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Renting is the New Selling

31.03.2009

for RentWhen”Cash is King”,  be a Kingmaker for your customers

In several other blogs, I have talked about the ethics of needing to bring value to your customer and discussed various components of what this value might be.  I have also discussed negotiation theory where we try to find out what value is most valuable to the customer.

In today’s financial crisis (Q1-2009), I can be reasonably certain that your customer values cash management.  You also are likely faced with the same financial reality and also value cash management; consequently, this is either a conflict/deal breaker or an opportunity to investigate how not all cash is equal.  If cash is not the same to everyone, then we have the perfect opportunity for great negotiations.

If I go back to negotiation theory, “what costs me less but costs my customer more?” or specifically what ‘cash’ costs me less than my customer?    The answer is cash on something with a very high profit margin for my company.  If I sell a product that is 100K but half of this is margin, then I only need 50K of cash to provide what would normally cost my customer 100K of cash.  Will my customer pay for me improving his cash management?  Perhaps, but first let’s see how it might work in practice and where it will not work.

Using the same 100K product, I could offer to delay payments and thereby help my customers cash position so much that I can charge a small premium or resist a concession on something else.  Better yet, I could go a step further and introduce a rental business model.  The reasons are two fold: one, I get paid cash regularly, so my cash flow is less bad yet the customer ‘gets what they need’ with his cash neutrality (his costs and income are balanced).   On average, I only need 25K of consumed cash during the life of such a lease.   Second, I can add other services to this rental model in order to make the perceived value far greater than the financing alone.  I can add support contracts, upgrades, consumables, performance related payments, etc- all of which have high margins.

While you can put some limits on minimal rental duration, you will likely need to take some risk here.  If the value interval (duration when customer gets value from the product) will be longer than the customer’s “worry horizon”, then he is usually happy to pay a high premium over a longer term.  If you know your product well and how customers get value from it, then you should be in a position to make this bet.  An example is renting musical instruments to students– parents are not sure exactly how many years they might study–many parents will gladly pay some premium not to have to worry about instrument disposal should their child stop.  You could also see this as an insurance policy against the child’s possible loss of interest in the instrument.

If the customer is only likely to get value over a limited time horizon, then it is probably time to “come clean” and show the added value of a clean exit for the customer where their spending ends.  If communicated correctly, you customer should recognize you as an honest partner who clearly looks out for his interests–  these moments cement long term relationships.  If you have physical products, this means an opportunity for re-renting refurbished equipment that is returned.  If you are a software or licensing company, that means you have a defined time to find the next product your customer should license next.  Knowing that license rental costs will soon come to an end, customers are remarkably open and receptive at looking at new products when they know exactly where they will find the money.  An example of this type of rental might be diagnostic tool to comply with new legislation.  For the first years after the laws are enacted, the tool will get well used.  Later, however, most people will understand how to comply with the law and the tool will likely have less and less value.  A follow-on product can address another new legal compliance issue or move to business efficiencies in the same business area.

In both of these examples, imagine a competing company trying to sell against you with their similar product using a simple up-front or even a financed one-time-sale business model.  By presenting a rental model, you can demonstrate a better understanding of the customer’s problem and therefore a perceived more credible knowledge of the solution space of your product.  By renting you likely have better margins since you are focusing on the customer’s largest pains.  Finally, renting is helping you build a long term relationships which are always the key to mutual value and business success.

Challenge yourself to see cash as a precious resource that should be spent wisely.  Far too many companies are going on “cash diets” and have convinced themselves that all new cash spending is unacceptable.  Free yourself to imagine how spending very small amounts of this precious resource might return huge results- you are likely to realize that some ‘must have’, legacy uses of cash are no longer a must.  In doing so, imagine renting and see if the benefits don’t outweight the costs in cash– even in this credit crisis environment.

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