Occupancy Rates as a Marketing Tool

By Fred Gleeck

At a recent self-storage tradeshow where I was exhibiting, anoperator walked by my booth and looked up at my sign, which read, "How tocompetition-proof your self- storage facility." As he walked by, I tried toget him to slow down and talk. He paused briefly, looked at the sign and thenblurted, "Why do I need you? I'm 100 percent occupied!" But as mostintelligent operators know, this is misguided. You never want to be fullyoccupied, for three reasons: First, you waste advertising dollars; second, youinvite competition; and third, you're not maximizing profitability.

Occupancy and Advertising

Every phone call made to your facility from a potential tenant may cost youas much as $80 or $100 in advertising. How did I come up with this figure? Addup all of the marketing and advertising dollars you spend in a given year. Thentally all of the calls you receive from prospective customers in the same year.Divide the number of dollars by the number of calls and you have your cost percall. In a city like Los Angeles or Phoenix, this cost could well be more than$75. In your market, it might only be $20.

When people call your facility and you're 100 percent occupied, you may aswell take a $20 or a $50 or a $100 bill and burn it. After all, you've paid toget the phone to ring, yet you've got nothing to sell. This is ridiculous. Someoperators say, "I put them on a waiting list." The problem is thatwhen people call to inquire about storage, 90 percent of them will rent a unitwithin the next 14 days.

Inviting Competition

There are one or two companies that employ people to call around the countryand identify areas where facilities are operating at 100 percent. This data isthen used to tell developers where they might want to consider building. Byoperating at full occupancy, you essentially invite competition into your area.I'll go so far as to recommend that when people ask you how business is, youdon't give them the "full" truth. Rather than gloating about all themoney you're making, give the response I use when asked about the state of mybusiness: "We're getting by." Why give people yet another reason toget into the business and compete against you? Aren't there too many of thesepeople as it is?

Maximizing Profitability

Our last reason for not operating at 100 percent occupancy is that when youdo so, you aren't maximizing profitability. Take a look at the airline and hotelindustries as examples of how to set pricing--the right way. If you think ofeach seat on a plane or every room in a hotel as a storage unit, the goal is tomaximize profitability on each during any given day or flight.

How do they do this? They set their prices where they think they should be,and then move them up or down based on demand. If a certain flight starts tofill up quickly, the prices will rise quickly. The same thing happens at ahotel. If a day or week is in demand, the rates will be increased to maximizeprofits. This is the same way to work with your occupancy rates.

You need to set your prices based on occupancy rates within a unit size. Thisis an art and a science. Do not alter your rates across the board by a standardpercentage. This is the lazy method of adjusting rates. Instead, consider thisapproach: Let's say you have 500 units. Let's also assume you have fivedifferent unit sizes--100 of each. When you get down to just eight or nine unitsleft within a size, bump up the rates. This is a good rule of thumb, but youalso have to consider how quickly these changes take place. If units are rentingvery quickly, you may want to start bumping up the rates when you've got 10 or12 remaining.

How much should you raise your rates? The real answer is, as much as you can.The problem is we don't know what this magic number is. In a softer market,you'll want to bump up your rates without moving to the next major increment.For example, if you're at $83, you don't want to go all the way up to $90. You'dbe better off bumping the rent to $89.

There are some markets around the country that can tolerate rate increasesevery three or four months (and lucky you if that's where you own). I have anumber of clients in California, where no more storage is being built, who caneasily raise their rates three times a year. Depending on how strong the demandis for a given unit, you may want to increase your prices strictly for newtenants. If demand is really strong, you'll want to increase rates for new andexisting customers.

You may be asking, "But isn't this unfair?" I guess if you're JerryBrown you might think so (he's a fairly liberal guy). Let me ask you thisquestion: Do the oil companies think about you and how you'll feel when theyraise the rates on the gasoline you buy? I don't think so. Most managers hate toraise prices. Why? Because tenants scream about it. Many managers also feeluncomfortable about owners "gouging" customers. If you're an owner, Ihope your managers don't feel this way, but it's a very common sentiment.

Getting Everybody on Board

In order for managers to be on board with price increases, they need tounderstand how necessary they are for revenue maximization. I can't remember howmany times I've suggested clients raise rates against their managers' wishes andthey only had one or two tenants move out. When this happens, you know youprobably could have raised rates even more. If managers get a hard time fromtenants, I suggest they lay the blame on the owner, who is always a convenientscapegoat and can be made to look like the bad guy if necessary!

Pricing decisions should never be emotional. They should be based entirely onthe numbers. And keep in mind price adjustments go both ways. Sometimes, you maywant to lower prices based on demand. If the demand for a given unit size islow, you'll want to offer specials to bring people in. For example, if you aretraditionally slow in the winter months with your 10-by-15s, then you need tooffer some kind of a special winter rate on those units. Make sure, however, thespecial doesn't extend into the time period when demand for that particular sizegoes back to "normal."

This method of pricing will occassionally produce some odd results. I haveseen one situation where the price of a 10-by-10 was almost as high as the priceof a 10-by-15. Demand for the smaller unit was greater and the 10-by-15s weren'tmoving so well. So what? Adjust your prices based on demand. The market willalways tell you what to do.

Another frequent question I am asked is: "Is it fair to charge differentrates to different people for the same unit?" Let's go back to our exampleof airlines. Have you ever been on an airplane and asked the people around youwhat they paid for their tickets? I have. What did you find out? You hardly everfind two people who paid the same exact fare. Is this illegal? I hope not, forthe sake of the airlines! It's not only legal, it's great business. The airlineadjusts the rates based on demand. You should be doing the exact same thing

The 'Right' Occupancy Rate

What is the "correct" rate at which to keep your occupancy? Theanswer is: that rate which maximizes profitability on a short- and long-termbasis. Profitibility is best achieved by keeping occupancy rates between 92percent and 95 percent within each unit size. This way, you'll always havesomething to rent, but you'll be making the most the market will allow. If youfollow these suggestions, you'll not only be able to raise your prices, you'llbe able to keep your demand for storage high. Here is a summary:

Fred Gleeck is a self-storage profit-maximization consultant. He helpsstorage owners before and after they get into the business. He is the author of Secretsof Self Storage Marketing Success--Revealed! and numerous other trainingitems for self-storage operators. To get regular tips on self-storage, send himan e-mail at [email protected]; call 800.FGLEECK (345.3325).