By Gregory D’Atri-Guiran
With operators battling over every rental dollar, discounting has become a widely used marketing strategy in the self-storage industry. But “one month free” doesn’t have to be your facility’s calling card. Instead, adopting an automatic credit card payment program can reduce collection time, and increase occupancy and profit. Here’s how.
In 1987, my company built its first self-storage facility in the west end of Toronto, Ontario, Canada. As we were setting up the banking arrangements, I disagreed with our then bank manager over the legality of automatically charging customer credit cards.
In his opinion, transactions could be invalidated if there wasn’t a separate signature for each monthly charge. In weighing the pros and cons, we ultimately decided the risk of a customer trying to reverse the charges was far outweighed by the savings we’d achieve in collections. In the 23 years since, we’ve only had two such reversals out of the thousands of transactions we process monthly, both of which were resolved at minimal cost.
The real genius, though, was in the implementation. We created a two-tier pricing strategy in which we charged higher rents for cash transactions, and offered a 10 percent discount to customers who authorized us to automatically debit their credit cards each month. With this system, we enticed 70 percent of our tenants to the automatic payment plan.
We came to realize the structure has other benefits as well. The first was it created a natural “sorting” process. Anyone with good credit and money-management skills would generally opt for the convenience of the credit card discount program and the 10 percent savings. We also knew in advance those who would likely struggle to meet their payments and, with a lower collection load, we could more easily keep on top of those accounts. We were also paid for this extra work in the higher rental rate we charged.
The greatest benefit has been that we get much more longevity out of our automatic-payment customers because their storage-rental fees get buried in their monthly expenses along with their gas, dining, shopping and such. The more you contact the customer, the more likely he is to move out, as you constantly bring the storage fee to the top of his mind. The net result of our strategy has been higher occupancy rates than our competition.
Stop the Discounting
You might ask why I’m sharing my prize business strategy so publicly with my competition. It’s due to the foolish free-first-month discounting I see far too much in the marketplace these days. In an industry based on short-term rentals, it’s foolhardy to give away the first month’s rent.
Another major disadvantage of this kind of discounting is it attracts the most undesirable and unreliable customers. Often that first month free is all that’s used, and the owner has the work and liability of disposing of the junk deposited in the unit.
The final slap in the face with this kind of discounting is that by giving away the upfront revenue, you lower the value of your service in the eyes of renters. You condition them to think your rates are negotiable, and they are then rarely satisfied to pay the rent that is due. Your hope is this will be an ongoing relationship; however, the stage you set is the one you will have to live with, so beware.
When your total sales presentation is based on discounting, it defines the value of your service and the type of customers you attract. Bargain-hunters will always be bargain-hunters—only the deal you’re offering to buy their business will never be enough for them. When price is all you have to offer, what happens when the competition matches or beats it?
The error you make when you decide to discount is assuming you’ll get a much larger share of the business with the lower price. But the reality is you’ll get your share of the business―and your competitors will get theirs―based on location, service and a multitude of other factors. Furthermore, the business gained by the discount is often outweighed by the value you give away. The net result is a reduction in revenue.
Yes, a poor economy and low occupancy rates have driven self-storage owners to this poor judgement. I can only encourage you to adopt the same time-proven strategy that has worked for my company for more than 20 years. Imagine if it became the standard to require a credit card to rent a self-storage unit? Have you ever tried to book a hotel room or rent a car without one?
If we move away from that year-round discounting mentality, and provide incentives for customers to use their credit cards, we can start to solidify occupancies and perhaps all get back to collecting rent for the first month.
Gregory D’Atri is the founder and president of Storwell Self Storage, which operates three facilities in Toronto, Mississauga and Scarborough, Ontario, Canada. To reach him, call 416.534.5555; e-mail email@example.com ; visit www.storwell.com.