In today's rental industry, rental rates concern many, and numerous rental owners are complaining about the low-rate structures of their competitors. However, if those owners properly manage their businesses, they could base their rates on time utilization, and supply and demand, and not concern themselves with what their competitors do.
I want to share an anecdote from a recent consulting engagement when a rental manager said to me: "I have 40 water trucks, and I have demand for 42 water trucks, but the rates are terrible, only $1,500 a month. I've never seen them so low; I don't know what to do."
People complain about getting only $350 for a 20-foot scissorlift. At the same time, they say they need to buy more scissorlifts because the demand is high. I tell them when demand and time utilization are high, that they should instruct their staff to raise the rate and say no when customers demand $350 lifts.
The methodology of how to accomplish this is simple. More than likely, you already have the software that can help you do it.
First I want to start with some basic definitions. If you use the basic methodology of time utilization and return on investment, you can determine when to buy equipment and when to sell it, when to raise rates, and when to transfer equipment to other branches. The answers are there, you just have to set the discipline to make results happen.
You manage your business; don't let your competitor manage it for you. When I ran a rental business, we controlled our pricing based on our time utilization. That's all you have to do.
Here are some basic definitions: On-yard utilization is a time measurement of equipment by category that designates, on a daily basis, the status of all revenue-earning equipment. I can't imagine running a rental center without knowing what's happening in my operation every single day. For example, if I have 150 pieces of equipment, I need to know how many are on rent. If today 80 are out on rent, I need to know it. The next day are 82 pieces on rent or 78 pieces on rent? If I have 12 backhoes, I need to know if today 10 are on rent, if the next day nine are on rent or 11 are on rent.
You need to know your utilization numbers to react to pricing. If I have 10 backhoes and nine are on rent, I raise prices. I certainly would not discount. I would only discount if my time utilization of a category of equipment fell below 60 percent on a major item.
As president of Herc, I was constantly aware of my time utilization. I had voice mail in my car, and the utilization report was on that voice mail. A hard copy of the on-yard report by branch was waiting for me at the office. We based many of our decisions on that utilization report. We didn't base the decisions on what our competitors were doing, but on what we were doing.
On-yard utilization is what is happening in your branch every day. To get perspective on how your business is doing, go back a year because cycles repeat themselves. Industrial plants schedule their turnarounds; you also have celebrations, public events, holidays - all these things go in cycles. They don't cycle exactly, but very closely. Watch those year-to-year cycles.
I noticed, for example, from on-yard reports, that Fridays were weak days and Mondays were good days. Some days people return equipment; some days people take out equipment. Once you see the cycles, you can predict them for your own company. If you don't have an on-yard report, go to your software supplier and demand one. You can't run a company without knowing what's on the yard and what is on rent.
Before I go to companies to consult, I ask them to print me copies of all their reports. They print me a stack of papers, but they don't even know what those reports say. And then I have to interpret printouts that, frankly, do not provide me with much meaningful information. My next step is to contact their software supplier to clarify the report.
The other important measure is time utilization, which is different from on-yard utilization. A time utilization report is a time measurement of equipment by category, conducted on a monthly basis. I recommend a 22-day monthly cycle although you can define that month as you wish. The on-yard report is ideal for day-to-day pricing. The time utilization report is good for strategic buying decisions. You can run the time utilization report and get it on a yearly basis so that it helps you understand the direction of demand over a longer period of time.
Also important is dollar utilization, a measurement by category of each individual piece of equipment, of the dollars earned by the equipment divided by the first cost of the equipment. You can measure dollar utilization monthly or yearly. For instance, if I bought an air compressor for $10,000 and I got $5,200 out of it in rental revenue in a year, that's 52 percent dollar utilization. So I might set, for a month, $500 as a goal, or 5 percent on a monthly basis. Dollar utilization is simply rental revenue divided by the first cost of equipment, regardless of whether the equipment is brand new or five years old.
Unfortunately, a lot of software people are telling rental companies to measure their business based on dollar utilization. The problem with dollar utilization is you can't tell if you're really making money without figuring repair and carrying costs.
ROI discipline Return on investment, or ROI, is a monthly or yearly measurement by category. ROI is defined as rental revenue minus these: depreciation, interest, parts and labor divided by net book value of the equipment.
So you need to determine how much money is being spent to keep that equipment operating? You need to know ROI. A chart on page 146 and 147 of my book, Service Success, describes the whole ROI measurement.
With a good ROI report, you can analyze whether a JCB backhoe is better than a Case? Is Deere better than New Holland? You can see the difference. You can pick out a piece of equipment if it isn't performing well. You can decide if repairs are too high. You can't run a rental business without knowing what that equipment is returning.
If you have zero ROI, that means the equipment is paying for itself, but not making money or losing money. It paid its depreciation, interest, parts and labor. What you have to determine in your business is the ROI necessary to make money and pay for the branch and corporate overheads in addition to providing profits.
