Competitive Pri¢ing

Jeff Kinder Comments
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Do you remember back to your college marketing class when your professor taught you about the five P's of marketing? They were product, position, placement, promotion and price. In the self-storage industry, I think we need to add one more P--people. The idea is, if you pay attention to all of them, you can be successful in the business world.

Our main product is self-service storage space, and there have been many articles and seminars on how to put service into the self-storage industry. You determine the position and placement of the product when you develop a new property. The features and benefits you build into a facility are a reflection of the market it serves; in this manner, you position your facility to conduct business in that area. Once you determine your layout and unit mix, you place your product "on the shelf," making clear what customer choices are. All these aspects have to be considered upfront in the development stage of your facility, or it will cost you money and value for the life of the property.

That leaves promotion, price and people. Of these, the primary determinants of success for most of us are the latter two. Let me say that again: On a day-to-day basis, the two biggest levers you have for moving your property toward success are pricing and people.

Price It Right

Chart 1

Convenience is still the No. 1 reason customers choose your store instead of U-Lok-U-Lose. If your people answer the phone and make it easier to rent with you than the next guy, you'll get more than your fair share of business. Nothing is better at communicating the value of your facility than your sales team answering the phone and helping people on the property. Nothing exemplifies the professionalism of your operation, makes customers feel secure and comfortable, keeps your retail aisles clean and well-stocked, markets your store, or creates value in the minds of customers better than the people who run it every day. Start with the right people and get them the training and tools they need to turn every opportunity into a sale.

Price is the No. 2 reason a customer will choose you instead of Storage-R-Us. It is the biggest lever you have to boost your profitability. Storage is a top-line industry. Expenses are relatively small and fixed whether you are empty or full. Occupancy is a good yard marker, but not the goal. Promotions, and the discounts and allowances most of us attach to them, have a much bigger price tag than most of us realize, and are usually not worth it. Get your pricing right and your occupancy and revenue will follow without the high cost of discounts.

Storage is an elastic commodity in a specific trade, and the success of your project is most influenced and mitigated by basic supply and demand. Simply put: If you don't charge anything, you will get full and stay that way--but you won't have any money. If you charge too much, you will never get anybody to move in, and you still won't have any money.

Pricing is a proactive process. It requires you to do more than wait for the guy down the street to raise or lower his price. For most of you, the first pricing question to consider is, "What are you waiting for?" Take a look at your average annual occupancy. You will produce the highest dollars per gross square foot at approximately 91 percent. Don't be fooled by seasonal conditions. Nearly every market has a slow time of the year. The annual averages tell the story. If your average annual occupancy is 90 percent or higher, in any particular size or type, you aren't charging enough.

What do I mean by any particular size or type? Some operators tell me the reason they haven't raised prices for the last three years is they haven't ever reached that 90 percent-plus average. Invariably, in taking a closer look at their stores, it has always been one or two sizes that have lagged behind and kept the overall occupancy down. You have specific products that need to be priced individually. Just because Giant Food Stores raises or lowers the price of potatoes doesn't mean it will adjust the price of mustard or cereal. If it has too much candy left over after Halloween, that won't stop it from raising the price on cranberries and whipped cream as Thanksgiving approaches.

Just because you see a weakness in the sale of 5-by-5s doesn't mean you have to wait to raise the price on your 10-by-10s or, worse yet, put your entire store on sale. You should not give away a month free on the 10-by-20s or wait to increase their price just because you have too many 5-by-10s. In fact, increasing the price of other size units around a problem size is just as effective at making it seem like a good deal as discounting the problem size.

Waiting for the guy down the street to do something often runs contrary to supply and demand. If the competitor has 100 10-by-20s and charges $199 to keep them full, what is your supply? If you have 100 of them, $199 might be right. But if you only have 25 of them, you can probably charge $239 and still keep yours full. You both have the same market demand, but he has more supply to fill. Conversely, you may have more of another size that requires you to come in under the competitor's price to stay full. Always consider price first! Before you discount or give allowances, make sure you are priced right.

The Cost of Discounts

In my last article ("Pricing Your Product," December 2000, Inside Self-Storage), and at the last two ISS tradeshows, I talked about basic and technical strategies for pricing the specific products in your property. Now want to talk about what usually happens when you don't make sure you are priced right.

