Let’s get this out of the way right up front: There is no magic to pricing such that you win every deal every time (without getting fired!). That said, let me share with you what I’ve seen over the last decade and a half of helping people set up pricing programs and models, and working through deals.

To start, there are two ways to approach pricing to win deals: tactical, which is pricing policy creatively applied to individual deals at the time the sale is being discussed , and strategic, which refers to corporate pricing policies and goals. In the best situation, management has established a rich and flexible strategic pricing model so that the sales team can be as creative and flexible as possible in serving the customer — which is, after all, how deals get won.

Then, the discussion will turn to the quantitative analysis of pricing results that is an emerging industry trend — the Moneyball approach, if you will — and how advanced analysis can aid both strategic and tactical pricing.

Tactical Pricing
At the simplest level, here are some “rules of thumb” that all experienced pros know:

Ramp Up (Or 90-110) Structures: These tend to drop the PV of rents to the customer at a given yield (if the discount rate is higher than the yield);

Interim Payments: All other things being equal, a pro-rata interim payment increases lessor yield. You can give that increased yield back to the custom as a lower rate;

Security Deposits: These are lower risk and, if considered as part of the cash flows in the deal (a perfectly valid way to consider them), increase the yield at a given rent. So a security deposit should get the deal more favorable treatment by your credit people, and has the potential for lowering the rents while maintaining the same yield;

Advance Rents: These tend to lower the risk profile and provide a lower rent at the same targeted yield;

Delaying Commencement: Move the residual across a year boundary, which can boost the yield. And so on. Find someone in your sales area with gray hair, and they can fill you in on some more tricks of the trade. On a more sophisticated level, a sales pro should know the following:

What Are My Company’s Pricing Rules and Goals? This seems painfully obvious, but there’s a difference between knowing rules for mere compliance, and knowing rules based on goals — the latter is understanding where you can be creative, where the company is willing to be accommodating for the right reasons.

What Goes Into the Targeted Yield? In every company I’ve seen, there are some sales pros, usually top performers, who truly understand what the company is trying to achieve — volume, quality business, penetration, mix and so on — and will be able to argue that they are achieving the corporate goals even when the proposed deal falls outside the “cookie-cutter” comfort zone. But to do that successfully, they must understand how the company measures success on an individual transaction basis — which among my clients is represented by the targeted yield. So, what goes into that yield? Sometimes, strategic rules exclude some of the rules of thumb listed above — security deposits or interim rents, for example, are not included in the transaction’s yield target. The sales pro is denied the ability to create a better deal for the customer — and possibly win the deal — by including a security deposit or interim in the pricing. Is this really what the company wants?

Finally, What Special Tax Considerations? — bonus depreciation, green credits — are available, and for how long? While these factors are also a key part of pricing strategy, the sales pro who understands how these items affect the quote and can confidently explain it to the customer when necessary is simply in a better competitive position.

All of the above is subject to corporate and market realities. If you sell micro or small-ticket leases and loans, you will not, in general, have the flexibility that someone selling corporate jets or MRIs will have — your company will not have the management headroom to handle exceptions on a large volume of smaller deals. And, sadly, the number of lessors that have the tax appetite for bonus or even standard MACRS depreciation has fallen drastically during the late economic unpleasantness. That brings us to corporate level strategic pricing.

Strategic Pricing
At a strategic level, the corporation must balance a number of competing goals and constraints, including:

Tax Appetite: If your company cannot make efficient use of the tax benefits of true leases, it must decide on either not offering tax leases to the market, or accepting a much lower rate on tax leases in order to compete with firms who can still use the tax deferrals. Perhaps loans and buck-out leases are all the company feels it can offer;

Overhead: The cost of flexibility is often additional overhead costs. If the salespeople are allowed to negotiate residual estimates with the asset management team, that’s more man-hours invested. Fortunately, through proper planning and judicious use of technology, this particular issue can be mitigated to a great extent;

Speed: If you are financing $10,000 assets, the process had better be fast and require an absolute minimum of human touch. Even for larger deals, the need for speed is growing over time — he who gets back to the customer first is often the winner;

Books: How are deals going to look on the books? This can become an economic issue if the mix of deals (or the new accounting rules!) start affecting the way your ratios look to your funders;

Risk: Exposure to certain segments and customers must be monitored and managed.

