Pricing Strategies
An Overview of Strategy Styles

By Jim Killoran

The following is the second installment of a two-part excerpt from Self-StorageSuccess, a manual for the development of self-storage properties. For orderinformation, contact LeManx Information Products, P.O. Box 542, Shelton, WA 98584; (800)764-1909.

Price It Right

OK, so how do I raise rents and not alienate my customers? Not so fast. Let's firstdetermine which rates should be raised and by how much.

When to Raise Rates

The computer software that I use at our facility gives me a one-page report showing theoccupancy of each type and size of unit that we have. In fact, it even highlights thosecategories that exceed 92 percent occupancy. Each month I print a copy of this report andfile it in a folder marked "rate increases." And each month I flip through thesereports to see which sizes and types of units have consistently exceeded 92 percentoccupancy, then I raise the rent on those units. It's as simple as that.

I honestly don't have a hard-and-fast rule that defines "consistently" interms of a fixed time period. Generally, I don't think that three consecutive months of92-plus percent occupancy is long enough, but six months is certainly plenty. So somewherebetween three and six months I apply the new rate, depending on my overall feel for howbusiness is going.

All right, now we know when to raise the rates, but by how much? Again there is nohard-and-fast rule, but here's what I do: If the current rate for the unit is less than$50, then I'll go for a 5 percent to 8 percent increase, or about $3 or $4. Certainly notless than $3, and I choose to stay with even dollar amounts, although many facilities willallow a rate to end in 50 cents, for example, $34.50. For units with a current rate of $50or greater, I will increase the rate by no less than $5, more if I think I can get it. Howdo I know if I can get it? I test the "street rate" first.

Street Rates vs. Across-the-Board Rates

The street rate is the rate that you assign to the units that are currently vacant andyou would rent to the next person "off the street," as opposed to anacross-the-board rate, meaning that the new rate is applied to all units, occupied or not.

By testing a new rate using the street-rate method, I can quickly make a determinationon its acceptability. By observing how well the new rate is being received by mycustomers, I can further adjust the rate up or down as needed. When the new rate is"just right," it's time to apply it across the board.

Let me relate a situation that happened at our facility and opened my eyes. We haveseveral, a dozen to be exact, very large units (12-by-40 with 12-foot-high doors) thatwere intended to house recreational vehicles. In reality, they tend to be rented bycommercial concerns almost exclusively. But I digress. These units were seldom vacant.However, when one became available, our manager took it upon herself to experiment with anew rate for this size unit. Actually, I'm glad I didn't know about this until after thefact because I probably would have squelched her plan. (I suspect she knew this, whichprompted the whole cloak-and-dagger scene). Anyway, she increased the street rate awhopping 60 percent. Yes, 60 percent. And the unit was snapped up immediately. Needless tosay, an across-the-board rate increase followed. Nobody moved out. Lesson learned: Youwon't get more if you don't ask for more.

Now we can talk about alienating the customer. In my personal experience, it justdoesn't happen. This doesn't mean that you won't lose a single tenant. Expect to. However,those who leave will be those who now realize that their need for storage has actuallybeen over for some time, and they just haven't gotten around to moving out, and this rentincrease is just enough motivation to do so now. These people will not be alienated, andif they have received good service from you, they will be back the next time they have aneed. Once, and only once, we had a customer who put up a fuss about a rent increase andmoved out in a huff. But believe me, we were glad to see him go, as he had been a problemtenant all along. In fact, in doing research for this book, one source that I read statedthat the industry average is a 5 percent loss of tenants due to a rate increase. Anothersource stated that it would be almost 10 percent. In my experience, I have not evenapproached the 5 percent level. The most recent increase I initiated was to a block of 75units where the increase was $5 per unit, and not a single tenant moved (perhaps theincrease should have been more). For the sake of argument, assume that you will experiencethe worst-case scenario and lose 10 percent of your tenants affected by the increase. Butlosing 10 percent of your tenants is a good thing, and losing any less than 10 percent iseven better.

For example, ABC Storage has three sizes of units that are currently 100 percentoccupied. It is receiving a monthly gross of $13,500 from these units, and we will assumea 10 percent move-out. Since 10 percent of our tenants in these three unit sizes movedout, the remaining 90 percent are still occupied and are producing a monthly gross of$13,320. This is a net loss of $180 per month, but ABC now has 20 units available to rent.

ABC Storage wins in two ways. One, when a potential customer calls, ABC has unitsavailable. And two, look at the difference in annual gross scheduled rents: a net increaseof $15,600. Keep in mind that you have incurred no additional expenses to achieve thisincome. So aside from additional incentive pay for the manager, this new revenue goesdirectly to the bottom line.

Other Reasons to Increase Rents

There are some markets that fluctuate seasonally. For example, if you are located neara summer or a winter resort area, you likely experience substantial variations inoccupancy rates across seasons. Simply stated, know your market, and don't hesitate toadjust your rates to fit the season. If your market is such that you have a steadyclientele as well as seasonal trade, two-tiered rate schedules are perfectly acceptable.Remember that you are providing a valuable service, and your customers will pay for thatvalue.

Then there is just plain old rent increase. As time goes by, the cost of everythinggoes up. Property taxes, insurance, utilities, you name it. You know this, and yourcustomer knows this. In fact, over time, your customer will expect an increase. Your jobis to keep a finger on the pulse of the self-storage industry, especially as it applies toyou and your competitors' market area. Don't be bashful. When justified, your increasewill be accepted by your customers. And remember that you don't have to wait for yourcompetition to make the first move. Lead, don't follow.

Tips on Rate Increase Notification

Here are some tips on the mechanics of notifying your tenants of a rate increase.

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 isalso the author of Self Storage Success and Self Storage Startup. In addition, he has beenin the self-storage business for 15 years and is co-owner of Freeway Mini Storage inShelton, Wash. For more information, call (800) 764-1909, or write to LeManx InformationProducts, P.O. Box 542, Shelton, WA 98584-0542.