Occupancy is the most overrated indicator of success in our industry. As I work with entrepreneurs and institutions alike, everyone can tell me everything about their occupancy--the exact unit or square-footage occupancy to the fractions of a percent, whether it's up, down or the same--but very little about what happens to their revenue. Occupancy is a leading economic indicator, but it doesn't guarantee anything in the bank. How much occupancy does it take to make your mortgage payment? What percentage occupancy will put your kid through college? How much occupancy do you want in your IRA? You need money for all those things.

Promotions--especially the free rent and discounts many of you employ--are the most frequent, counterproductive mistakes operators make. Promotions have their place--rent-up of a new facility being the most obvious. However, they are a tool you should not use until you know you are priced right and promoting the correct product.

Looking at occupancy without understanding your income is a truly frustrating exercise. Unless you are Public Storage, with 30 to 300 stores in a market, promotions are either marketing targeted at an audience with a specific incentive to buy, or community involvement that helps people in your trade area get acquainted with you. In the quest to promote their product, many operators offer free rent, thinking they are giving away something that doesn't cost them anything. In a worst-case scenario, many give discounts to all new customers without even promoting them. The promotions you use will all have some incremental value and cost. "Free rent," however, is not free to you. Look at Chart 2 (bottom) to see what happens to the revenue from 50 people who move in during any given month.

Chart 2

The Cost of Discounts
Is your $100 10-by-10 actually worth $100, or $82?

Month Renters Remaining Cost of Unit/Month Income Income w/ First Month Free
1 50 100 5,000  
2 40 100 4,000 4,000
3 33 100 3,300 3,300
4 28 100 2,800 2,800
5 24 100 2,400 2,400
6 19 100 1,900 1,900
7 14 100 1,400 1,400
8 10 100 1,000 1,000
9 8 100 800 800
10 6 100 600 600
11 6 100 600 600
12 5 100 500 500
13 5 100 500 500
14 4 100 400 400
15 4 100 400 400
16 4 100 400 400
17 3 100 300 300
18 3 100 300 300
19 3 100 300 300
20 3 100 300 300
21 2 100 200 200
22 2 100 200 200
23 2 100 200 200
24 2 100 200 200
  280   $28,000 $23,000

In giving the first month free to everyone who moved in, you reduced the total value of the 50 new tenants by 18 percent. Instead of the $100 per month you thought you were making on each of those 50 units, you were actually making $82. So, if you charged $100 per month and gave a month free to compete against the guy charging $95 per month, he is actually getting $13 per month more than you are, as well as attracting the long-term tenants. You would have to rent 10 more spaces as a result of your "special" to just break even. And that doesn't even count the cost of the advertising.

Do you know how many units you rented in this same month last year? What was going on with your pricing, promotions, discounts, available spaces, unit mix and competition? How many spaces did you expect to rent if you did nothing? If you haven't asked and answered these questions, you shouldn't be offering any discounts. All things being equal, if you rented more than 40 spaces last year without the discount, you probably lost money this year by renting 50 spaces with one.

Offering the second or third month free will reduce your loss, but what is the incremental value? A promoted discount still has to increase rental activity or you are losing money. Offering the first month free makes it easier for new customers to move in and has a much stronger impact on rental activity than second- and third-month offers. You still have to increase move-ins by 15 percent and 12 percent, respectively, just to break even. If you are not achieving that increased activity, you are effectively reducing your price, the value of your tenant base and the value of your property.

Promotion Principles

If you are considering using a discount to stimulate business, make sure it is truly increasing your bottom line. Apply the basics to make a successful promotional strategy:

  • Don't forget the fine print, i.e., "New customers only," "Select sizes only," "Subject to availability," "Offer expires x/x/xx."
  • Make sure your existing customers are not coming in and trading a coupon for their next month's rent. You are trying to attract new customers, not reduce the value of your existing ones.
  • Only offer concessions and discounts on the sizes and types that need the help, i.e., upstairs 5-by-10s or climate-controlled 10-by-15s. If one size fills up during the promotional period, it is no longer available for the discount.
  • Give the customer a sense of urgency and reduce your liability. Always put an expiration date on every promotion.
  • Have a plan. An incremental move-in benefit is your only benchmark of success. Monitor your move-ins and use the information to anticipate others. How many move-ins did you have during the same period last year? At what rental rate? What do you think will happen if you don't discount?
  • Don't honor a discount unless you advertised one. Otherwise, you're giving discounts to a lot of people who were coming to you anyway.
  • Track your results and learn something. This sounds basic, but many operators don't do this
  • Use a tracking and report format that can work with different promotions and give you comparable data.

