Smart Rental


Managing a Rental business is a unique challenge.
Get it right and your Rental business can be amazingly profitable. I know I've done it. Managing the complexities of Fleet Acquisition, Rental Software, Rental Operations, Fleet Depeciation, Remarketing and, of course, Rental Sales and Marketing. These blog posts are a distillation of some key lessons I learned. They are the things I wished someone had told me when I was busy managing my business. They're the hot topics I discuss with my consultancy clients. Go ahead, dive in. Read, discuss and Act. It's your business and your profits that have the most to gain.

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You can earn big profits renting just about any type of product, equipment or service imaginable. And that's true whether you're an executive in a large corporation or an entrepreneur working from your kitchen table. Some examples of rental businesses come immediately to mind such as car rental, residential or commercial property rental, and event location rental. But these are just the tip of the iceberg of a massive service sector spanning every imaginable niche, thousands of companies, millions of employees and billions in revenues

Major rental business markets include tool-hire, construction equipment, vans and trucks, movie props, musical instruments, advertising space, office furniture and equipment, sporting and camping gear. And there even more rental businesses supplying people, skills and services, and new sectors supplying software and cloud based services.

I have spent over 20 years growing Rental businesses in markets are varied as IT equipment, property letting, internet services and vacation rentals. I know that Rental businesses are as diverse as it is possible to imagine. So, I wondered, do they share any common ground? And is it possible to say that they are alike? I believe so. I believe that Rental businesses have much more in common with each other than most people realise, and that the same winning strategies can be replicated across them all.

But before I get into that I thought I should define those things that, I believe, make a rental business. For me there are 4 main features which set rental businesses apart from other businesses. Rental businesses will have all four - other businesses will not.

  1. Continued Ownership or Control
    Rental companies have continued ownership or control of an asset, facility, capability, service or licence. Ownership does not pass to their Customers, it is always retained by the Rental Company even if the the rental contract extends over many years.
  2. Fractional revenues
    Rental companies invoice their Customers for use of their asset, facility, capability, service or licence. Typically these invoices are small fractions of the 'sales value' if such a value exists. Invoice amounts are usually based on time or usage (and sometimes upon the value derived by the Customer - eg: Adwords).
  3. Continued service
    Rental companies remain responsible for the usability of the asset ( or facility, capability, service or licence) throughout its contract life.
  4. Rent Again*
    In rental businesses no single customer is expected to provide all of the lifetime income for the asset (or facility, capability, service or licence).
 

NB: *No.4 is a critical distinction. Without it, my definition of Rental businesses would be muddled with all manner of similar but quite distinct services such as Leasing. Leases are often called 'Rental contracts' and this is really confusing. But in fact Leases are more like mortgages from Banks. In a mortgage the Bank take fractional income over the mortgage contract term. And they usually retain ownership or control of the asset, and will repossess it of the mortgage is unpaid. But neither Banks nor Leasing companies are really planning to have multiple customers for any asset - they are not planning Rent it again. Therefore, for me, Leases and Mortgages are financial services and not Rental businesses.

Like-wise mobile phone companies offer 'contracts'. In these the phone handsets are 'rented' in a bundled contract of network access and phone. But the phone company will not plan to rent that handset again - they don't offer to rental used handsets at reduced prices. They may give you a trade-in value for your old handset as an incentive for you to extend or renew your contract. But they will sell or dispose of your original handset. In effect you're buying the handset over the term of the contract, and the phone company has sold it to you, not rented to you.

So OK, I have defined a list of features to look for. Using it you can quickly see which businesses are true Rental businesses, but so what? What is the value of that - I can hear you ask. And the answer is easy. If these are the four features which define a Rental business, and they only apply to a Rental business and they apply to all Rental businesses - then you can be sure that all Rental businesses share a lot of common issues. In fact I will go further and say that I believe that Rental businesses have much more in common with each other than they do with other businesses in their 'own' sector.

Think about that? 

