A word on pricing

Jim Chiswell Comments
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THIS IS MY FIRST COLUMN OF THE NEW YEAR. WHAT THOUGHTS CAN I SHARE TO INSPIRE AN OWNER OR MANAGER? What new insights can I provide readers into problems they may be facing?

Let's begin with the state of the self-storage industry. I specifically want to discuss the issue of pricing in today's economic climate. Our industry faces a much different business environment than it did at the beginning of 2002 when America and the rest of the world were still reeling from the Sept. 11 tragedies. I am not convinced the nation's economy has recovered from the recession that started in March 2001. As I have traveled the country this past year, I have seen firsthand how much more competitive many cities have become for self-storage.

Self-storage appraiser Charles (Ray) Wilson recently spoke at the Texas Mini Storage Association's annual tradeshow in San Antonio. He pointed out the financial results of the three self-storage REITs from their 10Q SEC filings for the second quarter of 2002. Public Storage, Shurgard and Sovran all reported drops in occupancy levels compared to the same period of the prior year. Occupancy rates in the 84 percent range were the norm, reflecting a higher vacancy factor than in the prior year's period. Public Storage actually reported a negative NOI result compared to the prior year. This is a different result than many people expect from these giant companies.

It appears a number of factors combined to produce these results, and the message is clear: Our industry is not immune to ups and downs in occupancy and rental rates. I see many owners across the country reacting to competitive pressures and downturns in occupancy. Cutting rental rates appears to be the first strategic solution owners are adopting--it is no longer a last-resort option.

The discounting of units is a critical decision that should not be made until all other options have been exhausted to stabilize or increase occupancies. I am seeing some owners slash their street rates or offer to meet or beat any competitor's prices. If you are dealing with fierce competition, first put everything in your business under a microscope before dropping your rates.

You need to look objectively at what might be the real causes of a drop in occupancy. Price alone is generally the fourth or fifth reason a customer selects a specific store. Ask yourself, what has happened to your inbound-call volume? Have your employees' closing ratios changed dramatically? What is the average length of stay for your customers? Are credit-card sales increasing or decreasing? Have you maintained curb appeal? Do you have a positive, customer-service approach to every potential and existing customer? Are your employees' skills as sharp as they need to be? Is your staff working each telephone call like their jobs depend on it? (Surprise--it does!) Do the skills of your part-time and assistant managers measure up to the levels necessary to provide a competitive edge over competition?

Until you can adequately answer these various questions, do not lower your rental rates, because if you cut your rates, I'll lower mine. If you start to give free months of rent, I'll let people move in for free. Where does it end? And just as important, how long will it take to climb back up the rental-rate scale? Every owner should conduct a self-audit of his entire operation and get back to the basics. Many owners need to get reinvolved in their businesses and ensure every employee is participating in the process of the store's audit.

If you have been historically averaging 30 to 40 calls per month from potential customers and that call volume is down to 15 or 20, you must ask yourself why. What changed in your overall marketing efforts in the past six months? Are you still generating the same number of monthly move-outs or has that figured increased? One thing I have learned over the years is, for many owners, their biggest competitor is not another store but the dumpster or Salvation Army. So ask yourself, are you making the entire storage experience a positive one?

Setting rates is not a science but an art. The only rules are the ones you establish for your own store. There is no law that says the rental rate per square foot of a 10-by-10 has to be less than that of a 5-by-15. You don't even have to rent by the month. You could establish a weekly rental program that provides a premium rental rate per square foot over a monthly rental--we all know people tend to stay longer than they think they will. You could also try selling everyone on prepaying for a two- or three-month minimum with no discounts. As a final closing technique, you might offer to freeze a new customer's rates for a period of six months or a year. I know that could hurt a little down the road, but not if it gets your surplus units filled today.

A few owners have started to price their units like upscale hotel rooms. You always pay more for an ocean-view room than one that overlooks the dumpster. In this pricing scheme, the 10-by-10 near the elevator commands a higher monthly rate than the one 200 feet away. The average rate for all 10-by-10s ends up achieving the desired income rate for the square foot budgeted.

Sometimes the pressure of competition is too great and your team is trying to do everything it can, but cutting rates should be the final straw in an effort to maintain market share. Whatever you do, do not lower your stated street rates. Instead, produce a discount coupon that gives new customers the rate you feel is necessary to be competitive. If existing customers learn you have cut your street rates, there is nothing to stop them from demanding to receive that same rate on existing rentals. You might be forced to cut rates on a substantial number of rentals instead of just the 40 or 50 new ones you needed to get back to the 80 percent or higher occupancy range.

Don't put yourself further behind your financial goals for the year by hasty action. Above all else, make sure your entire management team understands the pricing strategy you are establishing for the store.

Good luck this year. And if you happen to be an owner or manager with a 90 percent-plus occupancy and a goal of 6 percent to 8 percent rent increases this year, keep that good news to yourself. Everyone is out there looking for their next site.

Jim Chiswell is the owner of Chiswell & Associates LLC, which has provided feasibility studies, acquisition due diligence and customized manager training for the self- storage industry since 1990. In addition to contributing regularly to Inside Self-Storage, Mr. Chiswell is a frequent speaker at Inside Self-Storage Expos and various national and state-association meetings. He has just introduced the new LockCheckTM inventory data-collection system to the self-storage industry (visit www.lockcheck.com). For more information, cal 434.589.4446 or visit www.selfstorageconsulting.com.

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