Leasing Strategy
The major emphasis of a pricing strategy is on buying a product outright rather than leasing it. Except in housing, leasing is more common in the marketing of industrial goods than among consumer goods, though in recent years there has been a growing trend toward the leasing of consumer goods. For example, some people lease cars. Usually, by paying a specified sum of money every month, similar to a rental on an apartment, one can lease a new car. Again, as in the case of housing, a lease is binding for a minimum period, such as two years. Thus, the consumer can lease a new car every other year. Because repairs in the first two years of a car's life may not amount to much, one is saved the bother of such problems.
At the same time, overall the lease may cost slightly more than what a customer would pay by buying the car on loan. The net price of a fully equipped 1995 Ford Windstar with a sticker price of $23,650, after negotiations and a $1,000 manufacturer's rebate, would be $20,494. Payments on a two-year lease from Ford Motor Credit Co. would be $457.43 a month, or total payout of $10,520, assuming that the rebate is used for the first payment and a security deposit. At the end of the lease, the car would have a residual value—the value after depreciation—of $14,663. That is what the customer would have to pay if he/she decides to buy it, bringing the total cost to $25,183. On the other hand, monthly payments on a four-year loan at 9.9% would be $518.79. The total paid over the term of the loan would be $24,901, and the customer would have a vehicle valued at more than $7,000 at the end.20
Although there may be different alternatives for setting the lease price, the lessor usually likes to recover the investment within a few years. Thereafter, a very large portion of the lease price (or rent) is profit. A lessor may set the monthly rental on a car so that within a few months, say 30, the entire cost of the car can be recovered. For example, the monthly rental on a Toyota Corolla, based on its 1998 price (assuming no extras), may be about $239 a month (the sticker price is $15,985). With the term set at 36 months, the dealer gets all his or her money back in about 32 months. (It should be noted that a dealer gets a car at the wholesale price, not the sticker price, which is the suggested retail price.) The important thing is to set the monthly lease rate and the minimum period for which the lease is binding in such proportions that the total amount that the lessee pays for the duration of the lease is less than what he or she would pay in monthly installments on a new car. As a matter of fact, the lease rate must be substantially less than that in order for the buyer to opt to lease.
Automobile renting is transforming the market perspectives of the industry. One-fourth of all cars and trucks sold in 1998 went out under lease. By the year 2005, it is predicted, half of all cars and trucks will be leased. The reason for this shift in automobile buying is easy to understand. About 75 percent of car buyers need some sort of financing, and with interest on car loans no longer deductible, leasing's relatively low monthly payments are enticing. For the auto companies, leasing camouflages price increases, and restores brand loyalty. It offers companies an opportunity to strike up a relationship with the customers. Further, it attracts younger buyers to luxury brands and smoothes industry sales throughout the year.21
Leasing works out to be a viable strategy for other products as well. For example, furniture renting may be attractive to young adults, people of high mobility (e.g., executives, airline stewards), and senior citizens who may need appropriate furnishings only temporarily when their children's families come to visit. In addition, apartment owners may rent furniture to provide furnished units to tenants.
In industrial markets, the leasing strategy is employed by essentially all capital goods and equipment manufacturers. Traditionally, shoe machinery, postage meters, packaging machinery, textile machinery, and other heavy equipment have been leased. Recent applications of the strategy include the leasing of computers, copiers, cars, and trucks. As a matter of fact, just about any item of capital machinery and equipment can be leased. From the customer's point of view, the leasing strategy makes sense for a variety of reasons. First, it reduces the capital required to enter a business. Second, it protects the customer against technological obsolescence. Third, the entire lease price, or rental, may be written off as an expense for income tax purposes. This advantage, of course, may or may not be relevant depending on the source of funds the customer would have used for the outright purchase (i.e., his or her own money or borrowed funds). Finally, leasing gives the customer the freedom not to get stuck with a product that may later prove not to be useful.
From the viewpoint of the manufacturer, the leasing strategy is advantageous in many ways. First, income is smoothed out over a period of years, which is very helpful in the case of equipment of high unit value in a cyclical business. Second, market growth can be boosted because more customers can afford to lease a product than can afford to buy. Third, revenues are usually higher when a product is leased than when it is sold.
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