When I was creating Europe's largest IT Rental supplier I would have thought that the closest businesses to my own where the other companies who were selling the same IT equipment. Indeed, our company had successful sales divisions, some of which I also ran. I would never of thought that our closest peers were a Car Hire company, or Crane Hire or Hotel. I guess I was fixated on the products, and that's a mistake. Because the fundamentals of Rental are not based around the products (which could be anything) but on the reasons that customers hire rather than buy - the value that Rental delivers. Those reasons are not universal, there are many variants of them. But suffice to say that I would not buy an apartment for a 1 day visit to London. Nor would I buy a car for a Weekend trip to Rome. If I fancied Deep Sea fishing, I hire a boat and skipper. If I wanted a well dug I hire a digger and driver. I hope you can see that Rental is a business type in its own right - and Rental companies of all types share similar (if not the same) issues.

I'll be discussing in a future blog just what this means and the lessons that can be learned (and shared) across rental businesses to create better Rental businesses.

 

 

 

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Every business needs customers - that's obvious. You may have lots of them, and always be searching for more. You may have repeat customers, or you may not. Your customers may be massive corporations or individuals. It really doesn't matter how big or small, or how often they return to you, you cannot afford them to be strangers to you. How well you know your Customers has a direct impact on your ability to unlock Perfect Prices and develop your most profitable business.

But what do I mean by 'Knowing your customers really well'? You may be think that you already do. I did. I thought my sales team and account managers knew our customers well enough. After all we were on first name terms and we spoke to them regularly. But then I realised that while personal connections are important, especially when you have repeat customers, that wasn't enough. In any case we had so many customers that we couldn't have personal connections with all of them.

So I will let you into a secret. Well not such a secret really. Because it's true with just about every company that I have worked with over the last number of years. When I ask about customers I am usually told a few pieces of information. The company names, the products they buy (or rent) and how much they spend. The customers are generally handled by a sales force that is deployed based upon the same company names, the products they buy and how much they spend. When I looked at the personal relationships that existed; too often they're with procurement and not actual users. Just like other company's mine didn't focus upon our real Customers well enough. What we actually needed to know was why they are our customer, what they want to achieve, why that's important to them and how valuable it is to them. Without this we'd never be able to sell value and get to Perfect Prices and the profits they deliver.

Now I bet you are thinking that its not possible to know your customers to that level. To know what they want to do, why that's important and how valuable it is to them. Well its is possible. It's a marketing technique which has developed over the last decade and its all about developing Personas*. Personas are not real people (though they are often devised with particular people in mind). You create Personas to describe those that have a need for your services and recognise that they don't want to rent something just because they can. They want to do achieve something that's valuable to them in their business or personal life. Your aim is to understand what they want to do, and how valuable it is to them. This analysis needs to be done methodically and carefully. When its complete you may find that you actually have between 5 to 15 Personas which describe all of your customers. You'll find that large Accounts have, within them, multiple different Personas. This is your starting point for a whole new way of Marketing and Selling and achieving perfect prices.

*For a great introduction to Personas try this blog post

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Nothing has a greater impact on your profit margin than getting your prices right, or wrong! Raising your prices by just a few percentage points can have a dramatic positive effect. And raising prices is often much easier than finding and winning more customers. Knowing this I am often surprised at how little effort is applied trying to find ways to raise prices. To me, this search is vital. I always want to discover what I call Perfect Prices - the highest price your Customer will pay and still feel that they're getting great value.

Now I know that you will think that you're already getting the highest price you can. You're in a competitive market and you're fighting to win your business. You have very clued-in customers who know the market rates. And your profit margins are good. What's the the problem?

Well let me say that I was in the same position, I've been there. But I was wrong. It took a while to dawn upon me. But I was most definitely wrong, and when I embraced that fact and worked with my team we realised some dramatic results. We were able to increase our prices AND increase our sales AND increase customer satisfaction. That's the holy trinity for successful business. 

