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Expert Answers to Biz Questions

Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.

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The Biz Question

Hi, I've been posting messages for quite some time now and I'm posting this as a new, bright idea struck upon me and I want to know what you guys think.

I would like to start an online rental business where customers can rent items like scanners, printers, computers, game systems, cameras, soccer boots, sports accessories etc. The list goes on and on. My target would be those who would need such items but do not have the funds to pay it in full. Therefore, I will be there to provide the necessities for those who need them at a cheap price. My customers will get the items that they want by renting it online.

For this business, I will only operate in my country. Wanna know why? Simply because, it would be easier for me to track down customers in case they "flee" with my items.

So what do you guys think? Is this a great idea or what? Let me know what you think and lastly, thank you for reading.

Answer from our Guest Expert Kent Capener of Capener Consulting

Hi There!

One of marketing's Ten Commandments is to "Find a Need and Fill It!"

Your idea most definitely fills the bill! Isn't the Internet a fascinating thing? Just when you hear that growth is slowing (USA only), the capital markets are in an upheaval, every other commercial on TV is a dot.com, and here's a new way to deliver an old and "proven" moneymaker.

Now, I'm probably not the most accomplished researcher, but your idea inspired me to look for myself. I tried every word you could possibly think of and searched and searched, from Yahoo to Big Al's Web Crawler. The result on rental online businesses -- not much. I could rent an overhead projector online, but that's about it.

Your business concept is great and has superb potential, if you can answer some critical questions. (Here comes the quiz host!).

Can You Protect Yourself Against Rental Theft?

You mentioned you were going to keep your rental biz in-country, thinking "it would be easier for me to track down customers in case they 'flee' with my items." Do you really think so? I think you'd have the same success rate in Bolivia as you would in Baltimore. If I were you, I'd borrow from the theft-prevention menus of others, such as video and furniture rentals, to make sure you have binding agreement paperwork and solid procedures to better avoid this problem as much as possible.

For example, if your customer wants a product -- such as electronics, cameras, computers -- do it as a "rent to buy" transaction. This stuff is easy to lose, use, and abuse. As limiting as it can be, I'd also recommend you only do business on a credit card transaction basis. Deposits can be killers, but your new customers should be required to fork one over to you before they rent-to-buy a product.

When video stores first started, for example, owners dinged your credit card, but didn't charge to it if you returned the movie on time. If you didn't return the movie before the time deadline, your credit card was charged for a late fee or replacement cost, if it the movie was never returned. I'd recommend the same process for you. Authorize each charge for the full amount, authorize monthly payments via credit card as an option, and establish firm deadlines and procedures for completing the purchase transaction.

What if the credit card company declines a customer's monthly credit card payment? Have a back-up contract, one that authorizes you to take monthly payments and enacts either collection or "repossession" action based upon a set of circumstances. An attorney can help you with this chore.

What Will You Offer and How Will You Serve It Up?

I don't want to rain on your parade, but just because there ain't an online rental biz yet, doesn't mean yours will be an instant success. Most likely, the key to its success will be what you offer and how. I'd recommend making the selection of products based on economics, your economics.

A scenario might be a product that costs you $100 to buy; $10 to ship to the customer; and $10 to administer; for a total of $120. Your customer will be at your website because of saving out-of-pocket money, right? So let's say you rent the product for $15 per month, plus a two-month deposit, and at the end of 12 months, the product belongs to the customer. This equals $210. You break even at six months. If this is competitive to buying the product, you're in great shape! If it's more, it could probably be as much as twenty percent more with little loss of business. By its nature, the cash/capital cycle is long in these transactions, so keep this in mind when writing your business plan.

It'd be natural to think volume -- think fast food-type volume -- even while the product isn't producing profit for six months (according to our scenario). It is producing economic benefits however, as it is your product until the end of the transaction and you're depreciating it as the customer is paying for it. If you do lose it due to someone "fleeing," it's a write-off as well.

With your idea, the type of items people would rent is also the easiest to make off with. You wouldn't be competitive renting cement mixers, but they would be easier to recover than say a scanner that moved to Cleveland. This and one other marketing thought leads me to prompt you to look at another way to do it.

Can You Mix Up Your Marketing Strategies?

Since you didn't ask for limited thinking -- have you thought about renting only in markets where you're located? No, I don't mean just where you are. I mean where you have, how shall I say, representation? A good mix of great priced products, a tight recovery and collection program (20% or less loss), and a war chest of cash is a menu for a delectable biz meal. My sense is that the economies of scale say the "winners" are at higher levels of volume. I mean literally thousands, multiple thousands of products per month. Incidentally, it's at this level that the benefits of depreciation become very real. This too means that your buying power will be greater and that translates to lower costs and higher profits.

Distribution and recovery are sort of like waiting tables and taking out the garbage. If you are sitting on the deck of your Malibu beach house, in your lawn chair, with your lap top, how would you attempt to recover that $200 scanner you rented to that customer in Virginia Beach, who paid the deposit and one payment then stopped?

My recommendation is to think about all those local rental stores out there, those that rent the cement mixers and color TVs. Wouldn't they be ideal candidates for a cooperative program of some kind? A business model that included local market participation would go a long way to keep loss rates, both of product and collection, low. It could also provide a fundamental base for growth.

The most expensive item on your menu, in terms of cost, should be marketing and advertising. I'd also recommend that you factor in as much "new" into the products as possible. One idea would be MP3 players. Another would be portable DVD viewers. These are new product categories right now. MP3 has the potential to be very big. The economics are good too.

Anybody Else on Your Cloud?

Are you really alone out there? No. Take a look at http://www.rentit.com. While they list a plethora of products on the site, only tools and apartments work. This is only a "link site" that's appearing to attempt to sell advertising to those local rental stores. Quite a few sites offer rental business equipment; however, their thrust is to rent to people within their own market. Where have I heard that before?

Hope this Helps!

Kent Capener of Capener Consulting

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