The recent RER Keys to Profitability survey (June 2005) shows that most rental operators feel dollar utilization followed by time utilization are the key metrics to business profitability. I agree, however one without the other effectively cancels out the benefits of both. While there are many sales metrics that influence profitability, one key indicator that should have been included in the survey is return on customer, or ROC for short.
One hallmark of all successful organizations is that they employ an ROC sales metric. It's perhaps more important than dollar utilization. If your top customers are afforded preferred rates, do you earn profit on them? If you can't determine this metric, you need new software, a new accountant or a new operations person.
The fastest way to hammer the ROC of a customer is to re-rent equipment for them when all the like items in your fleet are out on rent. Question: If all of a certain category-class are currently on rent when someone requests the same cat-class, what do you do? Currently, most rental house managers take a close look at the deal, including the term; who the customer is, including prior spending; and if they think they can source the equipment from a competitor.
For this example we'll use a backhoe at $600 per week, but any equipment will follow the same principle. Let's say your customer needs a backhoe and yours are all on rent — good for you, bad for the customer. You begin to think, “I will re-rent from xyz competitor to prove to my customer that I'm the only call he/she needs to make.” This is the beginning of confusing customer service and operating a business for profit.
Let's assume the other rental house you contact gives you preferred rates and charges you $480 for the week. You charge the customer you're re-renting for the preferred rate of $480 a week, plus transport and ancillaries. The deal goes through with no hiccups. You invoice the customer for the $480-plus. In-turn, you receive an invoice from your competitor for the $480. On the surface this seems like an even deal, or what is called a “wash.” But be careful, it's far from even.
In order for you to cut a check for $480 (to a competitor no less) in a 10-percent ROI business environment, you will need to have grossed $4,800 — you didn't. You may be thinking this is an “even” deal — it's not. Any time you write a check drawn on the business account, the exact same profit and loss rules apply — even when you re-rent. If the deal did not include re-renting the machine and you were in a 10-percent environment, you should have made about $50 plus some ancillary profit. Obviously you may be in a 30-percent ROI environment, but this customer is likely trading at a 30-percent discount and the same math applies.
The difficult, but only possible solution is to source the equipment for the customer and have the customer contract directly with that source. You show merit in doing the legwork and if your relationship is based on mutual trust and respect you have little to fear. If you can't stomach the thought of referring a customer to a competitor, I'd advise looking at how this is achieved while maintaining their loyalty to your business.
Unless they had a written reservation with your business, and you rented all of your units out without checking, you have no obligation to pay for their rental. Think hotels for a minute. They sell out, they accept reservations, they deal with honored, preferred, government and a host of other customers that expect discounts: These customers all pay different rates, yet when they overbook, they do their best to apologize and source you other lodging. In short, it happens. Is your loyalty to the chain dampened? Perhaps for a day or two, if you had a reservation, but their efforts keep you loyal. If you did not have a reservation then you have surrendered your right to raise a fuss.
Another trend that almost always follows a branch that re-rents is the propensity to have a direct competitor in its top 10 rental accounts. This is indicative of a deeper problem — failure to manage the market and sales force. Your competitors are cleaning your clock.
The origin of this re-rental quagmire perhaps lies in the old rental school of thought that “some money is better than no money,” and a loser deal is written-verse walking. We all know what happened to the industry when this attitude was king.
However a re-rent is in a different class than a low-ball deal all day long. There is no business precedence for unjustly enriching the competition, and it is not taught at colleges and universities.
Often the sales rep will sell the manager hard on doing the re-rent, which is fine and expected, however no commission is due; this is a money loser for the house.
Hopefully this article will inspire a debate among the rental operators about accepting a deal that does not “stand on its own,” meaning the rental operator has no profit in it. If your answer is, “It's good customer service,” just try to deposit that in the bank. While I fully support the highest levels of customer service, this does not warrant writing a money-losing deal.
It's good management to rank your customers by profitability versus spend. For me, I'd rather bill out $250,000 a month and profit $25,000 than bill out $500,000 a month and profit $25,000. Re-renting for a customer absolutely destroys your ROC. Do the math.
Preferred rates should be inputted by your top financial wizard — not the regional sales manager or sales rep. When you begin to rank your customers according to the profit they produce for the company, you are taking the correct step. ROC as a sales metric will afford you the needed information to make the difficult decisions. Abandoning a customer that you do not make money on may seem harsh; it's not. So unless you have a big, red cross painted on the side of your building I will assume you are a for-profit entity.
The skills required to achieve the best ROC begin with proper sales training and effective use of computer-based information systems.
Greg Michael is based in Coral Springs, Fla. He is an independent master sales trainer specializing in the rental industry. He can be reached by e-mail at [email protected].
