Chapter 40

Rent Instead of Buy

The pattern

The term ‘Rent Instead of Buy’ speaks for itself. The chief advantage for the customers is not having to come up with the initial acquisition costs of a straight purchase, permitting them to get products that they might not be able to otherwise afford (WHAT?). Renting avoids locking up capital for long periods of time, leaving customers with more financial leeway (WHAT?). Many people greatly appreciate these advantages – especially in the case of capital-intensive assets. This opens up the opportunity of greater sales potential compared to an outright purchase (VALUE?). An important prerequisite for offering the Rent Instead of Buy option is the ability to finance the products in question in advance, as revenues will only come in at a future date (VALUE?). In this respect, renting is similar to Pay Per Use (#35), but with the major difference that rents are defined by the duration of use and not the actual usage. The transition between Rent Instead of Buy and Pay Per Use can often be quite fluid, such as levying a fee in addition to the base rate by car rental agencies when customers exceed the stipulated mileage limit.

The origins

Rent Instead of Buy is an old business model. There is evidence to suggest that Romans rented out livestock as early as 450 BC. Consequently, the concept was extended to a number of applications. In medieval times, for example, the nobility rented its land to farmers in exchange for a share of the crop. Such ‘rents’ (tithes) were, of course, not paid voluntarily but levied based on the grounds of the ‘estates of the realm’ concept, whereby peasants had a status below the church and nobility in social hierarchy. Today, the main application of renting is in the real estate market. In German-speaking countries, more than half of all apartments are rented rather than owned.

The innovators

Rent Instead of Buy has been around for a long time, but has also inspired a number of more recent innovative business models. An example is the first car rental agency, which came into being in the late 19th and early 20th centuries. One noteworthy pioneer of the system was Joe Saunders: he began by lending his Ford Model T to businesspeople in 1916, using the ten cents he earned per mile driven to maintain the car. As a clever entrepreneur he soon realised that he could build an entire business around the idea, and by 1925 the Saunders System car rental company had branches in 21 states.

Rent Instead of Buy: the evolution of car ownership

Another Rent Instead of Buy business model innovation was introduced by photocopier manufacturer Xerox (then known as The Haloid Photographic Company). Its Xerox 914 model was the first commercial automatic copier in the world to use a dry photocopying technique when it came to market in 1959. The device’s technical features were revolutionary, for suddenly it was possible to copy several thousand pages a day instead of a measly 15 to 20 as before. Because the Xerox 914 machine was too expensive for most potential buyers, Xerox decided to rent it out instead, at a cost of US $95 a month. This gave a tremendous boost to the demand for such advanced rental copiers, to the point that a few years later Xerox was no longer able to cope with production. Fortune magazine later named the Xerox 914 the most successful product ever marketed in the United States.

With a history dating back to 1908, CWS-boco is a Swiss provider of working clothes and laundry services whose products can be rented as well as bought. CWS-boco provides a convenient, all-inclusive service in the fields of hygiene and sanitation that goes beyond mere sales, so that renting is often more attractive and convenient to the customer than buying.

SolarCity pursues the goal of a rapid spread of solar technology, primarily in private households. SolarCity designs and installs solar systems on the roofs of residential buildings. The customer can choose between two options, the immediate purchase of the system or the Rent Instead of Buy option. In the latter variant, installation is free of charge. In a long-term contract (20 to 30 years), the owners agree to purchase the plant’s electricity, whereby the electricity produced by the plant is offered at more favourable conditions than regular green electricity, while price increases are hedged over the years. At the end of the contract period, the customer is the owner of the plant. SolarCity benefits from its customers’ constant electricity purchases. SolarCity enriches its value proposition with innovative partners such as Tesla’s Powerwall. Due to high consulting requirements, the business model includes intensive individual customer relationships, so that SolarCity also uses door-to-door sales.

Even when the practice of renting is well established, it is frequently supplemented by additional services including assembly, expertise and operation. Most ski destinations have experienced the growing popularity of ski rentals – more flexibility, less complexity and greater comfort are the main motivating factors for customers. Luxusbabe and RentAFriend make use of Rent Instead of Buy: customers can rent, respectively, cheap designer purses or even a friend.

When and how to apply Rent Instead of Buy

This pattern is widely applicable. If you offer products or services at a fixed price, you can also think about renting them out instead. In fact, if you choose to do this you will be able to play into an increasingly common trend: people want to use things and do not necessarily want to possess them. This trend, which started in the consumer goods industry, is already relevant in the automotive industry and will soon affect other sectors as well.