By Harley Rolfe
Most self-storage operators set themselves up for the most vicious type of business pressure. The story of unbridled price competition needs to be told.
I have usually danced around the subject, trying to avoid any doom-and-gloom expressions about troubling aspects of the industry. After all, this is a family show. But words like "quicksand" and "quagmire" spring to mind when dealing with straight price competition. The causes and effects are well-known.
"Location" distinguishes some facilities from others, but additional building is diminishing that distinction in many areas. There are regular references in this magazine and in the recent Inside Self-Storage Factbook about "saturation" and overbuilding. The subject is on the table.
Our Soft Underbelly
The industry has this dark side, and most offerings are a commodity. Such offerings are quite susceptible to aggressive price competition. That's the soft underbelly of self-storage ownership.
Let's trace the buy/sell dynamics of a commodity market. The best example is the agricultural commodity markets. The exchange itself (Chicago Mercantile Exchange) defines for each category (November wheat, April porkbellies, etc.) all the important features of each traded item. Those are primarily the quantity/sale, grade or quality, delivery point and terms. All are carefully and deliberately standard. People throughout the world can buy and sell, knowing exactly what they're doing. Bidding sets the price. No one knows in advance what that will be. Such is the fate of agricultural-commodity suppliers.
And self-storage? We offer proximate identical choices, too, then give callers our standard language (6-by-12, 10-by-20, etc.), and often post our prices on the office wall. That's a commodity approach. But we control our situation, farmers don't.
The Prospect Needs a Reason ... Anything Will Do
Every buyer must have a reason, some difference, on which to base his purchasing decision. He cannot act without one. When confronted with a situation where everything (including price) is the same, the prospect must resort to something exterior to the situation to permit him to act. He may flip a coin, choose the facility with the name that comes first in the alphabet. Ridiculous? Not when the prospect needs to do something and can't discern any difference. He knows that he's done something goofy, but your marketing program didn't give him any choice.
It's Just a Matter of Time
When the first facility goes up in a given area, it probably underserves it. The owner may have limited capital or ground or is conservative (or his bank is). So there is market space for another facility, and when it goes in, nothing much happens. They're both full. It seems that additional units can be added with impunity. But lurking in the economic landscape is a cliff. And the arrival at the precipice is sudden. When the additional units being added finally exceed the area need and facilities are experiencing unacceptable vacancy, any operator's single recourse is to differentiate itself by dropping rates.
How Far Is 'Down'?
The facility has to drop rates below those of its rivals or there is still no reason for the prospect to act. By how much? Enough to give the prospect reason to stop shopping. That can be very little if the prospect is tired of bargaining for nickels. With self-storage, the whole process seems a little silly because our rates just aren't that high. Is there a real difference between $45 and $47 per month? Nope. The issue here is in providing the prospect with some way--any way--to distinguish one choice from another and permit a prospect to make that decision. It's imperative. He's stuck until he does. That's how the spiral begins. If just meeting the competition were enough, then prices might stabilize. But the fact that the price must beat the other guy forces the downward spiral until something enters the equation to stop it. Is it any wonder that this process tempts suppliers to get with their brothers to stop the rate slide? In so doing, they risk the farm, but that may seem like a reasonable risk, given the box they're in.
The tragic thing is that as the price drops, no additional units are being sold. The price elasticity of self-storage is already very low, so lowering the price just means that the amount of collective income from all units sold drops, and nothing good accrues to the facility owners for the sacrifices they make. They just hope that the problem blows over.
Operators are in that fix because they choose not to distinguish themselves to prospects. Little in the original development cycle is aimed at preventing the condition. There is an inherent attitude that, indeed, we are offering a commodity and the smartest thing we can do is control costs. Initially, refuge is taken in citing their unique location as the distinct feature. But that can be ephemeral.
The Scary Part
How far can prices drop? Where's the floor? Unless there is a demand upsurge, they will drop until it is costing (in actual cash outlay) a facility more to supply the next unit (called the marginal unit cost) than it is receiving in income. When that happens, some suppliers will quit. They will not/can not expend cash to stay in the market. They drop out--and save the day for their rivals. The supply is now diminished by the capacity of the drop-out and the prices can stabilize.
In self-storage, what is that marginal unit cost? Well, how much in actual cash outlay does it take to rent one more unit? Damn little. In those cases where there are facility managers, I suggest to you that that the cost of renting the next unit is zero. Thus, there is no barrier to a drop in prices in this industry. That's scary.
Also, prospects will get onto the act and egg you on for discounts and deals. The devil in that situation is that the representations by prospects while bargaining are not reliable. He says that Pete's Storage just offered him $45. Will you match that? You're at $50. You agree to $45. Pete finds out. Guess where Pete's next rate quote will be?
But do you believe the prospect remarks about Pete? I don't. He says that at $45, the contract is yours. We know that he needs a clear reason to buy. That means that Pete was probably at $47 and he's pushing you to get that distinctive difference. But should you have met the prospect bid? You, reader, take it from there. That's the price spiral. For prospects, it's a game; for you, it's a lot more.
Prospects Are Rookies
The prospect's situation affects yours. Most prospects are rookies at buying self-storage. Because any buying decision can be stressful, the buyer wants the process to be as easy as possible. Thus, his inclination is to try to boil off all the features in the various facilities' offering choices to nothing, freeing him to simply choose the lowest cost. Nothing is easier than choosing the "cheapest." Even rookies can do that. That opens the way for the above sequences to kick in.
Once you are in the price war, there is little you can do. The only indemnity is prevention if you wish to avoid this quagmire. You simply cannot permit yourself to be seen as the same as your competition. To overcome the desire of the buyer to see all offerings as the same takes some effort. Time for a dose of marketing!
Missed some previous issues? Check the web at www.hardnosed.com.
Harley Rolfe is a semi-retired marketing specialist whose career includes executive-level marketing positions with General Electric and AT&T. He also owned lodging and office facilities for more than 20 years. Mr. Rolfe holds a bachelor's degree in economics from Wabash College and a master's degree in business administration from the University of Indiana. He can be reached at his home in Nampa, Idaho, at (208) 463-9039. Further information can also be found in Mr. Harley's book, Hard-Nosed Marketing for Self-Storage.