So, when should we discount? Almost never. But it is acceptable in the following scenarios

  • During rent-up to establish market share. Owners of stable stores around a new facility should relax--the sooner the new guy fills up, the sooner they will be able to raise rates again. Losing 5 percent in occupancy is better than losing 10 percent in rates. If you must react, just cut your rates on the sizes that need help by a price point--2 percent to 5 percent to 10 percent. Most of your sizes will be OK without a reduction or discounting.
  • Only if you know you are priced right. You have to know where the market is before you can tweak your pricing.
  • When you have a plan for discounting and advertising, and know what to expect if you don't discount.
  • When you are ready to track the results and learn from your mistakes.
  • In self-storage management, using the five marketing P's will truly add to your bottom line: "Perfect People and Pricing Prior to Promotions."

Jeff Kinder is the president of Advantage Self Storage in Olney, Md., which specializes in contract management as well as investment, acquisitions and development services. He has worked in the self- storage industry since 1986, including 11 years with National Self Storage and Public Storage in operations management and marketing. In 1991, he moved to Toronto to serve as vice president, operations, for Canadian Mini-Warehouse Properties Ltd., heading up the Public Storage subsidiary. For more information, call 301.774.0243; e-mail jeff@advantagestorage.com.

  • Two-year income = $28,000
  • Two-year income
    w/ first month free = $23,000
  • Difference = 18%

Actual rent = $100 - 18% = $82

Source: Advantage Advisors LLC, 1999


  • Total revenue months = 280
  • Total revenue months (280) x monthly rent ($100) = $28,000 total revenue
  • Total revenue ($28,000) / number of move-ins (50) = $560 average rental income per move-in

Source: Advantage Advisors LLC, 1999


The Bottom Line

The operating expenses of a property consume 25 percent to 50 percent of its revenue. A 5 percent increase to revenue can have a 7 percent to 10 percent positive impact on the bottom line, while a 5 percent reduction of expenses will only add 2 percent to 3 percent to the bottom line. And if payroll, property taxes and Yellow Pages advertising are the property's biggest expenses, what can it cut that will really save that much money?

Increase revenue by 5% = NOI + 7.6%
+5% Revenue

Revenue $350,000 $367,500
Expenses $120,000 $120,000
NOI $230,000 $247,500 (7.61% increase to NOI)

Decrease expenses by 5% = NOI + 2.6%
-5% Expenses

Revenue $350,000 $350,000
Expenses $120,000 $114,000
NOI $230,000 $236,000 (2.61% increase to NOI)

Yes, controlling expenses is important. You need to have a hard-nosed business attitude to control costs--and have systems in place to help you monitor and understand them. But if making an increase in revenue gives you a 3:1 advantage over expense cuts, doesn't it make dollars and sense to focus on maximizing the top line?


Advertising and Promotion Analysis
Direct mail vs. the "Special" banner

Direct-Mail Special
Last year, ABC Storage had 50 renters during month X. This year during month X, the facility has 50 renters, plus four additional renters brought in by a direct-mail promotion offering one month of free rent. The monthly rent for each renter is $100. The average revenue contributed by each renter over the course of his lease is $560 (see Chart 2).

Promotion Benefit:
Average income per move-in ($560) x number of redemptions (4) = Total incremental value ($2,240)

Promotion Cost:
Cost of advertising ($1,500) + Cost of promotional discount (4 redemptions x $100 = $400)
= Total cost of campaign ($1,900)
Net Gain (Benefit - Cost) = $340

"Special" Banner
Now look at the same exact scenario, but using a banner outside the facility to advertise the free-rent special instead of direct mail.

Promotion Benefi:
Average income per move-in ($560) x number of redemptions (4) = Total incremental value ($2,240)

Promotion Cost:
Cost of Advertising ($150) + Cost of promotional discount (4 redemptions x $100 = $400)
= Total cost of campaign ($550)
Net Gain (Benefit - Cost) = $1,690

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