We've all rented something at one point in our life, whether it was a bike for a vacation or wedding decorations. Did you know, though, that the rental business is one of the fastest-growing industries in 2021?
This trend is only expected to increase in the future years, making starting your own rental business an intriguing option. All you need is a good concept and the determination to build your own company from the ground up.
When deciding on whether to start a rental business or not, it doesn't have to be a full-time operation; many rental business owners run their business part-time, as an additional income, or during specific seasons, like a surf, ski, or bike rental business.
Whether it's a clothing rental business you're considering starting, or a tool rental business, the most pressing question people ask themselves before starting a venture is about profitability.
Is running a rental business profitable?
The answer is not a simple one, as it all depends on the type of business you're starting and your business plan. The good news is that sometimes it can be even more profitable to start a rental business than running a traditional retail business.
What are the profit margins of a rental business?
The profit margins of a rental business will greatly differ depending on the type of business you're establishing. For example, profit margins on cycle hire can be anywhere between 60-70%. On the other hand, party rental businesses have lower profit margins, with averages being estimated at 40-50%.
Understanding the industry is essential for making sure you're setting up your rental business for success. Having a sound knowledge of the sector will help you in making business decisions such as your target market, business location, capital requirements, client growth, and financial objectives for your business.
Can a rental business be more profitable than a retail business?
Even though renting is often regarded as a low-profit business model, the reality is that with the right strategy, it can actually be more profitable than running a retail business.
However, since the business does involve taking care of a revolving inventory, outdated systems with no automation and poor inventory management tools will require an extensive amount of unnecessary manual work, which can affect the profitability negatively.
Overall, renting profitability is determined by the rate of inventory turnover, the extent of automation of manual processes, and the amount of value added by expanding service staff.
On the other hand, in retail, the initial expenditure to stock the shelves is only a cost before any sales are made, while in renting, the inventory provides continual cash flow and sales. Additionally, renting gives you ownership of the equipment (resale value), whereas buying something in a store is a one-time transaction.
If you're developing a rental business that doesn't require a high number of human hours for the end-to-end process, you can actually beat traditional retailing when it comes to gross profit margins.
Combining retail and renting
It doesn't have to be a competition on which business model is better. The two models actually complement each other, rather than cancel each other out. Of course, if you're just getting started, there are budget-related restrictions that mean that you have to with either one or the other. But if you run an already-existing retail store, adding a rental service will actually help you reach another audience and help increase your revenue.
Imagine a scenario: a person walks into the store, needing to rent a trailer for their moving project. While in the store, they realize that having a drill and extra bolts and screws might come in handy during the move, which they end up buying. In other words, needing to rent something led to an upsell purchase.
This situation isn't as make-believe as you might think. Take Motonet, Finland's leading retail chain for motorists and DIY people, for example. In addition to offering all the needed tools and equipment for vehicles and building projects, they saw an opportunity to grow their operations, by starting to offer trailers for rent.
Factors that affect the profitability of a rental business
There are many different types of equipment, products, services, and locations that make great ideas for running a rental business, and picking the right one is going to make a difference in your success or failure.
One simple approach is to provide rental services for items that consumers only require once in a while but are expensive to buy.
Could a middle-class family, for example, afford a bounce house for a birthday celebration or an RV for holiday trips? It goes without saying that not every household can afford such large purchases. Even if they were able to, it would be a complete waste of money.
Before venturing into a new rental business, it's important to have a look at the top factors that make running a rental business profitable.
The degree of competition you experience in the market is one of the primary aspects that can effectively decide the amount of profitability of your small rental business. Individual company profits can potentially be lower if there is a lot of competition in the market. And, because small firms are certain to encounter stiff competition from established market giants, carving a place for your brand and standing out will take extra effort.
However, competition isn't always bad for business; already existing rental businesses within the area can attract potential customers that are looking to rent either way. Differentiating yourself from the competition with a different offering or providing more services like tours or classes, for example, will help attract the right type of customer for your business, without having to be in direct competition with other rental businesses.
For example, if a nearby equipment rental company is providing with all the needed power tools that a person could need to build a shack, you could differentiate yourself by offering trailers, which they might need, industrial cleaning tools with the needed cleaning liquids, and so on.
