rates balancing act

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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