Car Rental Software - Ultimate Guide (7): Finances

In part 6 we looked at ways to generate extra revenue through sales agents. This edition covers what it ultimately comes down to: the finances. We zoom in on the different phases of car rental in which the money is made. In part 8 (reporting) we build on this further.

The Phases

As we already described in Part 5 – Fleet Management, there are three essential phases in which the money is made:

• Phase 1. Purchase
• Phase 2. Rental/lease period(s)
• Phase 3. Sale

1. Purchase Phase

We hesitated over whether to say anything about this phase at all. The car rental companies we know are born negotiators and know exactly how to squeeze out every last penny. That matters, too, because every euro paid too much has to be earned back in a later phase.

We do, however, see opportunities to improve purchasing policy. All too often we see that purchasing policy is largely driven by the car dealer (seller) rather than the car rental company (buyer). In many cases this does result in a favourable price, but the question is whether the vehicle is (at that moment) a valuable addition to the fleet.

We would go so far as to say that in at least 20% of purchase transactions it would have been better to buy a different vehicle at a higher price, or no vehicle at all.

That is a dangerous statement. Most owners of rental companies and fleet managers will argue that, based on their gut feeling and experience, they know full well what is needed. We do not have that experience, so who are we to comment.

While that is true to some extent, we do have a great deal of expertise in data analysis. Every data analysis we have carried out shows that the make-up of the fleet is not optimal. Vehicles are bought that yield little or no money in the long term, or vehicles are bought whose utilisation rate was not in order at the time of purchase (over-utilisation).

That said, we also understand that the supply of new and used vehicles is currently scarce. In some cases it is simply not possible to buy the vehicle you need most at that moment.

When an opportunity to buy a vehicle does arise, it can therefore be tempting to jump at it with the argument: 'I am getting ahead of future scarcity'. That can be a legitimate argument, but always ask yourself a) whether the money could not be better spent elsewhere right now and b) whether you can really use the vehicle in the near future.

Finally, our tip is to run a consistent purchasing policy. Think, for example, about whether you buy new or used vehicles. Make sure that your purchasing policy fits the branding of your rental/lease company. If your customers always expect the lowest price, it may be a strategy to buy mainly used vehicles.

The buy-back agreement is also an interesting matter. Ask yourself whether you need one, and think about its binding nature. Perhaps you do not want to sell the vehicle back at all after the contract period? Especially in times of growing scarcity, that can be a problem.

Regardless of the above, a buy-back agreement is in any case not required to calculate the ROI of a vehicle. We were very surprised when an international car rental company put forward this argument…

2. Rental/Lease Phase

The second moment the money is made is during the rental and/or lease phase. There are many directions you can take here, and one of the most important questions is whether you focus on the business and/or the consumer market.

In general, contracts with business customers are a) longer in duration and b) recurring in nature. These are pleasant customers, since the pressure on operational staff is fairly low. Once the vehicle has been handed over, you do not have to worry about it for a while. In addition, business customers are less seasonal than consumers.

The business market has its downsides too. In general, you have to offer the vehicles at a lower (fixed) price than to consumers. A business customer also requires more account management and the sales process is longer. Finally, the business customer is more demanding. They attach more value to quality and expect more service.

The consumer market is more dynamic than the business market. Rental contracts are shorter and the customers are less loyal. On the other hand, the rental rates are higher.

Pricing Strategy

In practice we see that prices are generally aligned with those of competitors. The fear of being more expensive than your competitor leads to a 'race to the bottom', putting the (already small) margins under further pressure.

Although we understand this pricing strategy, in our view it is not the right choice. The price you charge should be based on the return you want to make on a vehicle, taking your target group into account. This applies above all to organisations that are focused on service and quality.

Pricing strategy flows from the strategy of your organisation as a whole. Too often we see service- and quality-oriented rental organisations chasing the lowest price in the market. This squeezes margins and in some cases even results in a negative return over the entire rental phase. *

We advise against this. Based on the unique characteristics of your organisation, look for a price that your customers are willing to pay, aiming at the very least for a positive return. If you notice that your margins are becoming too thin, consider splitting your business into different Brands.

• Incidentally, it can also be a strategy to make a negative return over the rental period, provided you make a profit over the vehicle's entire life cycle.

Splitting into Brands?

Splitting into Brands can be a good solution to offer service and quality at a fair price on the one hand, while also capturing the volume of a budget player on the other.

You can see this concept at KLM and Transavia, for example (both part of the AIR FRANCE KLM Group). KLM differentiates itself on 'Quality' and 'Customer Satisfaction' (focus on business). Transavia, on the other hand, is by its own account 'the number 1 budget airline in the Netherlands' (focus on consumers).

The product is the same, but the price and quality differ. In this way the AIR FRANCE KLM Group can serve several types of customer while keeping its margins under control.

We challenge you to give the above concept some thought. But only do so once you have clearly defined your (main) brand and strategy. What do you currently stand for?

3. Sales Phase

After the rental phase comes the sales phase. Here too, most car rental companies and lease companies score well when it comes to negotiating the highest possible sale price.

You do, however, need to look critically at the moment of sale. We often see that there is no clear plan here. The vehicle is sold based on unclear parameters that were not defined in advance. In other words: on gut feeling and experience. This makes it difficult to compare like with like from a financial point of view. In the transition to data-driven businesses, this is therefore an important point of attention.

Closing: The Link with Car Rental Software

You may be wondering what the above information has to do with (our) car rental software. The answer is that car rental software should support your commercial practice. An extension of your rental/lease business.

The common thread in the story above is that you, as a car rental organisation, 1) need to run a consistent strategy with purchasing, sales and rental pricing policies aligned to it, and 2) can then make adjustments based on the actual results.

Your car rental software should help you with this. On the one hand by offering the ability to record all revenue, but above all also all costs. On the other hand, this data must also be retrievable from the rental system. We go into this in more depth in part 8 – Reporting.

Would you like to talk further about this topic? Feel free to get in touch. We would be glad to have the conversation with you.