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CRA Rental Rally,
San DiegoOctober 27, 2004
Setting rental
rates is abalancing act:how can your
computer help?
Bill Veneris & Chris Redfern
Alert Management Systems
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“The economy isimproving, the rental
business is buzzing,but what about thoseRATES?” - August 2004
“Most of the large
rental companiesreport they are raisingrates -- but withcaution” - September
2004 “Setting the right rental rates demands fine-tuningof time and dollar utilization” - October 2004
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“We’ve always been able to get goodrates until the consolidators came inand cut them, which meant I had to
cut rates in order to compete andkeep the business. What was Isupposed to do, give them mycustomers?”
- Don Ahern, Ahern Rentals
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”When the consolidators came in, itwas all about market share andbecoming the biggest. They
overpurchased on fleet and floodedthe market, upsetting the supply anddemand balance. Pricing was not aprimary concern. The industry waschasing time utilization and exposureat the expense of rate.”
- Graham Hood, Neff Rental
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”If the question is, can we return to
rates that existed prior to
consolidation, my answer would be no.Once commoditization begins in anindustry . . . . it’s very difficult to
reverse the trend..”
- Willie Swisher, Stephenson’s RentalServices
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“In many equipment categories we areactively sacrificing utilization in favorof higher rental rates…”
- Chuck Miller, Sunbelt Rentals
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“Without computerization, you’re justdrawing straws in the dark.”
- Fred Hageman, partner with
Hageman, Stansberry & Associates
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What’s your pricing
strategy?
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The five components
of price
• price objectives
• cost• competition
• demand• legal considerations
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price objectives
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The goal of our pricing strategy is
to maximize profit.
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Cost-Plus Model
Net Cost+
LTD Maintenance Costs
+Share of Operating Costs
+Profit
---------PRICE
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Cost-Plus Model
Total Cost = Net Cost + Maintenance Cost (Life) + Share of Operating Cost + Profit
Rental Days 80
Rental Rate 185
(Operating Cost - Maintenance Cost)/Gross Profit 76.73%
Profit/Gross Profit 5.60%
Original Equipment Cost 17,500 Net Cost 5,500
Equipment Sales Price 12,000 Maintenance Cost (Life) 5,000
Life (in Years) 5 Operating Cost 56,777
Maintenance Cost Per Year 1,000 Estimated Profit 4,144
Year's Revenue/Original Cost 0.85 Total Cost 71,421
Year's Revenues 14,800 Total Revenues 74,000
Total Profit (Life of the Machine) 6,723
Variance 2,579 3.49%
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Fine-tuning the revenue
side of the model
• Damage Waiver
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Fine-tuning the revenue
side of the model
• Damage Waiver
• Sales Tax
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Rate calculation methods
• Prorate vs. Fixed Rate
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Rate calculation methods
Rental Rate Prorated Fixed Rate
Hour $10 $6 $10
Day $60 $48 $60Week $240 $240 $240
8Day/1Hr Rental $294 $310
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Flexible rates
and demand
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Customer-specific rates
Targeted ratediscounting
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Cost-Plus Model:Skid Steer Dealer
Total Cost = Net Cost + Maintenance Cost (Life) + Share of Operating Cost + Profit
Rental Days 80
Rental Rate 185
(Operating Cost - Maintenance Cost)/Gross Profit 60.00%Profit/Gross Profit 10.00%
Original Equipment Cost 16,000 Net Cost 500
Equipment Sales Price 15,500 Maintenance Cost (Life) 2,000
Life (in Years) 2 Operating Cost 17,760
Maintenance Cost Per Year 1,000 Profit 2,960Year's Revenue/Original Cost 0.93 Total Cost 23,220
Year's Revenues 14,800 Total Revenues 29,600
Total Profit (Life of the Machine) 9,340
Variance 6,380 21.55%
Profit for general rental store was $6,723.
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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 92
Rental Rate 155
(Operating Cost - Maintenance Cost)/Gross Profit 60.00%Profit/Gross Profit 10.00%
Original Equipment Cost 16,000 Net Cost 500
Equipment Sales Price 15,500 Maintenance Cost (Life) 2,000
Life (in Years) 2 Operating Cost 17,112
Maintenance Cost Per Year 1,000 Profit 2,852Year's Revenue/Original Cost 0.89 Total Cost 22,464
Year's Revenues 14,260 Total Revenues 28,520
Total Profit (Life of the Machine) 8,908
Variance 6,056 21.23%
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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 80
Rental Rate 145
(Operating Cost - Maintenance Cost)/Gross Profit 60.00%Profit/Gross Profit 10.00%
Original Equipment Cost 16,000 Net Cost 500
Equipment Sales Price 15,500 Maintenance Cost (Life) 2,000
Life (in Years) 2 Operating Cost 13,920
Maintenance 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) 6,780
Variance 4,460 19.22%
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Rental is a volume-sensitivebusiness
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%
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Elastic vs. Inelastic demand
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A B C D E
Volume 1.00 0.90 1.10 0.90 1.20 1.30
Pricing 1.00 1.10 0.90 1.00 0.90 0.90
Number of Tickets 13,333 12,000 14,666 12,000 16,000 17,333
Dollars/Ticket 75 83 68 75 68 68
Revenue 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 1,052,906
Fixed Cost (%) 60
Fixed Cost 567,585 567,585 567,585 567,585 567,585 567,585
Variable Cost 359,991 335,992 410,656 335,992 447,989 485,321
Variable 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, andCompetition
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Volume, Price, andCompetition
A B C D E
Volume 1.00 0.90 1.10 0.90 1.00 0.90
Pricing 1.00 1.10 0.90 1.00 0.90 0.90
Number of Tickets 13,333 12,000 14,666 12,000 13,333 12,000
Dollars/Ticket 75 83 68 75 68 68
Revenue 999,975 989,975 989,975 899,978 899,978 809,980
Cost 927,576 903,577 978,241 903,577 940,909 903,577
Fixed Cost (%) 60
Fixed Cost 567,585 567,585 567,585 567,585 567,585 567,585
Variable Cost 359,991 335,992 410,656 335,992 373,324 335,992
Variable 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%
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Benchmark is65% 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
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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%
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Effect of rental term on timeutilization
Term # Days $150/day $135/day $165/day
Day 1 25% 28% 23%
Week 4 38% 42% 34%4-Week 12 50% 56% 45%
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Predictive modeling is an art,
not a science.
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CRA Rental Rally,
San DiegoOctober 27, 2004
Setting rentalrates is a
balancing act:how can your
computer help?
Bill Veneris & Chris Redfern
Alert Management Systems