DO NOT WASTE YOUR MONEY

Companies, large or small, often lose money without knowing the cause. Or worse, realize that something is wrong only when it is too late to renew fleet or make new investments. What could be wrong?

Analyzing the problem usually we find out that the causes lays in prices or discounts. In such cases, the prices are usually: based on the competitor's, sometimes prices miscalculated or the discounts are excessive. If your company does so, beware!


What can be done? Here’s one way of approaching this problem. Firstly, list all direct costs for each vehicle class. Calculate company indirect costs and expenses - they can usually be prorated. Finally, define the expected percentages for: profit, bonuses for staff, commissions, investments, etc. A worked example is below:

1. DIRECT COSTS (daily and kilometer basis)
1. (A) Depreciation:  0.0926% / day         ← 1 / (3years x 12months) = 0.0278 / 30days = 0.0926%
2. (B) VLF:               0.0083% / day         ← (3%per year / 12months) / 30days = 0.00083%
3. (C) Tires:             $0.02000/km            ← ($200 / 40000km per tire) x 4 tires = 0.03220/km
4. (D) Oil/Filter:        $0.03000/km            ← ($200 / 6000 km)
5. (E) Maintenance:  $0.00700/k              ← ($1000 each 15000km)
2. PLANNED RESULTS
1. (F)  Profit:             20%
2. (G) Bonus:           2%
3. (H) Investment:     3%
4. (I)  Commission:   10%
5. (J)  Others:           0%                         ← Note: it is only to emphasize that you can list others
3. INDIRECT COSTS AND EXPENSES (prorate)
1. (K) Operational:        $50000/monthly
2. (L) Prorate:               $8.33 per car daily          ← ($50000 / 200cars) = $250 / 30days = $8,33
4. COST CALCULATION (by Vehicle Class)
1. (M) Car's Capital Cost:       $15000                 ← Note: take the average or the highest class' price 
2. (N) Monthly Depreciation:    $13.89/day           ← $15000(M) x 0.0926%(A)
3. (O) VLF:                             $1.25                   ← $15000(M) x 0.0083%(B)
4. (P)  = (C) + (D) + (E)             $0.057                 ← $0.02 + $0.03 + $0.007
5. (Q) = (P) + (L)                      $8.387                 ← $0.057 + $8.33
6. (R) Total = (N) + (O) + (Q) =  $23.53/day          ← $13.89 + $1.25 + $8.39
5. CALCULATING RENTAL DAILY RATE
1. (S) = (R) x 100 / [100 - ( (F) + (G) + (H) + (I) )]      ← Note: the Markup formula
2. (S) = 23.53 x 100 / [100 – (20 + 2 + 3 + 10)]
3. (S) = 2353 / (100 – 35)
4. (S) Price = 2353 / 65 =        $36.20/day
6. CALCULATING EXPECTED RESULTS
1. Profit:           $36.20 x 20%  = $7.24
2. Bonus:          $36.20 x 2%   = $0.72
3. Investment:   $36.20 x 3%   = $1.09                ← Note: saving for future investments
4. Commission: $36.20 x 10% = $3.62

               * Observe that the amount for costs is preserved: 36.20 - (7.24 + 0.72 + 1.09 + 3.62) = 23.53

Looking at items 2, 4 and 5 above, we can deduce:

1. Offering 20% discount, we will eliminate the profit.
2. If you are not paying commission on a Rental Agreement (RA), then this % could be negotiated as a discount.
3. If your price is higher than the competitor's, you may need to reduce costs or planned results. This assumes the competition is not mis-calculating prices or offering excessive discounts (in order to chase market penetration).
4. Fleet occupation level has not been considered above, but you should consider this in the formula as a correction index, something like: Capital Cost + 20% (considering 80% of occupation).

For companies using CARS+InterNET software, it allows you to limit maximum discount, which is validated when edit a price, or offer a discount. Please contact Thermeon to learn how do it (www.thermeon.com).