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 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

Weve 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 . . . . its very difficult to

reverse the trend..

- Willie Swisher, Stephensons Rental Services

In many equipment categories we are actively sacrificing utilization in favor of higher rental rates - Chuck Miller, Sunbelt Rentals

Without computerization, youre just drawing straws in the dark.

Fred Hageman, partner with Hageman, Stansberry & Associates

Whats 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 Model
Total Cost = Net Cost + Maintenance Cost (Life) + Share of Operating Cost + Profit Rental Days Rental Rate 80 185 76.73% 5.60% Net Cost Maintenance Cost (Life) Operating Cost Estimated Profit Total Cost Total Revenues 2,579 3.49% 5,500 5,000 56,777 4,144 71,421 74,000 6,723 Variance

(Operating Cost - Maintenance Cost)/Gross Profit Profit/Gross Profit Original Equipment Cost Equipment Sales Price Life (in Years) Maintenance Cost Per Year Year's Revenue/Original Cost Year's Revenues Total Profit (Life of the Machine) 17,500 12,000 5 1,000 0.85 14,800

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

Hour Day Week 8Day/1Hr Rental

Rental Rate $10 $60 $240

Prorated $6 $48 $240 $294

Fixed Rate $10 $60 $240 $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 Rental Days Rental Rate 80 185 60.00% 10.00% Net Cost Maintenance Cost (Life) Operating Cost Profit Total Cost Total Revenues 6,380 21.55% 500 2,000 17,760 2,960 23,220 29,600 9,340 Variance

(Operating Cost - Maintenance Cost)/Gross Profit Profit/Gross Profit Original Equipment Cost Equipment Sales Price Life (in Years) Maintenance Cost Per Year Year's Revenue/Original Cost Year's Revenues Total Profit (Life of the Machine) 16,000 15,500 2 1,000 0.93 14,800

Profit for general rental store was $6,723.

Cost-Plus Model:
Skid Steer Dealer
Total Cost = Net Cost + Maintenance Cost (Life) + Share of Operating Cost + Profit Rental Days Rental Rate 92 155 60.00% 10.00% Net Cost Maintenance Cost (Life) Operating Cost Profit Total Cost Total Revenues 6,056 21.23% 500 2,000 17,112 2,852 22,464 28,520 8,908 Variance

(Operating Cost - Maintenance Cost)/Gross Profit Profit/Gross Profit Original Equipment Cost Equipment Sales Price Life (in Years) Maintenance Cost Per Year Year's Revenue/Original Cost Year's Revenues Total Profit (Life of the Machine) 16,000 15,500 2 1,000 0.89 14,260

Profit for general rental store was $6,723.

Cost-Plus Model:
Skid Steer Dealer
Total Cost = Net Cost + Maintenance Cost (Life) + Share of Operating Cost + Profit Rental Days Rental Rate 80 145 60.00% 10.00% Net Cost Maintenance Cost (Life) Operating Cost Profit Total Cost Total Revenues 4,460 19.22% 500 2,000 13,920 2,320 18,740 23,200 6,780 Variance

(Operating Cost - Maintenance Cost)/Gross Profit Profit/Gross Profit Original Equipment Cost Equipment Sales Price Life (in Years) Maintenance Cost Per Year Year's Revenue/Original Cost Year's Revenues Total Profit (Life of the Machine) 16,000 15,500 2 1,000 0.73 11,600

Profit for general rental store was $6,723.

Rental is a volume-sensitive business

Volume Pricing Number of Tickets Dollars/Ticket Revenue Cost Fixed Cost (%) Fixed Cost Variable Cost Variable Cost/Ticket Profit Fixed Cost 60% 1.00 1.05 1.10 1.15 1.20 1.25 1.00 1.00 1.00 1.00 1.00 1.00 13,333 14,000 14,666 15,333 16,000 16,666 75 75 75 75 75 75 999,975 1,049,974 1,099,973 1,149,971 1,199,970 1,249,969 945,975 60 567,585 378,390 28 54000 5.4% 945,975 567,585 377,991 104,398 9.9% 710,002 567,585 395,990 136,397 12.4% 733,226 567,585 413,990 168,397 14.6% 756,450 567,585 431,989 200,396 16.7% 779,675 567,585 449,989 232,395 18.6%

Elastic vs. Inelastic demand

Volume, Price, and Competition

A
Volume Pricing Number of Tickets Dollars/Ticket Revenue Cost Fixed Cost (%) Fixed Cost Variable Cost Variable Cost/Ticket Profit % 1.00 1.00 13,333 75 999,975 927,576 60 567,585 359,991 28 72,399 7.2% 0.90 1.10 12,000 83 989,975 903,577 567,585 335,992 86,399 8.7%

B
1.10 0.90 14,666 68 989,975 978,241 567,585 410,656 11,734 1.2%

0.90 1.20 1.30 1.00 0.90 0.90 12,000 16,000 17,333 75 68 68 899,978 1,079,973 1,169,971 903,577 1,015,574 1,052,906 567,585 335,992 -3,599 -0.4% 567,585 447,989 64,399 6.0% 567,585 485,321 117,065 10.0%

Volume, Price, and Competition

A
Volume Pricing Number of Tickets Dollars/Ticket Revenue Cost Fixed Cost (%) Fixed Cost Variable Cost Variable Cost/Ticket Profit % 1.00 1.00 13,333 75 999,975 927,576 60 567,585 359,991 28 72,399 7.2% 0.90 1.10 12,000 83 989,975 903,577 567,585 335,992 86,399 8.7%

B
1.10 0.90 14,666 68 989,975 978,241 567,585 410,656 11,734 1.2%

C
0.90 1.00 12,000 75 899,978 903,577 567,585 335,992 -3,599 -0.4%

D
1.00 0.90 13,333 68 899,978 940,909 567,585 373,324 -40,932 -4.5%

E
0.90 0.90 12,000 68 809,980 903,577 567,585 335,992 -93,597 -11.6%

Benchmark is 65% Dollar Utilization

Daily Rate Var Cost # of Rentals Total Revenue Var Cost Total Net Revenue

$150 $135 $165

$37.50 78 $37.50 87 $37.50 71

$11,700 $11,745 $11,715

$2,925 $3,263 $2,663

$8,775 $8,482 $9,052

Dollar vs. Time Utilization

Daily Rate

# of Rentals

Total Revenue

Var Cost Total

Net Revenue

Time Utilization

$150 $135 $165

78 87 71

$11,700 $11,745 $11,715

$2,925 $3,263 $2,663

$8,775 $8,482 $9,052

25% 28% 23%

Effect of rental term on time utilization

Term Day Week 4-Week # Days $150/day $135/day $165/day

1 4 12

25% 38% 50%

28% 42% 56%

23% 34% 45%

Predictive modeling is an art, not a science.

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