Forbes on how to target generation rent
If you’re looking at making a move into the rentals market, what should you consider and what are the challenges? Kevin Herring (pictured), director of Forbes Rentals, has some essential advice…
There will be challenges ahead if you’re thinking of setting up a rentals business in addition to your retail store.
First of all, there are short-term, cash-flow issues. And there are the service requirements – will you need field engineers? How do you manage bad debt and what’s needed to comply with Financial Conduct Authority (FCA) regulations? And, finally, how do you deal with customer ignorance of rentals?
When you’re thinking about growing or building a rentals base, there will not be the immediate, short-term, cash-flow that is generated by your current retail sales. However, over time, the rentals cash stream can be clearly forecast and there are specialist lenders who can bridge that gap.
Our customers will rent a washing machine for an average of three-and-half-a-years. If that costs £20 a month, during that time we will incur installation and service call-out costs. During years three to four, the product might be upgraded, or we might have a termination. Once the washing machine is returned, we have to refurbish it. It could then be waiting for six months in our warehouse while we’re trying to remarket it.
When it’s re-rented, it will be at a reduced price and it will now appeal to customers with lower earnings and restricted credit. The income potential has now been returned to the product, but we have to invest in it throughout its life with marketing, servicing and customer support. This must be factored in when we’re setting our rental pricing.
Retailers may feel that they lack the required service infrastructure to move into rentals, however, the service that is required today is much less technical than it once was.
There is still a service requirement and warranties do not cover the majority of the customer issues we see. Technology involves a high degree of hand-holding and this is what our customers love about our no-quibble rentals service. A high proportion of service calls involve washing machines with blocked pumps, or TVs with set-up and connection issues. The aim is to build job density and allow for specialisation and engineering support, but this comes with time.
Initially, it’s viable to use the retail and installation capabilities you have at present. A retail shop can offer front-line technical advice, which dramatically reduces the number of service calls. You could use your installation staff to provide basic service support. When a product cannot be repaired on-site, you can offer a swap-out service. Keep a few items of stock to be loaned to customers.
Arrears management and minimising bad debt are important to get right when you’re setting up a rentals business. You must guard against customer arrears. With an efficient credit check and credit control process, customer debt can be successfully minimised and more easily managed. This is good for the customer and for your bottom line. We credit-check our applicants with Experian and use that information to decide on the customer’s monthly rentals spend and whether they will be offered new or refurbished products. Think about making the payments as simple as possible for the customer – set up a monthly automatic payment method, like a standing order. We use direct debits.
If a customer does go into arrears, we initially manage it by phone, to set up payment plans, but, if required, we use our delivery teams to make contact with customers and collect outstanding monies, or to take back the equipment, if required. Swift action is key. Our arrears stand at a very low 3.5 per cent.
To be registered as a rentals provider, you’ll need to get authorisation from the FCA. However, for consumer hire, you only require limited permission status, so it’s not as convoluted as hire purchase.
Consumers are more familiar with the concept of renting through terms like ‘subscription’ for Amazon and Netflix, or service contracts or upgrade programmes for mobile phones or TVs, and leases for cars. The key is to market to specific demographics who are familiar with the rentals concept.
Rentals are about long-term business investment, nurturing that long-term customer relationship and building sustainable, long-term monthly recurring revenue. It’s a profitable, retirement pension plan.
- This article is taken from a speech Kevin Herring gave at the Retra conference last year