A New Pricing Regime in Self-Storage: Using Revenue-Management Tools to Increase Profit
|Copyright 2014 by Virgo Publishing.|
|Posted on: 12/03/2011|
By Bob Copper
I love my wife and everything about her. Well, almost everything. Despite my best educational efforts, she's still a closet communist. She doesn't understand why Southwest Airlines charges a different price every time I book a flight or why mountain-cabin rentals are more expensive during the peak fall season than in January. Of course, the reason those circumstances exist is ... say it with me ... profit!
While I've come to accept my wife's way of thinking, I'm having a difficult time understanding why so many self-storage operators adhere an outdated financial system in which their unit prices always stay the same, regardless of the situation. They fail to capitalize on existing and potential revenue because they don't use a revenue-management system. Those operators could increase their revenue and profit by using a couple of simple techniques proven to work across all facility sizes and markets.
Supply and Demand
The reason Southwest Airlines consistently charges a different airfare is simple: supply and demand. Their rates increase and decrease based on the demand, or lack thereof, for seats. The person who books his flight at the last minute is likely to pay more than someone who booked well in advance. And although the airlines are always aware and sensitive to what competitors are charging for the same flight, they're also aware of their own inventory and charge accordingly.
Can you operate your self-storage facility using a similar technique? Of course you can, and many sophisticated and successful operators do. They generally have the highest market rates and occupancy levels. These operators base their rates on their own supply and care little about what their competitors charge.
Many facility operators are far too concerned about competitor pricing and pay little attention to their own inventory levels. If you have only one or two vacant 10-by-10 units, why shouldn’t that next potential renter pay a bit more than the person who rented when you had 10 units available? If you print your rental rates on brochures or business cards, you can't effectively manage them. If you want to increase revenue and profit, start using supply-and-demand rate management.
Convenience and Customer Service
When I book a Southwest flight online, I can typically get a lower "Web only" rate that is not available if I call an agent. If I’m willing to buy online, I pay a lower fare than someone who feels the need to speak to a person.
More self-storage operators are starting to offer Web-only rates, and the evidence is clear that they do entice renters to make online reservations. If a customer walks into the facility, he will likely pay a higher rate one who reserves on the Web. Well-trained salespeople should be able to charge more for a walk-in rental than an anonymous online rental.
When I fly, I have no idea what the other people on that plane paid for their flight. Your self-storage customers also don't know what other customers paid. The evidence provided by operators who charge different rates to different "classes" of customers shows that this method works to increase revenue and profit. If you market web-only rates on your website, you'll find potential customers are more likely to reserve space online because they believe they're getting a special deal.
As a quick aside, if you don't offer online rates, reservations and payment options, you're already way behind the marketing curve and need to catch up. Think about it: The industry's largest and most successful operators, those who spend millions on customer research and marketing, have determined that it's good practice to make it easy for customers to conduct business online. What makes you think you're smarter than they are?
Implementing Rate Increases
Did you experience increases in some of your operating expenses last year? Many self-storage operators resign themselves to the fact that their expenses will most likely increase year after year, but they're unwilling—or more truthfully, afraid—to increase their rental rates. It's unreasonable to believe that the rates you charged last year or 10 years ago should remain the same while utilities, taxes, payroll, etc., continue to climb.
It's a crude analogy, but I liken the implementation of rent increases to boiling a lobster. If you try to put a live lobster in a boiling pot of water, he will try mightily to get out! But if you place a lobster in cool water and gradually turn up the heat, the next thing you know, you have a delicious meal.
The same is true with your tenants. If you send out notice of a substantial rent hike after years of no increases, it's likely that a large percentage of tenants will move out. But if you modestly increase rates each year, your incidence of move-outs drops significantly. Also keep in mind that for every $1 you increase your rent, you add $150 in value to your asset.
The Importance of Staff Training
Any efforts you make to manage and increase rental rates will not succeed if your staff is not competent or trained to effectively execute them. Today's economic climate the competitive nature of our business demands that self-storage managers be better trained and more knowledgeable. If you want to successfully use sophisticated revenue-management tools, charge different rates for different classes of customers, and implement common-sense rate increases for existing tenants (and you should want all of these things), you must have onsite staff who can make these things happen.
Does your team know how to sell a potential tenant on the benefits of renting from your facility, or are they simple order-takers and babysitters? If they're not good salespeople, your efforts to manage rates based on supply and demand are going to fall flat. If your staff has not bought into the idea of charging different rates to different classes of customers, those efforts will fail. If your employees refuse to take ownership and confidently defend your modest rent raises, then don’t waste the stamps.
Your management team needs the tools to successfully implement all of these revenue-enhancement techniques, and it's your responsibility as an owner to ensure they have them. Far too many owners are still acting like they manage a mom-and-pop shop. Your self-storage operation is a "big business," and you can use these systems to start treating it as such.
When it comes to your revenue, it's time to break free of "communist" ways of thinking and embrace a new pricing regime.
Bob Copper is partner in charge at Self Storage 101, an industry consulting firm that assists facility owner/operators and managers in developing more effective and profitable operational systems. It also aids in conducting performance reviews and providing the necessary tools to perform at higher levels in a competitive industry. To reach him, call 866.269.1311; e-mail firstname.lastname@example.org.