leasing-business-model

What Is The Leasing Business Model? The Leasing Business Model In A Nutshell

Under the leasing business model, a company purchases a product and then leases it to a customer for a periodic fee. The seller passes the property of the item to the lessor, which is a financier, that enables a buyer (the lessee) to use the item for a given period of time. In the end, the buyer can exercise the option to buy the item at the current market rate. This agreement makes it possible for the seller to dispose of the item, for the financier to make a profit on it, and for the buyer to use it while avoiding total costs of ownership.

Understanding the leasing business model

Companies that utilize the leasing business model sell continuous access to a product or service over an agreed period.

The model normally involves three parties:

  1. The seller – the owner of the product or service that sells ownership of the item to a lessor in exchange for payment. Note that the seller may or may not retake possession of the item once the contractual agreement has ended.
  2. The buyer (lessee) – the entity that negotiates access to the product or service in exchange for a periodic payment to the lessor. Once the lease is up, the buyer sometimes has the option of purchasing the item at the current market rate.
  3. The financier (lessor) – a third-party that enters into an agreement with the lessee and provides it with the item for temporary possession. In essence, the lessor serves as an intermediary or facilitator.

Where does the leasing business model occur?

The leasing business model is most often seen in transactions involving the exchange of expensive physical goods, including:

  • Commercial and industrial fleet vehicles – including passenger vans, buses, box trucks, tractors, trailers, and delivery vans.
  • Manufacturing and industrial plant equipment – in industries notorious for expensive item costs, leasing arrangements may be in place for stamping and forming machinery, welders, conveyor systems, and factory infrastructure or floor space.
  • Restaurant and hospitality equipment – these include exhaust hoods, tables, seating, point-of-sale (POS) systems, and stoves. 
  • Medical and laboratory equipment – such as lasers, X-ray machines, CT scanners, and even surgical tables.
  • Municipal equipment – many local councils and authorities also lease equipment to reduce costs. Items include police cars, garbage trucks, and street sweepers.

Advantages of the leasing business model

Let’s now take a look at some of the advantages of the leasing business model for both the seller, lessee, and lessor.

Seller

  • Early revenue – leasing can help the seller meet a need for early revenue, even if some revenue must be shared with the lessee.
  • Relationship building – since many leasing agreements extend over long periods, the seller has time to build a sustainable and loyal relationship with a buyer.

Lessee

  • Affordability – the most obvious benefit for a buyer is affordability. Many buyers are not willing to expose themselves to the risk of owning an asset outright while others simply cannot meet the high upfront cost. The leasing business model enables the buyer to pay in smaller monthly installments which can be budgeted for in advance.
  • Continuous upgrades – businesses that rely on the latest model equipment can easily upgrade when the current lease expires. This means they are never stuck with an obsolete model.

Lessor

  • Increased sales – lease financing through a third party can help product manufacturers increase their sales. In these circumstances, the lessor is in a stronger position to negotiate a commission from the manufacturer.
  • Tax benefits – as the owner of the asset, the lessor can claim various tax benefits including depreciation and investment allowance to reduce their liabilities.

Key takeaways:

  • Under the leasing business model, a company purchases a product and then leases it to a customer for a periodic fee.
  • Leasing transactions normally involve three parties: the seller, the buyer (lessee), and the financier (lessor). The lessor purchases the product from the buyer and then sells access to the product to the lessee over a set period.
  • For the seller, the leasing business model gives them access to early revenue and the chance to build a loyal customer base. For the lessee, leasing allows them to avoid the risk and cost of purchasing an item outright. For the lessor, they may be able to negotiate a higher rate of commission with the product manufacturer and reduce their tax liabilities.

Main Free Guides:

Connected Business Models to The Leasing Business Model

Franchising Business Models

franchising
Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). Usually, the franchisee pays a royalty to the franchisor to be using the brand, process, and product. And the franchisor instead supports the franchisee in starting up the activity and providing a set of services as part of the franchising agreement. Franchising models can be heavy-franchised, heavy-chained, or hybrid (franchained).

Total cost of Ownership

total-cost-of-ownership
The total cost of ownership (TCO) estimates the total cost associated with purchasing and operating an asset. TCO is a more comprehensive way to understand the real cost of ownership. Thus, how much it really costs in the long-term to own something, with all its related direct and indirect purchase costs.

Fractional Ownership

fractional-ownership
Fractional ownership is percentage ownership in an asset where individual shareholders share the benefits in the asset. These benefits may include income sharing, priority access, reduced costs, or other usage rights. Fractional ownership occurs when an individual splits the costs of an asset with others while retaining a portion of the ownership and usage rights to the asset. This makes fractional ownership ideal for expensive items such as vacation homes, yachts, sports cars, high-end motor homes, and private jets.

Other Connected Concepts

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.
six-sigma
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.
revenue-streams-model-matrix
In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.
toyota-production-system
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.
experience-curve
The Experience Curve argues that the more experience a business has in manufacturing a product, the more it can lower costs. As a company gains un know-how, it also gains in terms of labor efficiency, technology-driven learning, product efficiency, and shared experience, to reduce the cost per unit as the cumulative volume of production increases.

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"