It’s impossible to make a qualified decision about the direction and health of your rental business without complete visibility into your performance. Although many rental companies understand what data or reports they need to see every month from a financial perspective, other layers of equipment rental business profitability and performance measures should be tracked and analyzed to reach your core business goals.
The requirement for better, more focused data to adapt and change to a constantly evolving rental market is becoming even more prominent. As the equipment rental sector continues to thrive post-pandemic, rental companies are trying to keep up with new demand and increasing competition.
This blog post will outline how you can make strategic and tactical performance measurements work for your equipment rental business. With accurate insight and visibility over the right rental KPIs and metrics, you will be able to stay focused on the most impactful data and make informed decisions that create efficiencies and drive improvements.
KPIs vs. Metrics
Before we jump into the top equipment rental KPIs we recommend you start tracking, let’s take a step back to talk about performance measures. Two types of quantifiable measures will impact how you set your overall analytics strategy:
- Metrics track a specific data point or piece of the business process funnel. These are tactical measures and should be monitored regularly. For example, the number of new rental contracts, retail rental price, equipment purchase cost, warehousing costs, or rental revenue is a metric you should be tracking.
- Key Performance Indicators (KPIs) measure your performance toward achieving a larger strategic goal or objective. Net profit margin or monthly sales growth are good examples of a KPI.
It should be noted that there are varying opinions and views on what constitutes a KPI vs. a metric. We could probably write a whole other article on the debatable topic. For example, some finance executives might argue that ‘rental revenue’ is a KPI. However, rental revenue is a single data point that doesn’t inform you if you are achieving larger strategic goals. For instance, what if your rental revenue skyrockets from only a single, large customer or a product providing very little profitability because the costs against it are the highest in all your inventory?
In other words, if your rental revenue goes from one million to two million dollars in six months (doubles), but the profitability on that difference was only a hundred dollars, or you only added one new customer, did the rental revenue metric tell you if you’re achieving the results you want?
Metrics feed your KPIs, and when you bring both together in your ongoing analysis of the rental business, you will be able to evaluate your progress towards achieving your goals properly.
Let’s look at rental profitability as an example. For companies with most revenue originating from equipment rental, analyzing your rental profitability by different markets, regions, equipment groups, items, customers, and data periods become important KPIs to track. Rental profitability by market, for example, can be used to decide where to expand or contract the business and spending. Metrics that may calculate your rental profitability by market include rental revenue, fixed asset costs, storage and warehousing costs, and other costs of goods sold (COGS), etc.
Equipment rental companies need to think bigger than general, one-dimensional metrics to track equipment rental performance accurately and realize goals. By understanding what specific metrics support your rental KPIs and having the right technology in place to gather this data, you will be able to quickly respond to changes in the market and compete at a higher level.
Now let’s dive deeper into the four main areas of rental equipment KPIs you should start tracking.
4 Business Areas Your Equipment Rental KPIs Should Be Tracking
Every executive team has its preferred way of tracking and measuring performance and growth. KPIs and metrics are typically identified across different business areas, the most common categories being operational, customer, financial, and sales. One or more key KPIs should be selected from each category and analyzed by the specific department at the desired frequency.
Selecting and developing your own KPIs depends on your business goals and growth plans. As experts in the equipment rental industry, we focus on the KPIs our customers need to better track and manage their strategic initiatives. Below you will find an overview of the four categories of rental equipment KPIs that we recommend you incorporate into your analytics strategy for the most impact and improvement to your equipment rental business profitability. We have also included an example KPI to show you the importance of each of these performance measurements.
Rental Operations KPIs
KPIs for rental operations include the operating metrics that provide valuable information on the rental activities during one or more comparative periods.
- Example: Rental Sales Growth %
The Rental Sales Growth % KPI is fed by the Rental Revenue metric we addressed earlier and expressed as a percentage, which can be compared against your industry. A relatively general rule of thumb here is if you are a healthy company with steady growth, your rental sales each year should reflect that and increase at a rate of ten percent or more. If this number is significantly higher, such as fifty percent per year, this indicates several possible issues that may crop up.
