Deciding when to subrent vs. purchase - Formula has different caveats for equipment and event rental operations
by Connie Lannan
All equipment and event rental companies have been faced with the question of whether to subrent an item for a customer or purchase that item and bring it into their existing inventory. Making that determination is based on certain common key data points that depend upon whether you are an event or equipment operation.
To begin, rental operators need to track their subrentals and missed rentals, which can be done by most rental management software systems, according to Josh Nickell, American Rental Association (ARA) vice president, equipment segment, and James Auerbach, ARA vice president, event segment and rental industry workforce development.
“For me, the first thing to do is to start tracking missed rentals,” Nickell says. “I would consider a subrent as a type of missed rental because I don’t have the equipment to do that rental. Now, I also would track whether I was able to fulfill that rental another way. For example, when I was running my family’s equipment rental operation, was I able to upgrade them to a larger piece of equipment at no additional charge or subrent an item to fulfill that order? At the end of the day, the question for me is if I buy a piece of equipment, how many times can I rent it and what additional demand do I think I can make in the market on that piece of equipment? So, tracking missed rentals or rentals filled using upgraded equipment is important. The second step is why you missed those rentals. If you are missing rentals because the equipment is old, then it might be time to replace but not necessarily add to the fleet.”
While the data may skew a little differently depending on whether you run an equipment or event rental operation, as pointed out in the following stories, it all boils down to being able to justify your decision.
There are definitely situations where you may want to consider subrenting equipment, Auerbach says. “Subrenting is a way for companies to expand the range of equipment they have available for rent. From my experience, subrenting is a way to test the waters to determine if you have the demand in your market prior to actually purchasing. Smaller companies can partner with larger rental operators to complement their existing inventory through subrenting to grow their customer base. By closely monitoring utilization and demand of the subrented inventory items, a rental operator can make the decision to purchase the equipment and add to their inventory,” he says.
Nickell agrees. “If you think you can create a market for it, subrenting is a great way to get started in the market. Another option is a rental split with the manufacturer or a rental with a purchase option from the manufacturer. There are a lot of times with manufacturers, especially if it is a new type of product for the area or a new product to the market, that they will say, ‘We think there is an opportunity, let me lower your risk by taking a cut of the risk on it. If you decide it is a good option for your market, you can start to carry it,’” he says.
Nickell used an Excel spreadsheet or decision trees to simplify the decision-making process with questions like:
- Is this a seasonal item where I can miss multiple rentals in a day? If yes, here’s your next question. If no, here’s your next question.
- If I rented it, would it be profitable? If yes, here’s your next question. If no, here’s your next question.
- Did I miss the rental because equipment was down and I’m just waiting on a part? That will change the equation.
“That would lump things into buckets, so it was more obvious. If I was missing a bunch of rentals in a core category that I carry and it was not because my equipment was down but because I had a consistent need for it and I could prove a return on investment very easily, then I would go buy that piece of equipment,” he says.
Tracking subrentals is paramount to identify trends. “If you continue to see a high demand for the items you are subrenting, you can then start to consider purchasing based on the amount of rentals it will take to get your return on investment (ROI). Buying a new inventory item without the demand can leave you with something that sits on the shelf gathering dust, particularly for event rental operations,” Auerbach says.
So, your subrentals and missed rentals are critical data points. Others include knowing your inventory and your client base, utilization of that equipment, ROI, whether that item is a core piece of your inventory, whether the request is a one-off, the time of year when the request is made, whether you can replace that item with the current supply chain issues, whether you want to grow your market in a certain area and other factors, including delivery costs and storage capability, Nickell and Auerbach say.
“Dollar utilization is the most common metric used by equipment rental companies, but often falls short for event rental companies. You can’t just look at turns or rentals to decide if you are making your money back,” Auerbach says. “For less expensive rental items like dishes and tables or high-labor items like tents, the variable cost on each item is much higher. In those cases, you must factor in the high variable costs, which can be roughly calculated based on your profit margin percentage.”
For example, if a rental operator would buy something for $100 and rent it each time for $10, the incorrect perception is that it will take 10 times to pay for that item.
“That is basing it on revenue. If the business runs at a 20 percent profit margin, on each one of those $10 rentals, you will make only $2. So, in theory, that $100 purchase would have to be rented 50 times
just to make your investment. For events, you have to look at the profit margin,” Auerbach says. “You have to make sure you are making decisions on the right amount of turns to repay your investment or you can get into trouble.”
Auerbach and Nickell note that there are times of the year when certain pieces of equipment will be in higher demand than others. It is just the nature of the business.
“If you are not missing some rentals or having to subrent occasionally, you probably have too much fleet,” Nickell says. “You don’t want to never run out. You want to be as close to fully utilized as possible.”
There are many reasons to purchase a piece of equipment, Auerbach says. “You might want to introduce a new piece of equipment into your market due to existing demand. Your goal is to capture a piece of the market because you are getting requests and there is not an ability to subrent that item from someone else in the region. You know that you will also gain the additional rental orders associated with the new piece of equipment you are adding to your inventory. No matter what the reason, you have to have an understanding of the potential frequency of orders to justify the purchase of the item.”
While the data may skew a little differently depending on whether you run an equipment or event rental operation, as pointed out in the following stories, it all boils down to being able to justify your decision. “You must have accurate data and rely on that to help you make an informed decision,” Auerbach says.