By Jeff Kinder
One of the most important tasks we share as self-storage operators--whether we have 1,400 facilities or 1,400 square feet--is deciding how much to charge for our units. As the industry matures, convenience remains the No. 1 reason consumers choose one facility over another. However, as consumers learn more about the product, a growing number are adding price and value to their list of motivators.
We all want to create value in our properties. We all want to move the profitability of our own properties and the industry higher. This creates the need to be more consistent and sophisticated in the way we price our product. It requires us to maximize the value of our inventory and avoid the pitfalls of being priced out of the market, in either direction. The famous Sicilian mathematician Archimedes once said, "Give me a lever that is big enough, and I can move the world." Pricing is the biggest lever you have for moving your property toward profitability and creating value.
Profitability is easy enough to understand. The more you take in and the less you pay out, the more profitable you are. Expenses are relatively fixed. Payroll and property taxes are the two biggies. The rest of the expenses all add up, but you make a bigger impact on your bottom line by tweaking out another 2 percent to 3 percent in revenue than you do by cutting your trash-pickup cost in half. Yes, you have to watch your expenses and manage your costs. But if you are neglecting the top line, you are leaving your best player out of the game.
When we think of value, the first thing that comes to mind is that a low price means value to the customer. But what about the value you are creating for yourself and your family? Why did you get into the business? Did you really want to maximize the value of your investment, or did you just want to buy yourself a job? As I work with owners and listen to many of the people who attend tradeshows for this industry around the country, I am amazed at how many of them have not raised their rates in the past few years. Most haven't really thought about it. Some are just happy they can make their mortgage payments, take a few bucks home and be 95 percent occupied.
Occupancy is a wonderful thing, but I'd rather have the money. A quiet tenant base is wonderful, but when it comes time to sell, your property is not going to be worth $X per square foot just because the guy a mile over sold his for that amount. Your tenants have to be worth the same, or more. Your long-staying, strong-paying tenants will not contest that small annual increase; but if you've taken your eye off the ball and have to play catch-up, a large increase creates a reason for customers to rethink your value. Even if you are still the cheapest in the market, a big increase will send a lot of people out the gate. Maintain the value of your property by regularly reviewing your rates and making the appropriate adjustments.
Creating and Maintaining Value
So what are the appropriate adjustments? First, look at the factors that create value. Storage space is a commodity. Supply and demand are the biggest factors we deal with in pricing our product. If a new competitor opens up in your trade area, there is new supply. That supply will have to be absorbed before there will be excess demand that allows you to raise prices. What we are dealing with, however, is supply and demand for each individual product, not storage in general. If your local supermarket has too many boxes of cereal, they don't run a special on steak, too. Just because someone opens a new climate-controlled, four-story super storage down the block, doesn't mean you should put your whole facility on sale. You may have to run a special or reduce the price on your inside 5-by-10s or 10-by-10s to keep from losing too much marketshare while the new guy fills up, but you can still increase the prices for your drive-up 10-by-10s and 10-by-20s.
Check the market. Determine your value compared to your competitors. If you have visibility, easy access and great curb appeal, you should not be as concerned with the property down in the industrial park or out on the other side of the airport. They can only attract business out of the Yellow Pages. Even if they have all the bells and whistles, they have to make it worth the drive to go past your place to get to them. Let them stay under you. You'll get more than your fair share of their business as they drive by, even if your rates are higher.
If your biggest competitor has 88 10-by-30 units, he may only get $275 a piece for them. But if you only have 15 of the same size unit, you can probably charge 10 percent more and stay full. Certainly, your sales team can help you create extra value in the way they answer the phone and take care of customers at the desk. All storage is not created equal. What do you have that gives your place value? How can you and your team merchandise that value so you don't always have to sell based on price?
Know your operation. How many move-ins did you have last year? If your occupancy is down, is lower pricing or a move-in special the answer? Maybe you had a special last spring and you filled up with students. They all moved out in September and now your occupancy is down. However, if you still have good move-in activity, lowering your pricing or offering specials is just leaving money on the table.
What other changes have you made? New managers and new policies will have an impact. Don't always react to changes by lowering your pricing. If you have good move-in activity compared with other years, you may even manage a rate increase while your occupancy is lower, and take advantage of all the new customers at the higher rate. Seasonal activity is a great opportunity. If you know you have more move-ins in May, June and July, raise your rates in March or April. Don't wait until you are full in July or August. Nobody can move in at the higher rate if you are full. You will have more money in the bank at the end of the year if you get the increase in early, even if you only get to 92 percent instead of 95 percent in August.
If your average annual occupancy is more than 88 percent to 90 percent, you are not charging enough. If you have not reviewed and adjusted your rates on a size-by-size basis in the past few months, you are leaving money on the table. Whatever your excuse is for not reviewing your pricing regularly, it is wrong. You can always manage an increase, even in the difficult years, adding 4 percent to 5 percent regularly.
I've provided some examples and basic ideas as to what and what not to do in terms of pricing and value. The key is to make sure you are doing something on a regular basis. As you consistently monitor the value of your tenant base, move-in activity and relative value in your trade area, you'll come up with better systems. I look forward to speaking with many of you and sharing those ideas at the upcoming Inside Self-Storage Expo in Las Vegas.
Jeff Kinder is the president of Advantage Advisors, LLC, and principal in The Advantage Group. Advantage owns and operates self-storage facilities in the United States and Canada for its own account, and is a fully integrated acquisitions, development, financing and management-services supplier to the self-storage industry, helping individuals, corporations and asset managers maximize their self-storage investment.
Mr. Kinder has been in the self-storage business since 1986. He worked for National Self Storage and Public Storage for 11 years in operations management and marketing. In 1991, he moved to Toronto, to serve as vice president, operations, for Canadian Mini-Warehouse Properties, Ltd., heading up the Public Storage subsidiary, and in 1997, he started Advantage Self Storage. For more information, call (301) 774-0243; e-mail [email protected].