By Jim Killoran
The following is excerpted from Self-Storage Startup, a manual for the development of self-storage properties. For order information, contact LeManx Information Products, P.O. Box 542, Shelton, WA 98584; (800) 764-1909.
While there are at least five different pricing strategies that are considered to be commonplace, I like to believe that there are about as many variations to these five styles as there are self-storage owners and managers. To give you some background, I will define each of the five briefly, and then explain, in depth, the variation that I find most successful.
Follow the Competition
Unless your project was the very first one ever built, or you have the only facility within a hundred miles, following the competition is likely how your rates were established in the beginning. This is certainly an acceptable starting point, and after all, your customers are going to do the same thing that you did: call your competitors and compare rates.
The definition of this strategy is simple: Be the lowest price facility. You target the price-conscious customer (who in my opinion is not the best-value customer). You are also setting the stage, whether intentionally or not, for a price war. As you will learn later, this is a war with a guaranteed result: Everybody loses.
As the name implies, this strategy is employed by new facilities just getting underway, or by facilities that have just completed a major expansion. Using this strategy in the former situation is justified if done properly. However, I am opposed to its use in the latter situation because it undermines the goodwill that you have with your current customers. We will discuss better alternatives.
Also known as market skimming or skimming the cream, the theory behind this strategy is pricing your product such that you attract a clientele that is less price conscious (and perhaps more service conscious). This customer is less likely to be a problem tenant, thereby reducing delinquencies and the associated management headaches. While it may seem to be more difficult to fill your facility with such customers--after all, there are only so many of them to go around--the most successful operations have done just that.
ROI (Return on Investment)
Sometimes called cost-coverage, this technique involves determining your costs of operation, adding to that the rate of return that you feel you need to make on your self-storage investment to be a big success, and then setting your rate schedules accordingly. Without a doubt, this is the most ridiculous (if not bizarre) pricing strategy. Nowhere in the formula do you find market-driven factors like supply, demand or competition.
You may be able to dazzle some lenders or partners by proposing this method as it neatly covers all of your costs and shows a profit to boot. But the world of reality will not be impressed by this handiwork. Unfortunately, the saying, "If you build it, they will come," does not apply to the self-storage industry.
So which should you use?
I haven't coined any cute buzz-words or catchy phrases to identify the method that works best, but this is what has been working successfully at our facility:
First, just to be clear, nothing further needs to be said about the return-on-investment strategy.
We absolutely do not agree with price-penetration. If you actively seek to attract customers via cheap prices, what you will get are cheap customers. Our experience has shown that this group of customers will have a higher percentage of delinquencies, abandonments and unjustified complaints than the group of customers who are not as concerned with price as they are with service and amenities. Remembering that your goal is maximum profits, an impressive occupancy rate pales quickly when compared to a bottom line that is suffering dismally from delinquencies and abandonments or from a price war. (We'll talk later on how you can thwart most price-war attempts by competitors before they start.)
Let me just interject a few words at this point about the aggressive lease-up strategy as it applies to a brand-new facility. If you have little or no competition, or if your competitor's facilities are full, your lease-up pricing strategy need not contain much in the way of real discounts, freebies or giveaways (whether real or perceived), only that the customer base knows that you exist and are open for business.
If you do have competition to overcome, then your grand-opening offers should be more real than perceived. But the point to take note of here is that your "regular rate" schedule can remain intact during your lease-up period, giving you the flexibility to use it as soon as possible. For example, as the popular sizes begin to reach a comfortable occupancy rate, your lease-up specials for those sizes can quickly be terminated.
Don't Follow, Lead
While it is true that our rate schedule was initially developed directly from what our competition was charging, I've learned, over time, that this should only be a guideline. In fact, I now firmly believe that if you set your rates the same as your competitor's, you are doing them a big favor.
I'll explain. Occasionally I spend some time driving by or, if possible, through our competitor's facilities. In the world of business there is nothing like having first-hand knowledge of what you are up against. While driving through a particular facility, I became appalled at the deteriorated condition that it had fallen into. Huge pot holes in the unpaved driveways, several obviously un-rentable units (the doors were either missing, or so badly damaged from being backed into that they were inoperable), garbage strewn about-- and they no longer offered on-site management. The office was now permanently closed and had been replaced with a trailer parked at the front gate, complete with a "caretaker" and his four junk cars that will never see a highway again. As I sat there looking at this disgusting mess, which at one time had been a respectable facility, it dawned on me that they were charging the same as us and getting customers.
It was now obvious that we could easily support higher rates by simply comparing all the amenities that we had to offer to facilities that did not. And it was an easy sale.
That was a big lesson, and one that has contributed substantially to our bottom line ever since. Customers will pay more if they get more, and the "more" can be in many forms: service, cleanliness, friendless, security, attractiveness, and so on. It can even be a perception of "more." For example, if a facility radiates a feeling of security, whether or not it actually is more secure than the facility down the street, it will become, in the mind of the customer, the more secure facility. Perception is not everything of course, but it goes a long way toward making sales.
So, to sum up this discussion of pricing strategies, I believe that the one that will do the most justice to your bottom line is a variation of skimming, although I dislike that name. I much prefer to put it this way: If you offer a clean, secure, well-managed facility, and you couple the delivery of quality service with good salesmanship, you will attract and keep the best customers in your market area, and they will gladly pay top prices to have it.
In order to establish the optimum rental rates, we need to first examine occupancy rates. Consider the following question:
What is the goal of the facility?
If you're an owner, ask that question to your manager. If you're a manager, ask it to the owner. If you're an owner/operator, then you need to ask yourself. If the answer is "To be 100 percent occupied," then you're all in trouble. You may as well put out the closed sign, lock the door and go home, because you have all missed the point of being in business.
The correct answer is: To maximize income.
So what's wrong with 100 percent occupancy? Several things. Put aside for the moment the fact that being fully occupied is the wrong objective, and that it is not the reason that you built your facility. Let's examine what happens when you achieve an occupancy rate of 100 percent, or even 95 percent: The phone rings. It's a potential customer inquiring about the rate and availability of a storage space. You politely respond that you currently have nothing available. You might even offer to put his/her name on your waiting list.
Look what you've done. You've sent the prospect to your competitor. And not just for now, but likely for any future storage needs as well. You might say, "Well, I had no choice. There are no units available!" In a moment, you'll learn how to correct this situation by correctly pricing your product.
To state this in another way, suppose that you call on your favorite widget store because you need widgets, but the widget store is out of widgets. So you try again in a few days and still no widgets. How long before you throw up your hands and seek out another supplier of widgets? Not long, I'd say. It should be noted that our society is a bit impatient in these matters.
Incidentally, I have been a victim of this very scenario. Some years back when we were enjoying full occupancy, kicking back with our feet on the desk, all smiles because we were "doin' well," it was brought to our attention that the word around town was "Don't bother to call them, they're always full." The lesson we learned from that was: raise our rates or expand. We did both.
There is the potential of another problem with full occupancy, and that is manager complacency. The manager's job becomes considerably easier without having to fuss with renting units and marketing and all that. That statement probably just put me in bad favor with some of the managers reading this, but I believe that I can redeem myself when I suggest owners instill a manager's incentive program.
Jim Killoran is the owner of LeManx Information Products. Based in Shelton, Wash., LeManx specializes in providing information to the self-storage industry. Mr. Killoran is also the author of Self Storage Success and Self Storage Startup. In addition, he has been in the self-storage business for 15 years and is co-owner of Freeway Mini Storage in Shelton, Wash. For more information, call (800) 764-1909 or write to LeManx Information Products, P.O. Box 542, Shelton, WA 98584-0542.