Price It Right

Pricing Strategies
An Overview of Strategy Styles

By Jim Killoran

The following is the second installment of a two-part excerpt from Self-Storage Success, a manual for the development of self-storage properties. For order information, 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 first determine 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 the occupancy of each type and size of unit that we have. In fact, it even highlights those categories that exceed 92 percent occupancy. Each month I print a copy of this report and file it in a folder marked "rate increases." And each month I flip through these reports to see which sizes and types of units have consistently exceeded 92 percent occupancy, 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" in terms of a fixed time period. Generally, I don't think that three consecutive months of 92-plus percent occupancy is long enough, but six months is certainly plenty. So somewhere between three and six months I apply the new rate, depending on my overall feel for how business is going.

All right, now we know when to raise the rates, but by how much? Again there is no hard-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 not less than $3, and I choose to stay with even dollar amounts, although many facilities will allow a rate to end in 50 cents, for example, $34.50. For units with a current rate of $50 or greater, I will increase the rate by no less than $5, more if I think I can get it. How do 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 and you would rent to the next person "off the street," as opposed to an across-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 determination on its acceptability. By observing how well the new rate is being received by my customers, 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 have several, a dozen to be exact, very large units (12-by-40 with 12-foot-high doors) that were intended to house recreational vehicles. In reality, they tend to be rented by commercial 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 a new rate for this size unit. Actually, I'm glad I didn't know about this until after the fact because I probably would have squelched her plan. (I suspect she knew this, which prompted the whole cloak-and-dagger scene). Anyway, she increased the street rate a whopping 60 percent. Yes, 60 percent. And the unit was snapped up immediately. Needless to say, an across-the-board rate increase followed. Nobody moved out. Lesson learned: You won't get more if you don't ask for more.

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

For example, ABC Storage has three sizes of units that are currently 100 percent occupied. It is receiving a monthly gross of $13,500 from these units, and we will assume a 10 percent move-out. Since 10 percent of our tenants in these three unit sizes moved out, 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 units available. And two, look at the difference in annual gross scheduled rents: a net increase of $15,600. Keep in mind that you have incurred no additional expenses to achieve this income. So aside from additional incentive pay for the manager, this new revenue goes directly to the bottom line.

Other Reasons to Increase Rents

There are some markets that fluctuate seasonally. For example, if you are located near a summer or a winter resort area, you likely experience substantial variations in occupancy rates across seasons. Simply stated, know your market, and don't hesitate to adjust your rates to fit the season. If your market is such that you have a steady clientele 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 that value.

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

• Don't call it a rate increase, call it a rate adjustment.
• Notify your tenants in writing, allowing plenty of time before the new rate takes effect. I use between 45 and 60 days notice.
• State the effective date plainly and clearly in the letter.
• Always give the reason for the adjustment. Property taxes went up, or insurance rates or whatever. Embellish a bit if need be, but don't lie.
• To keep confusion to a minimum, show only the new rate, not the old rate and the new rate. And show only the rate for the unit(s) that the tenant rents. Don't send your complete rate sheet.
• Give thorough consideration to the timing of your rate adjustment. Is there a particular time of the year, like during the winter, when the weather or other factors would help to discourage an impulse to rush right down to your facility and move out?
• A final word on rate increases: Listen to your customers. Ask departing tenants why they are leaving. If the reason is the rate hike, they won't hesitate to tell you. If they cite other reasons then your increase is reasonable and has been accepted.

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