Setting optimal pricing strategies for your rentals is critical for business success. Charging excessively high prices means you risk diverting sales to competitors and losing out on customers. However, setting prices too low can mean slimmer profit margins or even difficulty in covering your production costs. In both cases, you risk the financial health of your business.
A fair price determines the value of your product, attracts consumers, and ensures profitability. However, setting an effective pricing strategy is not straightforward and there are many factors to consider. These include your purchase, maintenance, and depreciation costs, competitive marketplace analysis, identifying your customers and understanding their spending habits, as well as defining your business goals.
An effective pricing strategy will help you successfully navigate the break-even period and set the long-term strategy towards making profits.
Here’s a list of pricing strategies to get you started:
1. Cost plus margin
This is one of the simplest pricing strategies where you calculate costs associated with owning the asset and add a profit margin to it.
Let’s say an asset’s maintenance, depreciation, and miscellaneous costs add up to $50. The owner decides to add a margin of $30 and rents the asset at $ 80/day. If it breaks even at 2000 units, then it will take about 25 days to break even at the price of $80/day. A simple formula calculation is as follows:
Price = Cost + Profit
This is one of the easiest methods to cover your costs and make profits, keeping in mind assets are maintained, serviced, and made available in a timely manner. It is beneficial for small rental businesses to keep operating at the cost plus margin pricing strategy and maintain their survival in the market.
2. Competitive pricing
Rental businesses do not operate in isolation. They constantly need to monitor the competition and this is where competitive pricing comes into play.
This strategy works on the principle of keeping prices at the same level or similar to what other rental businesses are charging. This is effective when your rental business is well-established and has a strong position in the marketplace.
If your business and products are well known, customers are more 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 e-commerce sales on the rise 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.
1.Price = Competitor’s price
2. Price < Competitor’s price
3.Price > Competitor’s price
Based on your competitor research, go for any of the three options mentioned above. Each of the pricing strategies has its own outcomes depending upon multiple factors.
- First, a business setting the same price as its competitors will need to provide a distinctive product or service. This will encourage customers to choose your product.
- Second, opting for a price lower than the competition will require the business to keep its production cost to the minimum. This is because charging a low price will reduce profit margins to increase sales.
- Third, choosing a price higher than the competitor’s price demands premium product features to justify the price paid by customers.
3. Psychological pricing:
Here are a few examples of psychological pricing. “Buy one, get one free,” “Last day flat 50% off,” and “$1.99 only!” A psychological pricing strategy creates a perception in the consumer’s mind that the price of the equipment they are renting is the lowest, or on sale.
Businesses can choose the psychological pricing strategy to upsell. Let’s say a forklift on a sale offer can be rented out for fifteen days at $ 14.99/day. A customer requires a forklift for ten days but they are encouraged to rent it out for fifteen days on a sale offer. This offer benefits the business by increasing the rental period but also the customer who can avail a discounted price.
Even though this pricing strategy is widely used, remember that setting a price also indicates the value of your product in the customer’s mind. A rental asset that is always at a discounted price might also indicate low quality. Which is why this pricing strategy is beneficial on a seasonal basis such as voucher coupons when demands are low.
4. Bundle pricing
Here you can bundle rented assets together and price them as a package deal. The benefit: Customers get a lower price compared to what they would pay to rent both items separately.
As an example, if you are in the AV rentals business, you can package a camera with lenses as a bundled item and set a price point. The customer will perceive this as a discounted offer because renting accessories individually will cost more than in a bundled offer.
This is a beneficial pricing strategy for rental businesses that are aware of their bestsellers and how to bundle them with simple accessories. This will increase the rental cycle for assets and asset stock and eventually add to more profits.
Read more on how Bundle pricing can help your business here.
Strategically setting a price for your rental business can be time-consuming and requires robust market research. However, this is one of the most important tools for businesses that want to continue growing and bringing in profits. Competitive and fair pricing builds a positive image of your rental business.
EZRentOut, a cloud-based equipment rental software can help. EZRentOut offers companies in numerous industries seamless rental management along with a host of other features. You can integrate your website with our EZR plug to keep track of all your rental Assets and operations. Try us out today!