A business that grows too fast may experience shortages in working capital, insufficient capital funds, lack of experienced staff, supplier challenges, and inadequate space. These types of obstacles can be difficult to navigate for any rapidly expanding company.
Remember to consider the effects of seasonal sales. Compare this year to previous years on a year-to-date basis, and then compare month to month.
Fleet Analytics KPIs
KPIs for fleet analysis are designed to provide the necessary information for evaluating the makeup and profitability of the rental fleet.
- Example: Washout Percentage
This KPI represents the lifetime profitability of a unit once it has been designated for retirement from the rental fleet. With this KPI, you can glean important information regarding the profitability of different unit types, whether more or less investment should be directed to the equipment category, group, or item, and at what cost to your market.
Understanding Washout Percentage also influences future cash flow planning as you determine the likely effect of equipment purchases on up-front outlays, ongoing cash inflows/outflows relating to operations, and eventual salvage values.
The calculation is determined by taking the lifetime revenue generated for a unit and subtracting the original equipment cost, any associated carrying costs, and all other expenses such as maintenance for that piece of equipment. The original equipment cost should be reduced by related disposition proceeds, if any.
KPIs for finance include key financial ratios and trends of most interest to the top-level executive group. Financial analytics will be most useful to the senior executives or shareholders to determine investment and business direction.
- Example: Gross Profit and Gross Profit Margin Ratio
Gross profit is the net revenue minus all related direct sales costs, otherwise known as Cost of Goods Sold (COGS). Gross profit margin measures your percentage of revenue that is actual profit, before adjusting for operating costs by taking your total revenue, subtracting your COGS, dividing by the revenue again, and multiplying by 100%. These KPIs are essential for senior management and executives to measure the consistency and success of the business or department.
Fixed costs such as staff salaries are generally not included in the COGS; however, acquisition costs, transportation, brokerage, and other similar costs must be included. For service and rental departments, gross profit can include only direct costs, such as two dollars for the cost of providing rig mats.
Gross profit is the measurement used to ensure your expenses stay balanced with any related sales. Gross profit margin reveals the ultimate health of your business. That’s why it’s imperative to remain consistent across your organization with both of these analyses and the costs you use to calculate them.
If more detail is required, information for gross profit and margin KPIs may be pulled from the general ledger or the sales and inventory system. Most financial, equipment rental, and service systems should have a report providing some level of this information.
Customer Analysis KPIs
KPIs for analyzing your customers provide insights into the changes or shifts in customer behavior. These metrics should provide information about your customers to identify trends and red flags and allow you to take actionable steps to fill in any gaps in services.
- Example: Average Customer Value/Profitability
Rental revenue is a significant metric for the business, but as we alluded to earlier, what is feeding the symptom of ‘revenue’? Are we selling the right things? To the right people? At the right price? Average Customer Value is a good indicator of the overall health of the rental business and the market it serves. It tells us how engaged our customers are and if we are selling them what they want at a profitable price.
Suppose your average customer value shows a consistent decline over time. In this case, you can trigger further analysis and possible action, such as surveying your customers or re-directing investments to different types of equipment.
Top 30 Equipment Rental KPIs and Metrics
These are only a few of the rental KPIs and metrics you should be tracking. In our latest guide, we have developed a detailed list of the most important KPIs for the equipment rental industry – 30 in fact! These examples will give you a better understanding of what you could be tracking, but it doesn’t mean that we expect you to start monitoring them all right away.
Depending on your organization’s age, size, and complexity, the KPIs you choose to monitor will differ and evolve as you grow. It is, of course, impossible to effectively monitor all of these without the right goals and technology in place. It is best to start with a few KPIs in each category and get comfortable with them. Once they are fully understood and become the basis for meaningful change, more can be considered.
After reading our guide to equipment rental KPIs, if you have any questions, please feel free to reach out to us. Many equipment rental companies are still using complicated, manual Excel spreadsheets to track their monthly and quarterly KPIs. We can provide some insight into simplifying your analytics strategy and getting the right technology in place.