Calculating bill-out rates for specialised equipment

[gavint]

Hi Everyone,

I'm looking at investing in some new pieces of equipment.  Beforehand I need to determine if it makes sense based on potential use and expected return on investment, some of this equipment is fairly expensive and wouldn't see daily use.

How do you calculate the day rate you charge to customers for specialised equipment?  There's the lazy way by just taking the local rental rates for the same thing and using that rate, but these things I'm looking to buy aren't available to rent.  Do some of you take a percentage of the new price and use that as the day rate?  Or do you do a more in depth calculation taking into account expected number of years of service, number of usages per year, maintenance costs and desired ROI?

Your thoughts are greatly appreciated!

[AnnaGrowsAMustache]

Hi Everyone,

I'm looking at investing in some new pieces of equipment.  Beforehand I need to determine if it makes sense based on potential use and expected return on investment, some of this equipment is fairly expensive and wouldn't see daily use.

How do you calculate the day rate you charge to customers for specialised equipment?  There's the lazy way by just taking the local rental rates for the same thing and using that rate, but these things I'm looking to buy aren't available to rent.  Do some of you take a percentage of the new price and use that as the day rate?  Or do you do a more in depth calculation taking into account expected number of years of service, number of usages per year, maintenance costs and desired ROI?

Your thoughts are greatly appreciated!

I actually don't have a clue how you would work this one out..... I think I would start with the cost of owning the equipment, so depreciation, interest on loans, insurance, maintenance, cost of regular servicing/calibration/whatever legal inspections have to be made. Then there's the cost of moving equipment to and from, or the cost of setting it up for people where you are. There might be a cost with not using the equipment regularly, for example, bulk printers have regular cleaning cycles that use ink, whether or not they are actually printing at the time. You'd have to cover all those costs and make a profit, right? Plus you'd have to replace the equipment at the end of its lifetime, so you have to add in something that cover that. That's how I would approach it.

[Smokystache]

Like Anna, I don't know the specifics of these calculations. But it also seems like the cost of purchase and frequency of use have to be factors too. Specifically there's a difference between renting something I can reasonably buy versus something I can't. I can choose to rent a chainsaw to clean up a tree that fell down on my property, but I can also reasonably buy one. However, I'm much less likely to be able to afford to purchase Bobcat/Skid Steer - so my only choice would be to rent it.

Likewise, I might use a chainsaw every few years and one can be purchased for under $200. On the other hand, most people aren't going to use a Bobcat/Skid Steer very often.

I think the general influence on rental prices would be - if it is relatively cheap and I might use it fairly often, you may need to have a lower rental price (at a certain point they may say, heck if renting it is 75% of the price to buy a new one, then I'll just buy a brand new one), conversely rental prices might be higher than typical for a device/machine that it would be outrageously expensive to buy and that you use rarely.

Of course, you'll also have to factor in marketplace competitors, how much work & time the device saves the renter compared to not having the device (after all, I could try to just saw a tree with a handsaw, etc.). And the likelihood that the renter will destroy the device. Good luck!

[gavint]

Thanks for the replies! It's been a few days since I posted and I played around with the numbers a bit.

I'm looking at a mini-excavator and a few pieces of tree diagnostic equipment. 

Here's how I approached it:  I factored the purchase price over the lifespan of the equipment, adding in insurance, maintenance, fuel and repair costs.  I then subtracted tax savings (business and income tax) and time savings in the case of the mini-excavator (a trip to the nearest rental business requires at least 1.5 hours on both ends - horrendous traffic and German officiousness).  I estimated the number of uses each piece of equipment would be used per year in order to determine potential income derived from it.   I assumed that the equipment would have a value of zero at the end of its life.     

I put it all in an excel spreadsheet which allowed me to adjust parameters.  My goal is to achieve at least a 25% ROI per year averaged over the equipment's expected service life.  That put the mini-excavator's day rate at around 135 €, the tree diagnostic equipment ranged from 65 € to 315 € per day. 

Cheers!