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! In some instances
the dealership or branch will make more money on the "padded rate" than you make on commission.
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.
In addition I've recently seen $1.00 out leases from GE, and in many states you now need to enter the rate factor or the lease interest on the face of the lease document. Can anyone tell me more on this?
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.
-=Good Selling=-
While I understand your feelings, I don't agree. As a dealer, every sale is different and nuanced. True, in a perfect world, all things being equal, I would agree with you.
ReplyDeleteBut strictly relying on a salespersons judgment to pad his own costs would lead, in my opinion, to a greater loss of sales.
With prices eroding and operating costs forever increasing, "padding"is much more efficient to allow the house to control unforseen costs as well.
Salespeople at best are extremely myopic when it comes to the cost of getting a deal done. Do we nickle and dime them death when things don't go as planned? The missed or wrong delivery, the unforseen network issue, and so on....
Salespeople as you know,(I being one of them), are very sensitive to chargebacks and are demotivated by the same.
Should I also not "pad" the cost of equipment? A rose is a rose.
We use the padded lease rates for incentives and bonuses and when quotas are reached, we give back a great portion of the revenue generated by the pad.
Most salespeople will take the path of least resistance and that isn't always in thier best interest, or the company they work for.
Reproman:
ReplyDeleteAppreciate the feed back. To answer your question Should I not "pad" the cost of the equipment? I would sure hope that you are using some type of markup, right?
I beleive in giving out the best rate and letting the sales person do their job, sell the system, and make a profit for the company and themselves.
Art,
ReplyDeleteWe standardize our rates so that instead of getting a quote on every deal our reps can use standard "street" rates. We also share 1/2 of any "pad" with our reps.
You are aware that sales teams at most dealerships are a break even proposition?
After salaries, bonuses, commissions, benefits expenses, lease administrator costs, sales management, network installation, delivery, lease returns, spiffs and specials. The "pad" is now a "post it note" at best.
Thanks for sharing. This is really interesting since I work in an office and we lease equipment and I've been trying to figure out the difference in costs. This explains a lot!
ReplyDeleteHey my friends I tell you some tips about. Here are some further tips that will assist in the process of increasing equipment sales: Include a monthly payment option with every proposal sent out to clients. Don't wait until the client has turned down the capital expenditure. Show the client how by paying for the system as they use it, they will see an immediate return on investment. Relate the monthly finance amount to monthly savings. Show how the equipment actually pays for itself.canada equipment leasing
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