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The Stimson Group Newsletter
July 2008
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Vol 2 Issue 7
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Summer Reading Issue....
Everyone deserves a short break, and since the kids are out of school I am taking a few days off as well. In this abbreviated issue we restart the Best Practices series with an excerpt from my InfoComm seminar on Rental & Staging Best Practices.
In an upcoming issue, I would like to feature some of our readers' recent accomplishments. Several companies have recently moved into new office and warehouse spaces or remodeled. Please send me some photos that highlight a cool warehouse innovation, storage trick, conference room, or lobby/reception area. In an upcoming issue of AV Matters I will share those photos with our readers and give you due credit.
Enjoy,
Tom (TR) Stimson, CTS
My Direct Email
Website
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R&S Monthly Trends Survey
June '08 Results
The June survey polled folks on their purchasing agenda for the second half of '08 with. There were strong indicators that flat screen displays and 16:9 portable projection screens would be high in demand. Are you keeping up with current trends? Download the results and see for yourself.
Survey Summer Break
Surveys is taking a break this month. If you have an idea for a survey or a question about previous surveys - just send us an email. If you just can't go a whole month without some data, then visit InfoComm's Market Research web page and download some of their industry reports.
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Best Practices Series: Do the Math
A popular discussion among rental managers is how to figure out what to charge for products and services. There are three basic approaches to setting prices. 1. Mirror market rates, 2. Be a market leader, or 3. Calculate costs and add a profit.
Market Rate Method
When positioning yourself to market rates, you research what other companies are charging and choose a price point that fits your image and service levels. This works well for established products and services, but often traps companies into groupthink pricing. If everyone bases their rates against the prevailing rate, what if the prevailing rate is wrong (ie: unprofitable)? This is exactly what has happened in some segments - especially traditional concert sound and lighting - where the rental and service rates often don't meet basic business needs for profit, recapitalization, and growth.
Market Leader Approach
Most managers believe that they want to be market leaders, but not everyone can be. Someone is holding down the middle and someone else (hopefully, not you) is bringing up the rear. Market leaders can set prices that others respond to. The easiest way to do this is to be the first to acquire new technology (and the expertise to use it) in your market. You can lead in one area, but that doesn't make you a leader in others. A true market leader is at the forefront in most if not all of the products or services they provide. Once there, you can set market price for the highest level of service and expertise.
Do The Math
AV Rental companies rarely seem to take the third approach to pricing: Do the math. The area in which I think it makes the most sense to do this is in calculating rates for deliveries. Consider this rental order: one 9x12 screen with projection, sound for 300 people, you deliver and set on day 1, the event will be operated by the customer on day 2, you teardown and return on day 3. In my travels I have seen typical delivery charges for this two-person job range from $75-300! Let's walk through one method of calculating what that service is really worth. The chart below is a real example.
Lease rates on vans vary, but a Sprinter with decent gas mileage on a two-year lease cost this company $900 per month. Over the course of one year they drove it an average of 24 days per month. In this example, the delivery in question involved outings on three separate days. Never mind the fact that it is possible and likely the van was used for other trips on these days. Part of being a business is creating economies of scale from which you can derive profit. The alternative to leasing or owning the van would be to rent one for three days - at a much higher rate than the $112 in the example. The lease has mileage charges associated with it, and there is of course fuel. This example gets way better gas mileage than most folks get. I want to point out that in this example the gas is only $4/gal. Even if the price of fuel doubled, the delivery cost in this example would only go up about $12.
The tech and helper have to make at least two trips - for installation and dismantle. Let's assume that the tech has to make one additional trip to help the customer get things turned on (the emergency phone call "HELP, your gear doesn't work!!!"). The subtotal of your costs at this point are almost $300 and you have not accounted for business overhead, sales commissions, or profit. Adding a simple profit margin brings the minimum charge for this transaction to at least $371! Further job costing and considerations for high levels of service, after hours on-call benefits, or even weekend or overtime costs that you cannot directly pass on would push reasonable two-person delivery and setup fees to the $500-600 range. Are you losing money everytime you deliver a rental order?
When it comes to calculating rental rates, math can come in handy again. As an industry we are years beyond simply dividing the purchase price of a product and dividing by ten to get a rental rate. Sophisticated rental companies figure the life cost of a product: purchase price, maintenance, repairs, and ancillary equipment including cases and cable. But, also consider the cost of the personnel you need to employ just to support that equipment - your overhead costs. It is less expensive for a business that already has three video engineers to absorb the cost of one new video switcher package than it is for an operation with only one video person.
When all is said and done, most companies have to rely on market pricing to determine their rates. It is simply a matter of "What the customer will pay..." The flaw in this logic is that the market rate firm will never become a true market leader or insanely profitable. If the difference between what a market leader can charge and what you can charge is 20% and you have a net profit of 10% - the market leader will make at least 2% higher profit than you using your costs of doing business. Reality is that most market leaders are highly efficient, have lower operating costs, and more productive capital usage. So, they actually make more money for every extra dollar they take in than you do. What is moving from 10% to say, 15% net profit worth to your firm? Do the math.
Comments? Email me.
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 About Thomas R. Stimson, MBA, CTS
Tom
Stimson is celebrating over twenty-five years in the communications
technology industry. As a Consultant, Tom helps companies build
smoother operations, focus sales, and increase profit. For more
information visit the website.
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