Ethical or Unethical? Some companies use em and some don't. For those of you who are new to the business, I'll try to make some sense of the "padded" lease rates. "Padding" means to increase the lease rate factor from what the leasing companies published rate is. Meaning, the leasing company will provide the Direct Branch or Dealer with a rate factor of .0276 for a 36 month fair market value lease, thus a $10,000 piece of equipment would cost $276.00 per month to lease. Dollar amount times rate factor equals cost per month.
Now, here comes the sneaky part (geez, I hope I do not get phone calls from attorneys with pointy sticks!). The Direct Branch or Dealer will raise the rates to the reps, such as the rate going from .0276 (36 month FMV) to .0289 (36 month FMV), thus a $10,000 piece of equipment will now cost the customer $289.00 per month. The Direct Branch or the Dealer will then "back out" the rate. Meaning, take the payment and divide by the real rate factor (.0276) which will then equal the total dollar amount that is paid to the dealer by the leasing company. In this case the dealer would receive $10,471.01 or an increased revenue of $471.01 by "padding" the rate!
What's unethical about this you might ask? For me there are a few items that bother me. (A) If I am the sales person and I wrote a sale price of $10,000 for the system it would not be true, because we would actually be receiving $10,471.01 and not $10,000. (B) The fact that it is an FMV rates means the customer would have the buy-out price assessed at $10,470.01 and not $10,000 as stated on the sales order. So, if the customer wanted to purchase the equipment at the end of the lease they would be asked to pay the FMV for the $10,470.01 and not $10,000.
Many reps just quote a price per month and never show the customer the actual cost of the unit, so would they then be ethical because they never quoted the actual sale price for the piece of equipment? In other instances the leasing companies will actually give a percentage of the total dollar amount back to the Direct Branch or Dealer by giving them higher rates, thus the "padding" comes directly from the leasing company.
My beef is why do we (Direct Branches and Dealers) use "padded" rates at all? If you want more profit for your box just increase the cost of the box to the reps and let them do their thing. Padding rates in the long run may lose more sales, because the monthly payment will be higher than your competitor if you are both at the same dollar amount. What happens when a smart rep looks at a competitors quote and realizes that the rates are "padded". Surely he will tell the customer that they are be over charged in the monthly cost and the Direct Branch or the Dealer is not what they seem to be.
I'm sure there are many arguments to this, however it seems to me that there is no place for "padded" rates in our industry.
Padding rates or the alternative suggested - increasing the cost of the "box" would result in the same dollar payment for the customer as well as the same FMV at the end of the lease.
ReplyDeleteI have seen that when manufacturer's / dealers cannot increase the price of the "box" they prefer to increase items in other areas - lease rates are only one example - others will be charging for every little thing like equipment storage/ re-stocking fee/ increase service costs or put un-reasonable minimums for service contract/ include quota's for networking contracts or IT services.
There are so many ways to take money away from the sales reps and in direct effect charge the customer more.
Probably a good discussion would be to know what kind of rates everyone is using in general and we can understand where it stands within our industry - my 60 month FMV is 0.0209 and 48 month is 0.0249