By: Scott Murr
President, Offsite Office Equipment Storage
As any sales professional knows, in order to exceed plan you need to win net new business. The majority of net new business is won by replacing a competitor’s asset. The majority of which are on lease and have over 90 days remaining on their agreements. The majority of those leases do not allow the customer to pay off their lease early and return their equipment. Rather the leasing company requires the customer continue to make their monthly lease payments, send in their letter of intent in the time window as designated on their lease agreement, and then return the equipment once return instructions are received.
Why does this policy exist? Residual positions and lease rates (see blog archive for full article) are set so that a lessor essentially breaks even or even loses a bit on the front end. They rely on fee income for their profits. Fee income includes; late fees, insurance charges, property tax filing fees, and renewal charges. I have recently read that for the average leasing company, just about 15% of their revenues are fee based. Therefore, if a lessor accepts an early payoff and return for an account they lose, they also lose any additional fee income that could have been generated on that account. If for example there are 20 months left on a lease and they accept the stream and equipment back, that lessor loses out on 20 chances they could have collected late fees, the chance the customer will go into renewals, the opportunity to charge for insurance. These leasing companies desparately need this revenue as it is their main source of profitability. Every deal that a leasing company books today is based on the model that each customer on average will generate X% in fee income based on the historical performance of their portfolio. This means, if all lessors were to change their pricing and residuals today, the no return policy would likely need to remain in place for 5 years for the old leases to mature and run out.
The vast majority of customers who go into renewal do so because they went with a new provider and their old equipment was put in a back closet, local warehouse, or a Public Storage unit and forgotten about. It is also very common for an asset to get damaged, parts harvested, or lost if the old equipment gets stored in a dealer’s warehouse. Out of sight, out of mind. Sales reps offer a solution for “out of sight”, but “out of mind” is what causes leases to renew. A growing number of Sales Professionals are starting to recognize they need a total solution to keep their customer engaged with the lease for the stored equipment in addition to storage.
The validity of a solution is one you can actively sell and incorporate into your sales proposal, not an answer to a question that you hope the customer does not ask. If you want to win more net new business, having a total solution is a key to reaching your goals. Most sales reps will avoid this subject and offer a partial solution to get the old unit out of sight. My suggestion to you is to really take some time to forumlate what your total solution is to address this. What tools will you offer your customer so the copier is out of their way, but more importantly the old lease is properly managed.
Most sales professionals out there when proposing a solution to a net new customer see the subject of how a customer’s old equipment and lease will be managed as a weakness. By putting light on what you see as a weakness and formulating a solution to address it, your weakness becomes a strength. In the field, if you are not getting stronger, you are getting weaker.
Offsite (www.offsiteequipment.com) provides a full suite of services for both independent dealers and national branches. Our services include:
- Outsourced administrative services on competitive lease end management. Offsite can contact your clients to remind them to send in their Letter of Intent for their old equipment, follow up for return shipping instructions, and manage their return shipping logistics.
- National network of warehouses available to pick up and store leased assets that cannot be returned early.
- Lease return shipping and copier moves.
- Outsourced lease administration, Offsite can process your deals for funding on a per transaction fee thus reducing dealers operating expenses.
- Program Agreement negotiation, back office consultation, lease sales training. Increase leased sales %, secure lower rates, increase credit approval percentage guaranteed.
Visit our website today at www.offsiteequipment.com . At Offsite, we know logistics and we know copier leasing, our services are second to none.
Scott, I agree with many of your comments. An early return on equipment puts the lessor in a financial bind. Most lessors are willing to work with the lessee to meet their requirements if they lease the replacement gear with the current asset owner (the lessor). Early terminations are often messy and I would suggest that lessees re-purpose the equipment within their own organization if possible or replace it on a rolling basis as other assets terminate in other departments.
Your comments about lessors making no money up front is correct. Lessors must remain competitive and give the best rates up front hoping they will get additional revenues from fees or extended post contract rents or buyouts that do not really represent true fair market value. This is in keeping with your comment that without the fees the leasing companies would not be in business long as they must make a profit. If all lessees returned all assets on time there would no longer be any leasing companies.
In all my experience I have only seen a handful of lessees that could truly manage their returns on time. The rest paid more than they should have which leads me to believe that unless there is a specific need for operating leases or budgets are very tight that financing is the best way for most lessees to fund a replacement. I believe a company that could truly manage returns (most likely through an outside-servicer onsite) that the greatest savings would be realized. This would require that the servicer agree to take responsibility for any extension rents charged by the lessor as a result of a late return. I have seen no servicer willing to take on this responsibility which attests to the fact that it is very difficult process to manage even using supposed professionals.
If a lessee can get approval from a lessor for like substitution in their contract it can provide more flexibility for the lessee. My suggestion would be for the lessee to purchase 20% of the product needed and lease 80%. The old 80/20 rule can be modified somewhat for more conservative lessees, but then lessee owned assets could be returned in lieu of the leased asset at end of lease and eliminate most extension rents. In addition tracking returned assets is a major headache for lessees so I would recommend that a lessee pay the small fee for the lessor to provide for pickup at the lessees location with an inspection for damage at which time the responsibility transfers from the lessee back to lessor. The lessee should compare freight rates for return occasionally as the lessor charges may be higher than is reasonable.