Whether you’re just starting to put together a rental business plan, or you’re re-doing pricing in your current rental company, your goal is the same: maximize profit and minimize headaches.
There are a lot of ways to approach rental pricing. You can keep it simple and stick to a formula—or work in things like loyalty discounts, bundles, and add-ons. In this blog post, we’ll cover everything you need to know to create the best rental pricing structure for your business, including:
- Setting a baseline break-even point;
- Using supplementary products and services as differentiators;
- Staying competitive within your market; and
- Making sure your rates attract the customers you actually want.
So, come on down—and let’s talk about how to price your rentals right!
Finding Your Break-Even Price
According to Rhen Hoen, the author of Pricing Rental Products: Strategies for Setting Prices and Positioning Your Rental Business for Success, many rental companies look predominantly at the retail cost of their rental items when setting their prices. The accepted rule of thumb is to charge:
- 3–5% of the retail cost for a daily rental,
- 10% of the retail cost for a weekly rental, and
- 20% of the retail cost for a monthly rental.
While this is a good starting point, it fails to consider important factors like minimum viable price, seasonality, and market value. So, resist the temptation to take the easy road—even if it seems like everyone else is doing it. (How does the saying go—something about following your friends off a cliff?)
Baseline Formula for Your Minimum Daily Rental Price
First, calculate your minimum daily rental price—a.k.a. the lowest rate you can accept for a one-day rental without losing money. To do this, you’ll need to know the:
- Purchase cost of the item;
- Estimated resale value of the item when you’re finished renting it out; and
- Total number of days you expect to rent it out before you retire it from your inventory.
If you’re new to the rental industry, it will be difficult to accurately estimate the total number of rental days for any given item. That’s okay; a rough estimate will do just fine, but we’d recommend erring on the conservative side. In other words, try to underestimate rather than overestimate.
Next, plug those values into the following formula:
Minimum Daily Rental Price = (Retail Price – Resale Price) ÷ Total Number of Rental Days
Now, this is not a true minimum daily price because it does not account for overhead costs. So, let’s talk about these pesky profit-eaters.
As you expand your rental inventory, it’s important to keep in mind that the cost of each item goes beyond its retail price. In other words, just because your business owns the item doesn’t mean you’re done paying for it. You need to factor in the costs associated with:
- Maintaining the item;
- Replacing the item at the end of its life; and
- Doing business in general.
That last one is especially important. The cost of doing business encompasses any fixed costs crucial to completing rental transactions, like:
- Website hosting
- Internet and phone service
- Storage and/or office space
- Delivery (including vehicles, trailers, and/or fuel)
- Marketing and advertising
- Business consultants (including attorneys and accountants)
To adjust your pricing for overhead costs, take your average total annual expenses (or estimated total annual expenses) and divide that dollar amount by the total number of days per year that you expect to rent the item. This is your overhead cost per day. Add it to your minimum daily rental price to get your true break-even point. Here’s the math-textbook version of that formula (no pop quizzes later—I promise):
True Break-Even Point = Minimum Daily Rental Price + Overhead Cost Per Day
Of course, you’re not in business just to break even. Now it’s time to think about how you’ll turn a profit.
Charging for Extras vs. Differentiating with Freebies
Remember those fixed costs we talked about in the last section? You can actually use them as a pricing tool by including them in a bundled package or upcharging for them on a one-off basis.
Marketing fixed costs as “included” can make the customer feel like they’re getting more bang for their buck—which ups the perceived value your business delivers. On the other hand, if you’re serving a “no frills” kind of clientele, they may appreciate having the option to add the charge (or not). For example, some people may prefer picking up equipment themselves rather than paying a higher base price that includes delivery. Other costs to consider here include:
A note about insurance: One way to save on insurance costs—particularly for mobile rental assets—is to equip them with GPS trackers. Not only do many insurance carriers offer discounts for using this sort of technology, but it also gives you the added peace of mind of knowing that you can more easily recover your rental items in the event of theft. Learn more about the benefits of using GPS technology to monitor valuable business assets here.
The Value of Convenience
Beyond overhead costs, you may want to consider offering other extras that up the convenience factor for your customers. This can make you a more attractive option than your competitor down the street. For example, if you rent out speedboats, you may want to offer waterski and wakeboard rentals at an additional charge. That way, the customer doesn’t have to go two different places (and enter into two different rental agreements) to rent a boat and a pair of waterskis.
This also brings up the opportunity to bundle items into a packaged deal. As equipment rental software EZRentOut states in this blog post, “The customer will perceive this as a discounted offer because renting accessories individually will cost more than in a bundled offer.”
Bundles and Packages
Think about your target audience and what they are using your rentals for. Are there other, lower-ticket items you could offer alongside your high-ticket items without significantly increasing your fixed costs? “This is a beneficial pricing strategy for rental businesses that are aware of their bestsellers and how to bundle them with simple accessories,” the above-linked blog post continues. “This will increase the rental cycle for assets and asset stock and eventually add to more profits.”
In fact, you may be able to build higher profit margins into your supplementary rental items than your main items, because your customers are likely:
- Willing to pay more for the convenience; and
- More focused on scrutinizing and comparing prices for your main offerings as opposed to your lower-cost extras.