So, what does a winning strategic pricing policy look like? Within the boundaries of corporate constraints, a winning pricing strategy should include:

Maximum Alexibility: Management and sales should be working together to make customers happy. The more freedom sales has to structure deals creatively, the more deals will be won. Anybody who has been around equipment finance for a while understands that a great strength of our industry is creativity. We can find solutions. We can get the deal done. The most competitive pricing strategy allows the sales pro to structure a way under a minimum set of constraints: we need a 20% ROE, or a 250 basis point spread or whatever target we’ve agreed on, and as long as credit is happy with it, have at it — skip months, interims, staggered deliveries, integrated services, whatever works. Even in the micro-ticket world, having more options is good.

Technology has made flexibility easier to manage. Not only do sophisticated pricing tools allow for quick and easy structuring, but origination workflow and integration to accounting systems also make processing even adventurous structures less painful. By automating the approval process when practical, human touch during processing is minimized and speed is maintained.

One final but critical point about flexibility: your accounting staff and system must be able to book the deals that your salespeople write. Communication and training are key here — no accounting pro wants some never-before-seen transaction plopped on her desk with no explanation, but only the directive: just book it!

Transparency: Are your policies and rules clear? Does everyone, including sales, understand them? I’ve seen many examples of very complicated pricing rules that, like barnacles or stalagmites, just seem to grow with no conscious thought. Can you reduce them? There is occasionally push-back from the management team when I mention getting the sales force involved in setting policies as they think that sales should just sell and not worry about how it is that management determines what to sell at what price. I would argue, based on experience, that the knowledgeable and inventive sales pro is in the best position to win deals, and management should be supportive.

Finally, the use of sophisticated analysis to find undervalued assets — made famous by Moneyball — is every bit as applicable to equipment finance pricing as it is to baseball or any other highly competitive field. Think of an “undervalued asset” as money left on the table. In our industry, that could mean, among other things, losing a deal we could have profitably won, failing to put our resources on segments that generate the most profits (or pouring resources into segments that don’t make us money) or failing to identify the product features that best correlate to our profitability — offering buy-out options that hurt rather than enhance our profitability, for example.

Technology has reached the point where near-instant intelligence on profitability is available to management. By analyzing your portfolio’s performance over time, and by segment, customer, salesperson, product, asset and so on, management has hard data with which to steer the pricing ship. How much, in terms of cash, income and yield, is a certain customer getting us? A certain salesman? A given segment? A given program? When making strategic pricing decisions or even when considering a pricing exception, such information is critical. An equipment finance company with that level of information is flexible, creative, and competitive, and can price to win more deals.

How It Works … Three Levels of Pricing
Nine months into a new promotional campaign — six months at 0% interest to select customers with great credit — analysis reveals:

• Better than expected volume;
• Higher than expected early buyouts at the end of the 0% interest period;
• Yields on these buyouts are lower than targeted yields.

Real-time strategic and tactical steps to maximize profits might include:

• Bump up the buyout amounts in year one to discourage interest rate arbitrage,
  which should reduce volume by exactly the customers making the arbitrage play;
• Start a sales bonus program that pays out only if the customer
  doesn’t buy out in the first 12 months.

Key: Pricing as a Feedback Loop — Analysis should supply actionable items now on current bookings and pipeline, and pricing policy should be able to implement changes quickly. Constant analysis and quick action mitigate the cost of failure.

Joseph Moore is the director of Sales & Marketing at Ivory Consulting Corporation. Over the last 13 years, Moore has worked with many ELFA-member companies, trained hundreds of equipment finance professionals in the intricacies of equipment finance pricing and given a number of presentations at ELFA events. Moore holds an M.B.A. in International Business and Finance. He can be reached at [email protected].