We all have managed our user base with the goal of upgrading every customer to a new solution. However, that goal does not always work out.
As leases near expiration, sometimes a customer may say they are happy with their current solution and express they are fine with the lease auto renewing. This is especially true now as we emerge from COVID and many companies are hesitant to upgrade to new solutions. For many sales reps, that is not good news. In this article, I will show you why this is actually good news and how you can profit from a customer going into renewals.
First, if you allow a customer to have a current lease auto renew for 12 months, you do not get any revenue credit or gross profit from that. The leasing company is the only one who wins in that situation. Yes, your trade up figure in most cases would not include any remaining renewal payments where your competition would have to build them in, but thats about it.
If a customer says they would like to renew and to come back to see them in a year, the talk track is pretty simple. Lets say there are 6 months remaining on their lease when they tell you they want to renew. Tell the customer “Great, I will send the paperwork over for you to sign today.” Take the customer’s current payment and put it on a new lease for 18 months (6 for the remaining term and 12 for the renewal term). Mark FMV on the lease, but you will be using dollar our rates (unless the leasing company will agree to do FMV on this kind of equipment).
The next thing you would want to do is build a second proposal. This one would be for 30 months. This would be the remaining 6 months plus the 12 months renewal plus an additional 12 months. In this you would use a payment that is 80%- 90% of the original payment.
Remember to factor in the annual escalation the customer will get on the renewal term/ anniversary date. Your service cost will likely be higher on your extension, so if you forget the escalation, it will erode revenue and profit.ZBA Solutions
Set a time to meet with your customer, just let them know it will take a few minutes to bring them by the paperwork for their current lease to renew. When you are there, offer the 18 month lease and also offer the 30 month, let the customer know the leasing company will discount their payments by 10-20% if they opt to renew for an additional 12 months. Plus they get to recognize the discounted payment right away!
Once you have a document signed, how does this translate into revenue and gross profit for you? Simple. Lets say the customer has an equipment payment of $500 per month on a 60 month lease, say it orignially funded $25,000.00. If the lease has 6 months left, your trade up to own would be roughly $5,200.00. If your customer just wanted to renew for the 12 months, their payment would remain the same. You would take that payment and divide it in to an 18 month dollar out lease rate. Lets say that would be a .066. You would fund $7,575 on the new deal. Your “C” cost is $5,200 and GP would be $2,375.75.
Did you sell the customer on the extended term with a payment discounted by 15%? Use a factor of .0431 (actual will vary) and divide it by the new discounted payment. $425 / .0431 = $9,860.78. Thats GP of $4,660.78. Its important to get the lease rates from the leasing company up front, beat them up on the rates a bit too if you can. They often charge very high interest rates on dollar out rates with terms of 24 months or less. Its also important to make sure the leasing company will allow you to use a dollar out rate on your deal but still have the lease say “FMV”. Some will not let you do this, CIT is one that if you use a dollar out rate on your deal, you cannont say “FMV” on the lease. If you do have to say dollar out on the lease, know this before you price the deal with the customer. Then you can actually discount the payment less (or not at all) and offer ownership of the asset at the end of the new term. You should only discount a payment if you extend a FMV term.
There is another benefit as well… Your trade up to own and return figure on this new structure would be the same. So if you can get a trade in value added to your GP (or no return shipping cost) it will all go to Gross Profit.
Remember, never ever just let a customer’s lease auto renew.