Scenario: A Customer rents a portable storage container for 3 months and calls before their next month’s rent is due to schedule the final pick up for day 5 of the new month. They ask, do you Prorate or do I have to pay the full month? Or, they don’t ask, you charge the full month, and they call to complain.
Your response could be one of two (ok.. three) things:
- Yes, we charge the full month whether you have it 1 day or 30 days in the month.
- Yes, we Prorate to a Daily rate of $XX/day or the full monthly fee, whichever is lower.
- Or some in between answer that confuses the customer and causes you time and money in the end.
Which answer saves you the most cumulative time and leaves the customer with a positive experience, and ultimately saves you money? Charging the full month’s rent no matter what, on paper, makes you more money- when you simply compare it to a Prorated rate. However, a Prorated rate, if redefined as a Daily rate, will most likely make you more money in the long run. Per an article on prorating referring to tenants on www.biggerpockets.com, “Prorating doesn’t cause you to lose money—it helps maximize your cash flow instead.” 1 A typical Prorated rate would be a division of 30/31 days. That is not enough to warrant your hard work and what you’d lose on rent that month, so come up with a higher rate and call it a Daily rate. A good formula to follow is your monthly rate, divided by 30 days x 3. You’re not Hertz… you’re a local Portable Storage company busting your hump and deserve to be paid for it, as the customer deserves to be treated fairly and not pay for days they are not renting the Container. A Win-Win.
Let’s break down the scenario above:
Your monthly rate is $189.- Your Daily Rate is $20 x 5 days = $100 in this scenario
- So far we’re at $189 versus $100. A difference of $89. But it’s not that simple.
- If you don’t Prorate you’ll likely spend another 15-minutes (or more) discussing this with your customer, and it’s not because they are happy about the answer. They may now ask for more detail on their billing as they lack trust.
- They’ll not only end this service with your company with a bad taste in their mouth, but they’ll be less apt to recommend you to their friends.
- Whereas if you told them (up front) you had a Daily Rate of $15 per day- they’d be thrilled they are saving money (it’s a WIN to them). The call would end on a positive note. They’d be more apt to write a Review and recommend you.
- If the customer was charged the full month’s rent and calls when they see it on their statement, they’re even more frustrated and you’ll likely offer them a refund anyway to diffuse the situation.
There are many pros to Prorating, but mostly it comes down to your time and the customer’s experience (and you won’t lose money if priced properly). Your policy to charge full rent, no matter how many days the customer had the Container, was now reversed with a Refund either because the amount of time you spent discussing this with them was getting unbearable, or you felt you needed to difuse the situation. The customer is done with the Container, so why not let them be done and end on a positive note? Then re-rent the Container to the next customer. You’ll not only earn the Prorated rent from Customer A, but another full month’s rent from Customer B on the same box in the same month, along with all of the other initial fees (Delivery, Insurance, Accessories, etc).
Then there is the topic of Prorating in the beginning of the rental and/or at the end of the rental. It makes most logical sense to charge rent for each day the customer has the Container, paying the first month the day prior to Delivery. Then for each consecutive month, the Rent would be due on the anniversary date of the delivery date. There is no need to Prorate up front when you are doing anniversary date billing. However, if you are billing on a day of the month (likely because you are doing manual billing), do what’s easiest for you. Manual anything causes you to often make many exceptions- for time savings purposes. Best practice is to collect initial fees BEFORE the container is delivered, not the day of Delivery or definitely not after. That practice only leads to potential Collections- wasting time and money. 28-Day Billing is a topic for another Blog and definitely has an effect on the discussion of Prorating.
The “Customer E
xperience” should always be the center of your decision making process, and the rest will almost always fall in place. There is a happy medium and a way to achieve happy customers and a profitable business- you just have to take a minute and break it down. Happy customers inevitably lead to more happy customers. Word of mouth is a powerful thing. Likely your competition does not offer “Prorating” or a “Daily Rate”. Use it as a competitive advantage and marketing opportunity, all while strategically being more profitable for the right reasons.
Takeaways:
- Have a Policy and stick to it. It will save you time with employees and training, empowering them with the answers.
- List your Policy details in your Lease Agreement.
- Explain your Prorate Policy to your customers at the point of rental, to be transparent and save issues on the back end (most of the time).
- Redefine the word Prorate. Make it a higher Daily Rate. Call it a Prorated Daily Rate- the customer will understand that.
- Only Prorate the Rent, not any added recurring fees (insurance, added storage fee at your facility, accessory rentals, etc).
- Automation is key. If you automate your billing- whether via software or a payment processor- see if they can also automate Prorating.
- Policies + Automation= Time Savings + $$
Experience is what teaches you what works and what doesn’t, giving you live examples and data to analyze conclusions. But you can also learn from your peer’s experiences and break down the scenario with logic. Small adjustments to your business model will likely have lasting positive effects both for your company’s climate, but also for your bottom line. Always push yourself to try new things and experience the benefits and/or failures!
August 18th, 2022
By Cathy Putnam, Stella Software
References:
1: www.biggerpockets.com
How (and Why!) You Should Calculate Prorated Rent For Your New Tenants