Times are good in the world of equipment rentals. Everybody is making money. But how long will the good times last?
To some degree, the answer to this question lies in the strength of the economy and the duration of the current economic boom. But an even larger part of the answer lies in the composition of your customer base.
As I consult for rental companies, I am surprised to discover that few owners and managers really know who's keeping them in business. They can rattle off their main customers, but they lack a clear understanding about which industries their business is coming from, and the relationship between that type of business and the economy as a whole.
Chances are that the surge in revenue the past couple of years has come from nonresidential construction, which is the most cyclical of all revenue sources. Before you question this statement, I will go even further and state that I believe that more than 50 percent of rental revenue for the vast majority of equipment rental companies is coming from the nonresidential construction segment.
I am concerned about revenue coming from nonresidential construction because this source of revenue spikes up and down with the economy. The good news is that the economy is strong, so you still have time to broaden and diversify your sources of revenue in order to avoid over dependence on nonresidential construction. By doing so, you will be protecting your business for the future.
I break rental revenue into three broad categories: construction, industrial and fragmented. By fragmented, I mean all other kinds of customers that don't fal l neatly into the other two categories, such as warehouses, building materials, hazardous materials, fiber optics, homeowners and others. I further break down these broad categories into 39 Standard Industrial Classification codes. The government publishes a book defining the SIC code for every type of business. See the chart below for a basic breakdown on the three major categories and subdefinitions.
As a rental center operator or manager, you can draw up your own business classification and SIC codes that best depict the nature of your business.
Once you decide on a code, either your own or SIC, assign a number to that class of business - for example electrical contractors No. 12, painting contractors No. 13, colleges No. 22, caterers No. 33 and hotels No. 34.
Now you need to code every rental agreement. Today's rental software packages can accommodate SIC codes, but chances are that you are not utilizing this feature of your software. You should.
Once you develop the codes, you need to make definitions. For example if a painter is using your equipment in an oil refinery or a caterer is using it at a college, how do you classify the rental? Your analysis will be more accurate if you code by the renter because that's the actual customer who is coming to you for business.
When working with a lot of codes, it is difficult to understand where your business is coming from. That is why I suggest defining your customer base in the three broad categories so that you can more readily gauge the progress being made in diversifying the base.
The goal is to obtain the largest portions of your business from secure revenue sources not dependent on the ups and downs of the economy.
Here are six steps for reaching that goal:
Step 1: Code and classify all of your open rental agreements by SIC code.
Step 2: Take each of the coded rental agreements and classify by construction, industrial or fragmented.
Step 3: Analyze and understand where your business is coming from. Determine if your business is dependent on a particular industry or customer.
Step 4: Set goals for what you would like your customer base to look like, by the three major classifications and the 39 SIC codes.
Step 5: Implement a program to diversify the business to SIC codes less dependent on the economy.
Step 6: Increase the number of customers you are doing business with.
For instance, if you determine that a university or cemetery, for example, is a protected SIC code because these types of businesses essentially are not dependent on economic cycles, you could establish a marketing plan to increase business with this type of customer.
The marketing plan could include these:
* Direct sales calls.
* Telemarketing by an outside telemarketer.
* Telemarketing by your inside counter sales staff.
* Direct mail using the following sources: Yellow pages, mailing lists, association members and dormant customers.
You have a lot more control in determining what your customer base looks like than you might think. The key is to understand the customer base and to be proactive in growing and diversifying it to protect the rental business. This takes work. If you grow your customer base large enough, you will never have to worry about a recession, and the bottom line of your business will hardly notice it.
How large should a customer base be? I like to look at active customers - or open rental agreements. Go through your open rental agreements and count how many different customers you are actively renting to.
If the number is more than 150, this is excellent. If it is between 100 and 150, I wouldn't set off an emergency alarm just yet, but you should be working to grow the base. If it's between 60 and 100, the alarm should start sounding off. Build the customer base with a sense of urgency. If it's below 60, you have a big problem; the business is at risk.
Today times are good, and when they are, it's easy to become complacent. However, it's hard to say how long the strong economy will be with us. Grow and protect your business while you can.
