By Fred Gleeck
At a recent self-storage tradeshow where I was exhibiting, an operator walked by my booth and looked up at my sign, which read, "How to competition-proof your self- storage facility." As he walked by, I tried to get him to slow down and talk. He paused briefly, looked at the sign and then blurted, "Why do I need you? I'm 100 percent occupied!" But as most intelligent operators know, this is misguided. You never want to be fully occupied, for three reasons: First, you waste advertising dollars; second, you invite competition; and third, you're not maximizing profitability.
Occupancy and Advertising
Every phone call made to your facility from a potential tenant may cost you as much as $80 or $100 in advertising. How did I come up with this figure? Add up all of the marketing and advertising dollars you spend in a given year. Then tally 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 per call. 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 as well take a $20 or a $50 or a $100 bill and burn it. After all, you've paid to get the phone to ring, yet you've got nothing to sell. This is ridiculous. Some operators say, "I put them on a waiting list." The problem is that when people call to inquire about storage, 90 percent of them will rent a unit within the next 14 days.
There are one or two companies that employ people to call around the country and identify areas where facilities are operating at 100 percent. This data is then used to tell developers where they might want to consider building. By operating 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, you don't give them the "full" truth. Rather than gloating about all the money you're making, give the response I use when asked about the state of my business: "We're getting by." Why give people yet another reason to get into the business and compete against you? Aren't there too many of these people as it is?
Our last reason for not operating at 100 percent occupancy is that when you do so, you aren't maximizing profitability. Take a look at the airline and hotel industries as examples of how to set pricing--the right way. If you think of each seat on a plane or every room in a hotel as a storage unit, the goal is to maximize 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 to fill up quickly, the prices will rise quickly. The same thing happens at a hotel. If a day or week is in demand, the rates will be increased to maximize profits. 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. This is an art and a science. Do not alter your rates across the board by a standard percentage. This is the lazy method of adjusting rates. Instead, consider this approach: Let's say you have 500 units. Let's also assume you have five different unit sizes--100 of each. When you get down to just eight or nine units left within a size, bump up the rates. This is a good rule of thumb, but you also have to consider how quickly these changes take place. If units are renting very quickly, you may want to start bumping up the rates when you've got 10 or 12 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'd be better off bumping the rent to $89.
There are some markets around the country that can tolerate rate increases every three or four months (and lucky you if that's where you own). I have a number of clients in California, where no more storage is being built, who can easily raise their rates three times a year. Depending on how strong the demand is for a given unit, you may want to increase your prices strictly for new tenants. If demand is really strong, you'll want to increase rates for new and existing customers.
You may be asking, "But isn't this unfair?" I guess if you're Jerry Brown you might think so (he's a fairly liberal guy). Let me ask you this question: Do the oil companies think about you and how you'll feel when they raise the rates on the gasoline you buy? I don't think so. Most managers hate to raise prices. Why? Because tenants scream about it. Many managers also feel uncomfortable about owners "gouging" customers. If you're an owner, I hope 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 to understand how necessary they are for revenue maximization. I can't remember how many times I've suggested clients raise rates against their managers' wishes and they only had one or two tenants move out. When this happens, you know you probably could have raised rates even more. If managers get a hard time from tenants, I suggest they lay the blame on the owner, who is always a convenient scapegoat and can be made to look like the bad guy if necessary!
Pricing decisions should never be emotional. They should be based entirely on the numbers. And keep in mind price adjustments go both ways. Sometimes, you may want to lower prices based on demand. If the demand for a given unit size is low, you'll want to offer specials to bring people in. For example, if you are traditionally slow in the winter months with your 10-by-15s, then you need to offer some kind of a special winter rate on those units. Make sure, however, the special doesn't extend into the time period when demand for that particular size goes back to "normal."
This method of pricing will occassionally produce some odd results. I have seen one situation where the price of a 10-by-10 was almost as high as the price of a 10-by-15. Demand for the smaller unit was greater and the 10-by-15s weren't moving so well. So what? Adjust your prices based on demand. The market will always tell you what to do.
Another frequent question I am asked is: "Is it fair to charge different rates to different people for the same unit?" Let's go back to our example of airlines. Have you ever been on an airplane and asked the people around you what they paid for their tickets? I have. What did you find out? You hardly ever find two people who paid the same exact fare. Is this illegal? I hope not, for the sake of the airlines! It's not only legal, it's great business. The airline adjusts 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? The answer is: that rate which maximizes profitability on a short- and long-term basis. Profitibility is best achieved by keeping occupancy rates between 92 percent and 95 percent within each unit size. This way, you'll always have something to rent, but you'll be making the most the market will allow. If you follow these suggestions, you'll not only be able to raise your prices, you'll be able to keep your demand for storage high. Here is a summary:
- Don't be afraid to raise or lower your occupancy rates to meet demand.
- Adjust your rates for units within a unit size, not across the board.
- Never operate at 100 percent occupancy.
- Get managers on board with this pricing philosophy. Explain why it is necessary.
- Continue to market aggressively, even when you're doing well. All it will allow you to do is increase your prices.
Fred Gleeck is a self-storage profit-maximization consultant. He helps storage owners before and after they get into the business. He is the author of Secrets of Self Storage Marketing Success--Revealed! and numerous other training items for self-storage operators. To get regular tips on self-storage, send him an e-mail at [email protected]; call 800.FGLEECK (345.3325).