Keep in mind that you can always add extras later as your business grows and matures and you get a better idea of which items are in high demand. You don’t want to bite off more than you can chew when you’re just starting out. As Brenna Swanston explains in this Chron.com article, “In the beginning, it’s all about quality, not quantity...You don’t want to go spending money on equipment that no one will ever end up renting, and it’s much easier to figure out what else you should purchase over time than it is to try and compensate for sunken costs from useless equipment.”
Keying Off Competitors
You might assume that the best way to break into the market as a new rental business is to simply charge less than the competition. But undercutting your competitors on price shouldn’t be your first resort.
That being said, you should absolutely research competitor rates. In some cases you can do this online, but if not, then you may have to harness your inner Sherlock and pick up the phone to do some real snooping. Your goal is to crack the case on the competitive landscape by answering the following:
- What is the highest price in your market?
- What is the lowest price in your market?
- What is the average price in your market?
Regional Price Adjustments
If your business is the first of its kind in your market, you may have to research other markets—keeping in mind that you’ll need to adjust for a higher or lower cost of living. There are many tools available to help you calculate that adjustment, but one reliable resource is the Regional Price Parities chart provided by the United States Bureau of Economic Analysis (BEA). This chart shows, for example, that prices in Hawaii are 19.3% above the overall national average—while prices in Mississippi are 15.6% lower than the overall national average. So, prices in Hawaii are 34.9% higher than prices in Mississippi.
Once you’ve identified the high, low, and average prices noted above, you need to think strategically about where your business fits into the mix. If you’re offering similar products and value as competitors on the lower end of the spectrum, then you may want to price low—at least to start. But if your offerings differ in a way that increases value, you may want to focus on attracting buyers on the higher end of the market. As rental software provider RW Elephant states here, “Even if your product is the same as something your customers can get somewhere else, you don’t have to set your pricing at the same point. Your pricing should take into account your brand, convenience you’re offering, and the experience you create for your customer.”
Creating the Right Brand Perception
In some cases, the value you provide—and the higher price you demand as a result—can actually differentiate your brand in a positive way. Charging higher prices can create a perception of higher quality. When you deliver an experience that matches this perception, you start building a reputation based on quality. This, in turn, makes potential customers more willing to pay a higher price for your services. It truly is a self-fulfilling prophecy. In fact, customers might start wondering what the other businesses are skimping on in order to get their prices so low.
On the flipside, if your rental rates are significantly lower than your competitors’, you run the risk of customers perceiving your rental products and services as lower-quality. And even if you do sell more units, you’ll have to work harder to make the same profit—often at the expense of the customer experience.
The bottom line: Think (and price) carefully. The previously cited RW Elephant article continues, “As a rental business owner, you get to pick your prices. Don’t sell yourself short. Low-balling your pricing can be a costly mistake.”
Attracting the Right Customers
In addition to impacting your brand perception, your pricing strategy impacts the types of customers your rental business will attract. If you’re trying to attract anyone and everyone, then pricing your rental services competitively-yet-affordably will be your number-one goal. In other words, you’ll want to set a low barrier to entry.
As we alluded to in the previous section, though, you may actually want to be cost-prohibitive in some cases. If you’re targeting wealthy buyers, a price point that is too low could be a deterrent, because someone who is used to paying luxury prices may question the quality of your rental products if you’re not changing enough for them.
Impact of Price on Customer Experience
Even if you’re not targeting high-end buyers, keep in mind that the customers who purchase solely based on price can often be the most difficult to please. They are very concerned about getting value out of every single dollar, and if you don’t meet their expectations, they will not be happy. But as noted above, it’s more difficult to deliver great customer experiences when you’re serving more customers for less money.
On the other hand, serving fewer customers who are willing to pay more enables you to deliver the experience that those higher-paying customers are looking for. This also goes back to offering packages that include more than just the rental itself as well as providing related products and services that make your business the most convenient option. This will naturally attract customers who are willing to pay more for convenience and who understand that you provide more value than your lower-cost competitors.
By now, you’re probably well aware that there’s no one-size-fits all pricing formula. You can strategically adjust pricing in many ways to play to your specific market conditions and your target customers. Let’s talk about one more way to do this: the psychology of the deal. Everyone—even a higher-paying customer—loves to feel like they got the most for their money.
Deals and Discounts
There are a lot of levers you can pull to give your customers that feeling. For example, you could:
- Price one item low and make up for the loss—and more—by pricing a related item high.
- Offer introductory pricing for first-time customers or loyalty pricing for repeat customers.
- Provide complimentary products or services when certain conditions are met (i.e., create a rewards program).
Another common practice in rentals is to provide discounts based on the amount of time the customer is renting the item. You want to encourage longer-term rentals because it’s easier to rent an item to one customer for a week than it is to rent that same item to seven customers for a day each. So, don’t charge that one customer seven times the daily rate. Instead, create a weekly rate that gives the customer a better per-day deal in exchange for a longer rental term.
Seasonality and Flexibility
Also, remember that prices aren’t set in stone forever and all eternity. They may fluctuate seasonally based on demand. Or you may adjust them as the competitive landscape changes.
But how do you know when it’s time to ratchet up or down? It might sound simplistic, but this basic principle holds true in almost all situations:
- When you need more business, lower your prices.
- When you are turning away business, raise your prices.
Following this principle will help you naturally find your customer volume sweet spot. Going back to the customer experience and company reputation discussion, raising your prices temporarily means that, theoretically, you can service fewer customers without sacrificing profit. And this means you’re better able to provide each customer with a great experience.