD Maintenance Costs+

Share of Operating Costs+

Profit---------PRICE

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%

Fine-tuning the revenue side of the model

• Damage Waiver

Fine-tuning the revenue side of the model

• Damage Waiver• Sales Tax

Rate calculation methods

• Prorate vs. Fixed Rate

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

Flexible rates and demand

Customer-specific rates

Targeted rate discounting

Cost-Plus Model: Skid Steer Dealer

Total Cost = Net Cost + Maintenance Cost (Life) + Share of Operating Cost + Profit



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


Profit for general rental store was $6,723.

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%

Elastic vs. Inelastic demand

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

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%

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

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%

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%

Predictive modeling is an art, not a science.

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

Setting rental rates is a balancing act: how can your computer help?

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