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Rental companies stand to profit by creating packages for products and services.
By Philip E. Anderson
For several years, return on investment (ROI) has been the standard way for rental companies to measure profit potential. How many times, and at what rate, can a particular product be rented to maximize its income before it becomes dilapidated? And is the product’s quality high enough to withstand such rigorous use? The ROI model is based on a relatively simple calculation that well serves the nature of rental. But is this model still appropriate?
Specific calculations vary across the industry, but each sector has its own benchmarks. An October 2004 Rental Management article titled “Setting the Right Rental Rates Demands Fine-tuning of Time and Dollar Utilization” quotes Fred Hageman, partner in Hageman, Stansberry & Associates, a mergers and acquisitions firm for the rental industry, as saying that acceptable entire-inventory dollar utilization targets are generally 150 percent for party stores and around 65 percent for large, national companies.
When the article was written four years ago, yearly performance could be easily gauged on ROI alone. Assuming Hageman’s example of party stores, a piece of equipment that originally cost $10,000 should bring in $15,000 in revenue.
But that was then, and this is now. Costs are rising astronomically. Finding new and creative ways to increase revenue is vital. Focusing long-term budgets on per-item ROI and time-utilization rates is no longer enough. Instead, we must return to the rental industry’s original selling points: service and expertise.
Learn the rules
Add-ons are a great way to capitalize on the service-based nature of rental. Some basic rules can help you get started with add-ons and packages.
Suggest add-ons that complement the original product — Any add-on product or service must complement the original product for which the client came to you in the first place, ideally adding to the original sale. Complementary services that profit one type of event may be unacceptable at another. For example, a client who hosts a backyard barbecue might be interested in having ice delivered to the site, but doesn’t need valet parking. Clients throwing a wedding reception might need a reputable DJ with a sound system, but probably don’t want a large green trash container placed beside the tent.
Find add-ons that clients are willing to pay for — A good rule for finding add-ons that a client will pay for is to make sure they are what retailers call “value-added.” In addition to being a good fit for the event, suggest something that the client will need, but perhaps didn’t think of getting from you. If it’s a service or product the client will need anyway, why shouldn’t it come from you?
Get add-ons onto your insurance policy — Make sure that any additional services or products you provide are covered by your insurance. Murphy’s Law rules the event rental business. Be prepared for the worst by knowing what your insurance covers. If you are working with subcontractors, be sure they cover their own services and indemnify your business.
Choose trustworthy subcontractors — Subcontractors, no matter how trustworthy, are not your employees. They may or may not work the same way you do or uphold the same standards you do. But when they are working on your jobsite, alongside your crew and with your client, they are a representative of your company.
Cover yourself by working with subcontractors you trust. Since they are working under contract for you, they should be prepared to answer to you as their coordinator. Subcontractors should be made aware that while everyone must work together, any changes or modifications will be approved by the event coordinator. This will not only keep your relationship honest, but will foster trust among the local special events community as a whole.
Choose your service
Several add-on services might interest your clients, depending on type of event, type of venue and size of budget. Be creative in choosing services that will add to the personality of the event.
Experiment with various packages and gather feedback from clients. For example, offer different outdoor wedding packages: for 50 guests, 150 guests and 300 guests. Consider offering themed add-ons, such as baseball-themed inflatables and popcorn or hot dog machines for a baseball tournament fund-raiser. Examine how to capitalize on a good working relationship with a caterer, lighting vendor, DJ or other event professional. Consider marketing their services as part of your own package.
Clients are often receptive to your expertise. Those who rent a tent in July, for instance, probably do not know that the heat index in an enclosed canopy is often twice that of the air outside the tent, so suggest climate controls such as ceiling fans, vented sidewalls or air conditioning. Those who take inflatables to a public park may not realize that most pavilions only have two 110-volt outlets, so suggest generators and cables. Infrequent tent users may not understand the need for a structure permit, so suggest taking care of the permit process for the client.
Find the right price
The earlier rules of ROI made for an easy formula: simply start with the equipment’s original purchase price, multiply that by the ideal rate of return and divide that amount by the number of rentals you expect to get out of the equipment. The result was a seemingly magic number that told exactly how much to charge for the rental.
Pricing add-on services isn’t as easy, however, since there are several other costs to factor in. Ask yourself some key questions. Do I have the equipment and personnel in-house? If not, what will a subcontractor charge for this service? Are there additional labor costs? Are there upfront costs that could create cash flow issues? What is the going rate for this service, and does this fit the client’s budget?
It’s easy to simply name a price but—speaking from experience—it rarely works out. It’s better to do your homework by researching like services in similar markets. A good place to start is with the actual service provider.
There is no general rule for how much to charge for add-on services, as each service is different and has different values. One event professional told me that she strives to make a 15 percent profit margin on any add-on service. In addition to covering her time, she wants to profit from the service as well. Fair enough; after all, we aren’t in this business solely for fun.
Get started
Start thinking about which packages or add-ons you might like to offer. Ask clients for their input or suggestions to help guide your research. Whatever you decide, don’t wait too long. As costs rise, ROI alone is no longer a reliable way to forecast or execute profit success. With critical analysis, proper planning and fair-market pricing, packaging products and services can be a profitable way to boost your bottom line.