So I'd like you to ask yourself. Do you know all your customers really well? Are your sales people motivated to avoid giving a discount? Are they motivated, and skilled, at finding ways to add value and increase the rental rate? Do you avoid offering a fixed price list even for your largest Customers? Do you instantly and dynamically vary your prices based upon your stock and demand? Do you program and plan future pricing variations based on upcoming holidays/events/occasions? Do you understand why your Customer chose you and how likely they are to recommend you to others? If you answered 'Yes' to all of these, Bravo you're starting a better place than I was. But I have more questions. 

When I was working through this with my team we were stumbling in the dark; unsure of the next steps. But you don't need to be. Just see my upcoming posts on Personas, Value Add, Sales Motivation, Commissions, Marketing and Fleet Management. These all intersect at pricing and result in Perfect Prices and higher profits.   

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Rental customers are repeat customers, or they could be. And they know other people that want what you provide. Having happy customers is imperative to your success; and ideally you want customers to be so happy that they'll refer others to you. But how do you know if your Customers are happy enough? Will they actually refer new customers to you? That's the purpose of a Net Promoter Score (NPS). It's a standard measure of customer satisfaction and loyalty, and its used to determine just how likely your customers are to recommend and promote your company. And because its a 'standard' measure it means that your NPS score is directly comparable to others; you can compare how you are performing.

Net Promoter Score (NPS) is a simple measure calculated from answers to the one key question: How likely are you to recommend our company/produst/service to a colleague using a scale from 0 to 10 where zero means not at all likely and ten means very likely? 

Those who respond with a score of 9 to 10 are called Promoters, and are likely to buy more, remaining customers for longer, and give referrals to other potential customers. Those who respond with a score of 0 to 6 are labeled Detractors, and could spread negatives words about you or your service. Responses of 7 and 8 are labeled Passives, and their behavior falls in the middle of Promoters and Detractors. The Net Promoter Score is calculated by subtracting the percentage of customers who are Detractors from the percentage of customers who are Promoters. For purposes of calculating a Net Promoter Score, Passives count towards the total number of respondents. And that's it. One question, and one simple calculation.

NPS has been widely adopted and now with more than two thirds of Fortune 1000 companies according to a 2016 Bloomberg report. But NPS isn't just for the large companies, and part of its beauty is its simplicity. It doesn't take massive resources to get going, in fact you can get your NPS started today for free here (and no that's not a shameless plug - I am not on commission - its just want to show how easy this is).  The other great attraction of NPS is that its a consistent measure, directly comparable to other businesses. In business to business markets the average NPS is between 20 and 25. Therefore successful rental businesses should be looking to score higher than 30 - and if I was looking for a new rental business to invest in I'd want it to be in that range. Just to emphasise the point I have just read the latest trading statement for HSS Hire*, a successful UK based group, who are rightly proud of their achievement of an NPS score of 42! What's yours?

 

* No this not a plug. I am not affiliated with HSS Hire in any way. Although I have been one of their happy customers :)

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Depreciation is a problem for all rental fleet managers, and the CFO. And its a problem for sales and marketing too. Get it wrong and your profits will evaporate, your fleet will wither and revenues fall, and you simply won't be able to reinvest and compete. But by thinking laterally its possible to turn Depreciation into to a huge opportunity. Particularly for fast depreciating assets. 

The biggest cost for most (not all) rental companies is buying and maintaining their fleet of rental items. These are the things that customers want and they must have. But once bought they have to be accounted for - and they'll be added to the fixed assets of the company. From then on, and at every reporting period (usually monthly), they must have an asset value assigned to them. A 'book value'.

Instinctively we all know that things lose their value over time and with use. It’s not always true - some assets can rise in value. But generally most types of goods and equipment see their value melt over time. For some types of rental goods this happens slowly; such as a 40ft metal shipping container which can be used for 15 years. But when you consider the value of the latest phone you'll know that it plummets quickly. This fall in value is a problem for the CFO of a Rental Company, because the financial accounts should always reflect the realistic market value of the company’s assets. And so various methods are used to calculate the declining value of each asset - its monthly depreciation.

