Finding the right rental pricing strategy for your business is all about that sweet spot between setting affordable prices that are high enough to bring in decent profit margins.
This may cause a dilemma for you as a rental business owner cause you may have to sacrifice profits to remain competitive.
Do the right math regarding purchase prices, depreciation, maintenance, storage, shipping, delivery costs, etc., to maximize your rental income and minimize turnover.
Conduct in-depth market research to find the optimal prices that attract repeat customers and help you gain profits.
The first step is calculating the rental price after assessing its purchase and maintenance costs. The second step is understanding and finding a pricing strategy for your target market. This two-step approach can help your rental business determine how to price your rental items perfectly.
6 factors that impact rental pricing strategy
The rental pricing strategy that will work best for your business depends on your business model, customer expectations, market conditions, and operational capacity.
Careful consideration of these factors will help you determine an equipment rental strategy that aligns with your business goals and attracts customers.
Here are a few other factors that impact rental pricing:
1. Customer expectations
As a business, you earn when your customers’ expectations are met.
In essence, your customers will drive the rental pricing you choose.
If your customers are willing to pay a premium for a better quality and specialized rental experience, your pricing will cater to their needs and have higher profit margins.
If your customers are only looking for affordable rentals, you will have to price your rentals with marginal profits. But, you may end up getting more customers in return.
It is crucial to assess your target clientele and their expectations before pricing your rentals.
2. Market conditions
The only thing constant in any market is change. Always devise a pricing strategy that caters to sudden fluctuations in the market.
Market conditions such as demand, seasonality, and economic fluctuations will heavily influence your customers’ behavior. Be prepared.
You can charge a premium or additional costs during peak seasons when demand is high for your rentals. Similarly, lower your profit margins to maximize revenue, attract customers, and remain competitive during slower periods.
3. Operational costs
If your rental prices are too low to cover your costs and expenses like storage, maintenance, and servicing, you won’t be able to run your business at all.
Set an equipment rental pricing strategy that covers rental inventory management and maintenance expenses while leaving room for profit.
If you overcommit to lower prices, it will affect your business operations, make it harder to earn profits, and negatively impact customer satisfaction.
A pricing strategy that balances operational costs and profitability requires you to consider equipment availability, maintenance costs, and staff resources.
4. Inventory depreciation
Your rental equipment inventory will depreciate over time.
Once the equipment’s healthy lifecycle is over, retire it, sell it off, and replace it.
Powerful rental software is equipped with tracking the equipment lifecycle and the ability to sell it via the webstore.
Old or less maintained equipment can be rented out at lower prices and used to attract customers who prioritize affordability over quality.
The more wear and tear your equipment has, the lower you can go for its rental price.
However, compliances and regulations may come into play for critical equipment such as machinery, vehicles, and medical equipment.
Keep the equipment in your inventory at a lower rental price as long as it is safe to use and operate. But once the safety threshold is crossed, retire it or sell it.
5. Bundling and discounts
Maximize customer engagement by renting out multiple items or additional services in bundled rental packages. Additionally, offer discounts on bundles.
Bundling is convenient for customers as it saves time and reduces decision fatigue. It also increases perceived value along with increased average order value.
This incentivizes your customers to choose your rentals over your competition.
Understand your customers’ needs and adapt your bundle offerings to market trends and feedback to create attractive rental bundles that are repeatedly booked.
6. Seasonal pricing
Adjust your rental rates based on peak and off seasons and related changes in demand.
Depending on your industry and the kind of equipment you’re renting out, adjust rental rates to compensate for rising and falling demand.
Maximize revenue by raising rental rates during peak season, and lower your rental rates in off seasons to attract customers.
How to price rental items effectively
A fair price determines the value of your product, attracts customers, and ensures profitability.
If you set a fair price high enough to give your rentals a healthy profitability, your business will be sustainable and successful.
Here are the four most popular ways to price your rentals:
Cost plus margin formula
It is a simple pricing strategy where you calculate costs associated with owning the asset and add a profit margin.
You follow the simple formula; Price = Cost + Desired Profit.
For example, an asset’s maintenance, depreciation, and miscellaneous costs add up to $50, and you decide to add a margin of $30 and rent the asset at $80/day. If it breaks even at 2000 units, it will take about 25 days at $80/day to break even.
This formula works perfectly only if your assets are maintained, serviced, and made available on time.
It is beneficial for small rental businesses to keep operating on the cost-plus margin pricing strategy and maintain survival in the market.
Competitive Pricing
Rental businesses do not operate in isolation.
Competitive pricing is when your rental prices are affected and adjusted every time your competitor increases or lowers their price.
In this rental pricing strategy, you keep your rental prices similar to those of other rental businesses.
Competitive pricing is most effective when your rental business is well-established and has a strong position in the marketplace.
If your business and rentals are well known, customers are likely to pay a competitive price.
However, if you are new, and charge the same price as an established business, customers may prefer to rent from the known entity.
With the rise of the internet and frictionless comparison, it’s easier to research competitors’ pricing models.
This information works in parallel with an in-depth analysis of your target audience and other rental competitors in the market.
Based on competitor analysis, go for any of the three options below:
- Price = Competitor’s price
- Price < Competitor’s price
- Price > Competitor’s price
All three of these pricing strategies have outcomes depending on multiple factors.
First, if you set the same price as your competitor, you can distinguish your rentals by offering an exceptional experience, product, or service.
Second, if you set your rental price lower than your competitor, keep production costs to a minimum. Lower prices will reduce profit margins but increase sales.
Third, if you set rental prices higher than the competition, you can only win if you offer premium rental equipment with a personalized rental experience.
Psychological Pricing
A psychological pricing strategy is when you create a perception for customers that they’re getting a great deal because the rental price of your equipment is the lowest due to sales or special deals.
You can create psychological pricing by positioning your rentals with slogans like: ‘Rent for 6 days, get 1 day extra’, ‘50% off for Black Friday’, ‘15% Discount if you rent today’, etc.
However, if you set a low price, your customers will equate it to the actual value and quality of your rentals.
If they see a rental being consistently on offer or cheaply priced, they may perceive it to be low quality.
It may attract more renters but will drive away premium customers who want to rent high-quality equipment with great service.
Bundle Pricing
Bundle prices allow multiple pieces of rental equipment to be packaged together and rented as a single deal.
For instance, if you are a construction equipment rental business, you can package your wheel loader with a few gallons of gas for free.
A tool equipment rental business may package a heavy-duty drill with free drill bits and Fischer anchors.
A camera rental company may bundle up cameras with lenses and lighting equipment.
Additionally, you can bundle your equipment with services such as delivery, pickups, maintenance, servicing, etc.
Your customers would love to rent a complete bundle at a lower price rather than renting every equipment and inventory item separately.
Be aware of your most utilized and frequently rented pieces of equipment, and use bundle pricing to package them together and increase your business revenue.
Utilize bundle pricing effectively to increase your equipment rental cycle, resulting in additional revenue.
Always balance affordability and profitability
Choosing the right equipment rental pricing strategy is balancing profitability and customer expectations.
Follow our tips and optimize your rental rates for maximum profitability and customer satisfaction.
Finding the right rental pricing is a constant exercise.
Regularly adjusting your pricing strategy based on feedback and market conditions will ensure competitiveness and success in the rental industry.
Happy renting.
