Pricing – It’s time to sharpen up

by Professor Colin Tourick

Contract hire pricing. It’s not the sexiest of topics, is it? When compared with some other parts of the organisation, pricing tends to be positively tame.

It can be fun to get out and negotiate discounts with manufacturers, dealers and garages, or parts pricing with tyre companies.

The whole new business sales area is always action packed, with everyone being focussed on the cut and thrust of winning deals in a tightly competitive market.

Account Management is an absorbing area: looking for ways to deliver more value to the client and to nurture the relationship for mutual benefit.

Even setting RVs and SMR budgets can be absorbing: trying to bring together all of that vehicle, economic and market data to help you decide how much a particular car will sell for in three years time.

But pricing – trying to work out what price to quote – isn’t seen by our industry as an exciting new frontier where we should be focussing a lot of attention.

That’s not the case in some other industries. It’s worthwhile looking elsewhere to see what we can learn.

The airlines have revolutionised their pricing over the last decade or so, having realised that the price of an individual seat is largely irrelevant: it’s much more important to maximise total revenue per flight because an airline seat is a bit like food; a most perishable item. Once the flight has taken off you can’t sell it.

American sports stadiums alter their pricing dynamically during according to how well ticket sales are progressing, even if that means moving the boundaries between differently priced zones to balance supply and demand.

Online retailers and insurance companies actively manage their prices, making changes by the day and sometimes by the minute.

Even small pricing improvements can yield impressive results.  If you could increase your average gross margin over cost of funds by 5% (from say 4% to 4.2%) with no drop in volume, how much incremental profit would that deliver to your bottom line? Research across a range of industries (Philipps, 2005) showed that a 1% improvement in pricing delivers, on average, an 8% improvement in bottom line profit.

This isn’t a call for everyone in the industry to increase their margins by 5%. It’s a call for everyone to look at the way they do their pricing and consider whether there might be a better way.

Contract hire company quoting databases are massive and a lot of work goes into building and maintaining them. Typically, prices are built up through the activities of a number people working in different departments.

Someone acquires and loads vehicle details and list prices; someone else negotiates VRB and dealer discount details; someone negotiates tactical deals with manufacturers; a team of people decides RVs and SMR budgets; someone else determines money costs, and so on.

Different people in different silos, each having responsibility for some elements of the price that will ultimately be quoted to the client.

Then the sales and account management teams are given their targets and told to go out and win business. But what tools are they given to help them choose the optimum price to quote– the one that maximises the probability of winning the deal at the highest possible price?

In most cases: none. They have their volume and margin targets and they probably use an RoE tool but these won’t help them decide what to quote for a particular client on a particular day for a particular model, term and mileage, in order to maximise the probability of winning the deal at the highest possible price.

If they need to pitch a particularly low price they will refer the deal up to their manager for approval. What additional tools will the manager have to help them decide what to quote? In most cases, none.

It’s always in the client’s interest to ask for a lower price. The salesperson needs to decide whether to lower the price or not, and it’s rarely obvious whether they really need to.

Many of the industry’s clients have sole supply deals. They look at the overall value of the relationship and accept that their supplier won’t always quote the cheapest rental in the market, every time.

However a lot of business is written on a multi-supply basis – or via brokers – where every quote has to be pitched correctly or the deal will be lost. And there can be a tendency to quote too low in order to win the business.

Fear of competitors is a powerful motivating force. When the directors of several hundred large European corporates were asked if they were in a price war, 55% said yes. And when they were then asked who had started the price war, 92% said it was someone else!

 Business people are often put under pressure to cut prices but too often they give in when they needn’t. Or they hold out for too high a price and lose the deal. It would be so much better if they were armed with good information from the outset that told them the optimum price to quote. 

And this is certainly achievable by managing prices better. Research (Hogan, 2011) showed that companies with excellent Price Management practices enjoy profit margins 24% higher than their competitors.