Another important factor that influences the success of your small business is the market demand for your product or service. For example, equipment rental companies that rent out power tools have a high level of demand year-round, whereas one that rents jet skis will only be popular during summer.
Again, running a seasonal rental business doesn't mean it won't be profitable - just means that you'll be operating only during specific times of the year. This might be perfect for someone who just wants to do it part-time or as a side gig. Alternatively, what you might want to consider is expanding your offering to be year-round.
Let's say during summer you're renting out jet skis and paddleboards, during winter you can start offering snowshoes or ice fishing equipment - whatever fits the needs of your potential customer base.
3. Online presence
With an online presence, we mean everything from marketing to being able to book your rental equipment online. Being active online with social media platforms, for example, will ensure that you'll be able to reach the right audience and convert potential customers into buying ones. An appealing and interesting advertising strategy will almost always spread the word and attract potential customers to your brand. Fortunately, a lot of great tools are free, and you can achieve a lot even with a small budget.
Modern consumers expect and demand convenience, which means offering the option to book and pay for their rental online is essential. In addition to being a convenient option for the customer, running your rental business on a sufficient e-commerce platform will help you automate a lot of the processes related to inventory care and managing finances. You can save a lot of money by automating processes because you won't have to hire someone to keep track of everything, and you'll end up having a better understanding of how well your inventory is doing, and what your most popular items are, which makes choosing items for your inventory easier.
4. Use of inventory
When it comes to the rental industry, less is often more. The golden rule in operating a rental business lies in the physical utilization rate: the less your products are being used, the more your business is losing.
There is no demonstrated link between purchasing more equipment and increasing profits, so the key is investing in the right amount of inventory - it's better to have less, and be always fully booked than to have rental equipment sitting around collecting dust.
With this being said, it's all about trial and error: find out what your customers hire the most and which equipment is the most popular, and continue investing in that. Once you have a strong customer base and products on a constant rotation, start exploring new options and expanding your offering.
It's an obvious factor, but still worth mentioning. Costs cover everything from rent, utility bills, insurances, employees' paychecks, you name it. If your costs start to grow but your income stays the same, it will make your business less profitable. Another thing that may add up to the overall costs is the maintenance of your rental products.
Maintenance might become a frequent occurrence. Unlike with retail, your rental products are in constant rotation and go from one person to another. When you rent your items, you must always be prepared to cope with damage and wear since you must keep your equipment in good working order. Depending on the rental equipment or products you're offering, these expenses might be extremely high.
Take bikes as an example, if something happens to a bike and it ends up needing spare parts, that's an additional cost. The cost of the spare parts and time spent on the maintenance will have a direct effect on the profitability of your rental business, which is why it's so important to choose the right products.
Luckily, when you have the right tools at your disposal, things like a physical store location can become unnecessary. For example, you can operate your rental business based entirely on the delivery-only or click-and-collect models, which means no additional costs that you have to spend on rent.
How to improve your business' profitability?
These are just some of the factors that can affect how profitable your rental business ends up being. In the process of getting started and running your daily operations, you'll most likely come across other factors that will affect the growth of your profitability.
Things like automated processes, inventory management, social media, and expanding your offering will come up eventually - especially if you're looking into continuing your growth and increasing profitability. Because there are so many things to consider, we've created another guide on how to increase your rental business' profitability once you get up and running.
Should you start an equipment rental business?
Short answer - yes. Renting out products, equipment, or services to different customers on a regular basis means you'll build up an inventory that will eventually pay for itself. Rather than receiving a single lump-sum payment from a consumer, you have the opportunity to continue to generate a healthy profit on an item indefinitely.
Renting equipment is also a wonderful way to build long-term client connections and encourage repeat business. Unlike going into a store, buying something, and leaving, your customers will have ongoing service and interaction with your business from the start to finish of their rental period, giving you a great opportunity to provide excellent service and encourage that customer's return and positive feedback.
Whether you're looking into opening up a rental business or expanding your retail operations, it can be a nerve-wracking decision to be. The good news is, there are numerous advantages to starting a rental company, including high earning potential, flexibility, and limitless possibilities.
The rental market is growing constantly, and the emerging trends show no sign of the access economy stopping its growth. Consumers are constantly on the lookout for new methods to save money and shop more sustainably. Renting high-ticket things rather than buying them outright is a great method to save money, and save up on the space by not having to buy something that they plan on using once.