Most commonly the value of an asset is depreciated at a fixed rate over its working life. If the working life is deemed to be 50 months, and the value at the end of this time is zero then the depreciation is set to (100 %  / 50 months)=2% per month of the original cost. If the working life is deemed to be 25 months, and the value at the end is zero then the depreciation is set to (100/25)=4% per month. Etc.

So far so good. This is exactly how most rental companies account for Depreciation. Exactly how my company did it too. But there are real problems with this approach. And it leaves opportunities untapped. For example:

In the real world the value of an item plummets at the start of its life, and then levels out, its definitely not constant! And of course rental premiums should always be higher for new items. Therefore, with fixed rate depreciation and high initial monthly premiums, the rental profits of an asset are artificially inflated at the start of its life. And this isn't good. First of all its bad accounting and of course those inflated profits attract inflated corporation tax. And it isn't good for the fleet management either. Because those inflated profits will increase the temptation to add more and more new products as route to boost profits. Anyone paid on 'profit'* will naturally press for more investment.  And yet, all the while the older assets will stagnate and lose money; because and they 'cost' the same as new products in depreciation, and they simply can't command the same premium any more. If you're not very careful you'll run out of cash or your rental fleet will turn to mush. 

And if you think this won't happen. Just have a look at the rental businesses that are up for sale. They are rarely in great shape and all too often you can trace the problems back to a rental fleet that's been poorly managed. 

If you think that I'm recommend a different way of calculating and accounting for Depreciation, you'd be right. But this is not just a financial management issue for the CFO, this is a real fleet management issue and a sales and marketing issue too. So my approach is not just a simple change in accounting procedure, its more fundamental, and delivers success and profits by motivating everyone to do the right things at the right time. 

* I advocate paying almost everyone on profit, but that's another blog post for another day.

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Coming from the UK, and being involved with the Rental business so long, I forget sometimes that my Clients from across the world have a different understanding of what exactly I mean when I say 'Hire' and they say 'Rent'. I am indebted to this old article I have lifted from the BBC archive which might explain. But in general, in the UK, we use both Rent and Hire - and quite often they mean the same thing. I hope that clears it up!

"Hire or Rent? The meaning is the same: to rent or hire something, you pay money in order to be allowed to use it for a limited amount of time. It is simply a matter of usage. With some nouns you can use one or the other – it doesn’t matter which as both are freely used. You can: rent or hire cars, bikes, electronic equipment: 'We rented a TV and video as we intended to stay in England for only six months.' 'If you’re planning to go to Cambridge for the day, hire a bike when you arrive. It’s the best way to get round the town.' With other nouns it is customary in British English to use one and not the other. We would: rent a flat, caravan, cottage, house: 'I rented a cottage by the sea for the summer.' 'He rented me his flat in London while he was on holiday in Greece.' (However, note the difference in use, depending on whether it is used as a verb or a noun: ‘flats to rent’, but ‘bikes for hire’) We hire some help (i.e people), tools, equipment: 'I had too much to do on the farm, so I decided to hire some help three mornings a week.' 'The police enquiries were making no progress, so we decided to hire a private detective.' 'I was painting the outside of the house and had to hire a tall ladder to get to the top.' "

I am sure that this has not cleared it up. And its a problem as confusion sows doubt in Customer's minds. So I will try to be clear. And in an effort to be clear I have to add that I don't include what we in the UK call 'Hire Purchase' in my discussion of Rental. In the US 'Hire Purchase' is sometimes known as 'Rent-to-Own' - but its not a true rental, as the goods will only be returned and re-rented if the customer defaults on their payment plan. These kind of schemes are like more like Mortgages or Lease Purchase and while they are extremely useful they're not the businesses that I advise upon. Having said that most Rental companies would be advised to offer a short term rental with option to buy - what I call Try and Buy - but I'll explain how to make that successful and profitable in another blog post.

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