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3 Ways Heavy Equipment Dealers Can Increase Flat Revenue

Posted by Tom Lombardo | Thu, Sep 25, 2014 @ 10:00 AM

heavy equipment profit marginGiven the challenges facing your industry right now, this counts as spectacular news: Over the course of the last twelve months 53% of heavy equipment dealers saw their gross margin improve and another 25% remained flat. Only about 1 in five declined.

It’s been a long haul to get this level of industry-wide stability, but since we’re hardly out of the woods it’s worthwhile to contemplate another fact: in the past twelve months, 28% of dealers increased margins by more than 5%.

How did they do it?

Navel Gazing for Profit

Looking at the bright spots in your own business may reveal the answer, and the two most important areas to consider are new sales and rentals.

More than two out of three heavy equipment owners and managers increased their revenue from new equipment sales this year, and one out of two grew that revenue more than 10%.  It’s easy to sell the new generation of “Tier 4” equipment, perhaps because most of it has been built to meet “Tier 5 thru 25” requirements, should they ever materialize, by far exceeding the minimums set by Tier 4.

There can be little question that every contractor you work with wants these machines. But financial concerns regarding retrofitting, depreciation and resale make the purchase a complex business decision for most of them, largely because those who bought used equipment five or ten years ago that was compliant at the time now face significant costs to retrofit those machines to meet Tier 4 standards.

Paging Sir Isaac Newton…

Thus your customer compares the Tier 4 retrofit to buying new Tier 4 equipment, a calculation that’s so complex it seems to require a new form of calculus.

Some retrofits cost more than the down payment on a new machine, making it seem like a potentially wasted investment.  The new machine looks more attractive because fuel savings can defray loan payments, if not make up for them entirely. And the new machine might provide intangible pay-offs, such as increasing productivity or even generating referrals and good will.

But Tier 4 threw off the resale market for used machines, another important part of this calculation for your contractor, since any American purchaser will take the retrofit’s cost into consideration when bidding. If the machine is worth less in the U.S., he might consider selling it internationally, but now the international resale market has dropped significantly.

Heavy Equipment Profit MarginsAnd what about the depreciation part of the equation? Last year when accelerated depreciation laws were in effect, including a “rent-to-own” provision that drove a lot of business in the fourth quarter, the business case was easier to make because the tax break on the new equipment provided short-term pay-back to offset the lower value of the sold equipment.

But that’s no longer the case, and all of those factors combined have slowed new purchases. In fact, since new sales didn’t pick up as much as hoped, 26% of dealers expect to reduce their inventory for the second half of the year, indicating that the easy sales – the ones meeting the hottest pent-up demand – have already been made.

The Best Margins Come from Growth

But who wants to increase margins by reducing inventory? That’s not exactly a fun growth strategy. It’s much better to find new sources of profitable revenue, and if you look at your own books you’ll probably find the same thing that 65% of your peers found: rental revenue went up.

Heavy equipment dealers who intend to increase their rental business outnumber those who don’t by an astronomical 7:1 ratio. It makes sense; while your contractors slog through the new calculus of buying, they rent.  

While that may be the perfect short-term solution, you may want to try to look a little past it if possible. You know that the more things change, the more they stay the same: your customer wants to own, and he will as soon as he can.

Renting equipment is OK during the recovery and during a shift in the regulatory environment. But it will never be a long-term solution for him.

What To Sell To a Renter

So rather than cultivate his rental business as if that was the future of the relationship, perhaps now is the time to figure out what you can sell to him before he buys that Tier 4 machine.

These sales may generate revenue -- may even boost your margins – but more importantly they will get your prospect used to buying from you, which is how you want him to think of you and your business.

Some new technologies might just do the trick, so here are three items your rental customer may contemplate buying even while saving for his next (or first) Tier 4 machine:

  1. Job site transportation
    Consider the Ziesel, one of those design outliers that’s so cool it might someday become standard. Whether or not that happens, you can be absolutely certain that every contractor who sees it will want to talk to you about it and test it out:



    Contractors managing projects and bidding on new ones need time more than anything else, so perhaps this or something like it is the solution they need to create more of the one thing they can’t buy.
  2. Aerial Drones
    Analysts expect construction to be one of the first industries to incorporate drones into its business processes, and mapping to be their first application. Aerial photography drones can create stunning visuals giving you, your architect, your engineers and even your workers a thorough understanding of the terrain and the project. More expensive versions built specifically for construction site modeling can create 3D topographical maps by following pre-programmed fly-over routes during which it collects so much data it has to be transmitted to a computer in real time. Perhaps you can sell drones as a must-have tool to land the next bid…
  3. Better safety clothing
    Out of the box, only about a third of safety clothing meets OSHA reflectivity requirements, and the two-thirds that do stop meeting it after they’ve been washed twenty times. Any contractor thinking about expanding his business knows that worker safety is a core competency, and as is so often the case, the simplest tactics produce the biggest returns. Making sure each worker appears to every other worker as a blazing lime green mass of irreplaceable humanity makes their lives much less stressful and dramatically reduces preventable accidents. Call top quality safety clothing “business development insurance” preventing problems that might interfere with their goals.

Leading by example always has the greatest impact, so while you’re helping your customers think through the new calculus around purchasing equipment, show them how you build your business when you augment their next rental agreement with a purchase that will help them build theirs.

And the more things change, the more they remain the same here, too: Contractors are paid by check 26% of the time and writing checks is by far their preferred payment method. They like them because checks have the highest rating for bookkeeping accuracy, so when you run his check through your check scanner (we provide this equipment as a free loaner), let him know why: his signature on the check confirms his intent to pay more securely than any electronic method, and you like to work in an environment with as little business confusion as possible. And by running it through your scanner you also had your check processing company guarantee it and you’ve already deposited it. 

Check Guarantee Insider's Guide

Topics: Heavy Equipment, Increase Sales

Written by Tom Lombardo