Transaction Costs of Equipment Rental: The Problem

Contractors who regularly rent equipment (at least once per quarter) usually "have a guy" they rent from. When asked why they rent from that company, they respond that their "guy" has been getting them their rentals for years, knows what they want, and does it according to their process. This has been the way the equipment rental industry has operated for at least a century. Why is it structured like this when we can easily rent hotels and cars online?

The answer is transaction costs. The Business Dictionary's definition of Transaction Cost:

Economics: The cost associated with exchange of goods or services and incurred in overcoming market imperfections. Transaction costs cover a wide range: communication charges, legal fees, informational cost of finding the price, quality, and durability, etc., and may also include transportation costs. Transaction costs are a critical factor in deciding whether to make a product or buy it. Also called frictional cost. See also transfer cost.

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A contractor's main focus is to do an excellent job building/fixing/maintaining whatever they are hired to do. They spend most of their working hours and energy on making sure they deliver the best possible service. They typically do not have the many hours per week required to call various rental suppliers to quote their equipment prices each time they need to rent. In other words, the transaction costs of doing so is too great.

Attached is the current process contractors need to go through in order to quote multiple equipment rental suppliers.

Even if contractors spent 60-90 minutes to get the best price, they would need to make sure this new supplier delivers on time and has safe/reliable equipment. This is another form of transaction cost.

Contractors also have to make sure that the invoices align with the quote. That means more time on the back-end then just using "their guy" again.

Main transaction costs restricting equipment rental bidding:

1. Obtaining multiple quotes

2. Managing multiple deliveries/pickups

3. Managing damage claims with multiple companies

4. Aligning quote to invoice from multiple companies

These four reasons cause contractors to continue to rent from "their guy" so they can focus on doing the best work they can. Of course, they know that savings on equipment rentals directly increases their bottom line, the time and headache to do so is usually too great.