Part of creating an annual operating budget for your self-storage facility involves determining where the rental rates currently are and where you want them to be in the year ahead. If you’re a site manager, you can help your owner plan by doing a comprehensive review of your customer base. Is the time right to eliminate some or all of your discounts? Are your “board” rates in line with those of your competition? Finally, can you effectively increase facility income without sacrificing occupancy?
Many managers are reluctant to raise rates for existing customers because they fear a mass move-out event. Generally speaking, this rarely happens. The fact is, if you have high occupancy within a certain unit size, you can slightly raise rates for these renters, and a majority of them will stay.
For example, let’s say you have 100 units of a specific size. You charge $100 per month, and the units are 95 percent occupied. Assuming everyone is paying on time, you’re generating $9,500 per month on these units. If you increase the rate a mere 5 percent, or $5 per month, you’ll raise your monthly income by $475 if all the tenants all stay.
Now let’s say five customers move out because of the increase. This drops your profit margin by $500 per month, but you can now rent the newly empty spaces at the new rate. If you fill all five of them, you make up that $500, plus you’re another $25 ahead. On top of that, you’ll make $105 instead of $100 per unit per month on the remaining five vacant units. This may seem insignificant, but the extra income can offset some of the probable increases in utility costs, insurance and other facility expenses during the year.
Another way to increase your income is by eliminating discounts. Let’s revisit our example from above, but this time we’ll assume you have 50 customers paying $100 per month and 45 customers paying $90 per month due to a discount. You’re generating $9,050 per month in income.
By increasing the rental rate for those 45 discount customers by just $5 per month, you increase your income by $225 per month, and they’re still paying less than your board rate. However, you’ve now gotten them closer to where you want them. Assuming the occupancy trend continues, you should be able to raise their rate again in about nine to 12 months and show continual increases in revenue.
One of the ways to justify a rate increase (if you feel like you need to) may be to simply see what your competitors charge for a similar unit. If you’re charging $100 for a certain size and your closest competitors are charging $110, you can increase your rate by 5 percent and still be lower. You can certainly use this as a marketing tool.
However, even if you move your rates closer to the top of the market, you should be able to emphasize the positive features of your facility that will entice customers to spend their money with you vs. “the other guys.” You should feel confident enough about your operation to be able to do this.
The Question of When
When it comes to raising rates or eliminating discounts, the question is often when to do so. There are many different strategies you can use. You can change rates based on a customer’s anniversary date, or the season, or the customer’s length of stay, etc. The most effective time to raise rates is when occupancy in a particular unit size is high. You want to be relatively sure that the next customer through the door will be willing to pay a little bit more because the demand is there.
Any time you see the traffic to your facility increase, you should be thinking about raising rates:
- First, increase your board rates.
- Second, increase the rates of existing customers who have discounts.
- Lastly, increase the rates of customers who were (until step one above) paying board rates.
Have a plan that will take advantage of increased demand before it actually happens. It’s easier to raise rates on future customers than existing ones.
Consumers will often continue to buy goods and services even though the cost goes up. For example, fast-food restaurants are slowly increasing their prices by 5 percent to 10 percent, but people are still buying their food in record numbers. Why? Because the demand is there.
The self-storage business is no different, yet we are often reluctant to raise our rates for fear of overpricing and losing occupancy. By employing a strategy as outlined above, you take a small risk to increase your income, but you have a lot to gain when the rate increases take effect.
Our costs are increasing every year. To maintain a profitable operation, you must have a tactic to raise rates and your overall profitability. After all, we’re in the business to make money, and we should regularly embrace the challenge.
Analyze your rates compared to your competition, review your customer data files, and raise rents on discounted units first. If your occupancy is high in a certain unit size, raise it now before the next customer comes in. You’ll start seeing improvements in your income stream immediately.
Mel Holsinger is president of Professional Self Storage Management LLC, which oversees the operation of more than 40 facilities in Arizona, Colorado and Texas. Mr. Holsinger has been in the self-storage industry for more than 25 years. To reach him, call 520.319.2164; e-mail [email protected]; visit www.proselfstorage.com.