Fully allocated break-evens on a pre-tax basis often require ROI in the 15 to 20 percent category. Most rental companies need to get above these thresholds to make profit. With small items like rammers and small generators, you might have 100 percent ROI. Backhoes are about 30 percent ROI. But you have to understand the ROI in your business.
To do an ROI report, you need the discipline in the shop to write shop-repair orders, which have to be fed into the computer system. The report that will provide this information is a rental revenue analysis (See Service Success, pages 109 and 110.)
You obtain this report on a monthly basis and need to analyze it on a 12-month rolling basis. Then you can really determine if the machine is making a proper return. Should you be using new equipment; should you be using older equipment? When should you buy and when should you sell? The rental revenue analysis will provide the answers.
Reacting to what other companies are doing should not be the basis of your rental business. You have to look at it analytically and drive your business based on your results.
The key to running a successful rental business is to drive your time utilization up around 70 percent. If you get to 60 to 70 percent, you can hold on rates. Above 70 percent, you can raise rates; below 70, you should drop rates and drive time.
If a person on the phone says he or she wants a piece of equipment, look at your charts. If you have 80 percent time utilization, why discount? If you have, for example, a 20-foot scissorlift, and you determine you need $500 a month for your scissorlift, butthe customer says he or she can get it for $350, let the customer walk. You can afford to turn it down if you have 80 percent utilization. And if you lead, you can make more money, and maybe everybody else will follow.
Lift your rates if you're getting high utilization. If I had utilization in the 90 percent range, I might even go over rack rate. If I went down into the 50 percent range with scissorlifts, then I'd drop the rate to $350. But what would motivate me every day would be looking at that report, and I would move that equipment daily to drive that time utilization.
Manage your business If you have great utilization and so much demand that you need to buy more equipment to fill it, why would you drop your rates? Why aren't you managing your business? Why are you complaining about everybody else? Why don't you take control of what you have, drive forward and lift your rates?
When you have a combination of time utilization and ROI, you take control of your business. You need to teach your employees about time utilization and ROI. It's crucial.
When I ran a rental business, I hired counter people right out of college. I wasn't worried if they knew the breakout force of a backhoe. They can look that up in a catalog in a second. I was interested in making sure that they learned the basis of time utilization and ROI. The coordinators were taught to understand supply and demand, to price equipment based on the utilization reports and how to make money based on these analytical reports. I wanted to be sure that they understood this when they went out on the sales force or became branch managers. We had 25-year-old kids who were beating people with 25 years of experience because they looked at the tools and they managed by the tools. Now we see price wars because people are abandoning the tools and reacting to competitive pressure.
When you have high time utilization and higher ROI, what do you do? Raise the rates and buy more equipment. It's as simple as that. When you have low time utilization and high ROI - which you might have with pumps or generators, what do you do? You maintain or raise the prices. Don't buy any more assets; instead transfer or delete some of the assets because your time is low (See chart page 92).
You can't control rental rates unless you're in a position to say no. You have to be able to say, "No, this is my price, and I'm not going to take it down." You have to have the guts to say no, or you're never going to succeed.
Use your reports. Check the rental revenue analysis and see what it's telling you. Look for parts expense. Look to see what equipment hasn't rented in 150 days. Look for large labor expenses. With this information, you can go to vendors when you have problems with pieces of equipment.
You can also analyze your service staff. Who are the parts-changers and who are the mechanics? I could tell branch managers, "You've got a parts changer here." They might think he was a good mechanic, but I could see he was a parts-changer by the rental revenue analysis.
If you just look at your utilization rates and your ROI and rental-revenue analysis, you can improve your operations. Use the software you already have. And if you don't have it, get it. No matter what it costs, it's worth it.
Forget what your competitors are doing. If you know how to analyze your own business and act accordingly, you can beat your competition no matter how low their rental rates are.
On-yard utilization: A time measurement of equipment by category that designates, on a daily basis, the status of all revenue-earning equipment.
Time utilization: A time measurement of equipment by category that you conduct on a monthly basis. This measurement is based on a to-be-determined "calendar-day month." Industrial and construction oriented rental companies often define this month as 22 days.
Dollar utilization: A measurement by category, and each individual piece of equipment, of the total dollars earned by the equipment - computed daily, weekly and monthly - divided by the cost of the equipment.
Return on investment: A monthly or yearly measurement by category. ROI is defined as rental revenue less these:
* Depreciation.
* Interest.
* Parts.
* Labor.
Condition: High time utilization and high ROI.
Strategy: Raise rental rates.
Inventory: Buy more equipment.
Condition: Low time utilization and high ROI.
Strategy: Maintain or raise prices incrementally.
Inventory Do not buy any more assets. Consider transferring or deleting some assets.
Condition: Low time utilization and low ROI.
Strategy: Lower rental rates to drive time utilization.
Inventory Sell equipment in this category. Look for poor-performing equipment and equipment with high repairs and significant downtime.
