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Three-legged stools

The 3-Legged Stool Approach to Self-Storage Revenue Management

One of the most important areas of self-storage ownership is revenue management. Follow the “three-legged stool approach” to create program that will yield positive results.

Self-storage is a lucrative business, and it can be easy to adopt a position of comfort and lose sight of the big picture. Perhaps the most important area of facility operation on which every owner needs to be laser-focused is revenue management. Often, owners aren’t aware they need to take action until their property is underperforming. Follow these guidelines to create a revenue-management program that will yield positive results.

An Aggressive Program

The first step in turning around any underperforming property is to implement an aggressive revenue-management program. By doing so, it’s typical to see an increase in gross revenue of 18 percent or more in the first year.

What’s an aggressive program? Think of revenue management as a three-legged stool. For the stool to remain level, all three legs must be the same length; otherwise the seat is out of balance and money will roll off onto the floor. We don’t want that.

Let’s examine the three legs: occupancy, rate management and rent increases. While focusing on any of one these may improve revenue, each should be built equally, creating a balanced approach. First, consider where you want to be in your market. When it comes to raising rates and sending rent increases, fear can become a major factor and one that must be contained. Maximizing revenue takes courage and tough decisions.

Everyone wants to be a market leader. Becoming one takes effort. You must work harder than your competitors. You must train staff to be better business managers and commit to maintaining your properties for cleanliness and overall condition. If you ask customers to pay you more than a competitor, there must be a compelling reason behind it.

Occupancy

Self-storage operators often think they want their properties to be 100 percent occupied. This is flawed thinking. While there may be short-term situations in which your properties reach 100 percent, such as hurricanes, students storing for the summer or some other seasonal rush, maintaining occupancy that approaches 100 percent can be damaging to continuing revenue opportunities.

Being full is like having a store with empty shelves—you have no inventory to sell. If we can’t meet a customer’s needs, he goes elsewhere. All the money spent marketing to get that customer through the door is wasted.

Begin thinking about each unit type as a product on a shelf. For example, you may have drive-up 5-by-10s, interior 5-by-10s and climate-controlled 5-by-10s. These are three different products, and you should always have one or two of each type available so you never risk losing a potential customer by not having what he needs.

If optimum occupancy is in the 85 percent to 95 percent range, how do you maintain that level? Remember, occupancy is one of three legs of the revenue-optimization stool. It determines how rates are set and how aggressive you are with rent increases. If occupancy is low, rates should be low when compared to competitors, and you should be conservative with rent increases. When occupancy is high, rates should be higher than competitors and increases should be more aggressive.

While the primary focus here is on overall facility occupancy, look for exceptions. A site may only be operating at 70 percent occupancy overall, but could be 100 percent occupied on 10-by-10 units. While that means it’s probably time to look at lower rates on other sizes, for 10-by-10s, you want to be leading the market on price and giving these customers rent increases.

Rate Management

Correct pricing is critical to overall success. Here’s a simple truth: If prices are too high, occupancy will suffer. If prices are too low, you’re leaving profit on the table. Let’s look at some examples for making sound rate-management decisions.

In Scenario 1, 5-by-5 units are priced mid-range of your competitors. Let’s say we’ve had this rate for 60 days and demand tracking shows 10 inquiries and six rentals for a 60 percent capture rate. While that capture rate is low, you only have two available units and two competitors with higher rates. If you keep the rate at $32, you’ll be losing money on those last two spaces. In this case, a $5 increase to $37 is warranted. You’re still $3 below your highest competitor but have increased revenue potential on those two units by more than 15 percent.

Now let’s look at a Scenario 2, with 16 available units and only 80 percent occupancy. Take a close look at the capture rate. You’re on the low end, but you’ve got quite a few spaces not bringing in revenue. If you discover, through tracking demand and capture, that over the past 60 days you’ve been capturing only 60 percent—even though this is at the bottom end of market rates—consider dropping even lower. It’s all about balance. When you’re below 85 percent occupancy or have more than about five spaces available, capture rate becomes more important than price. Low revenue is better than no revenue.

On the other hand, if over the past couple of weeks you’ve had a capture rate of 80 percent or more, consider a small bump in rates. Watch closely and be prepared to drop the rate back down if you start missing opportunities.

The key to rate management is quick reaction to trends. When occupancy is high, inflate rates to maximize revenue even if it means missed opportunity. When occupancy is low, focus on capture rate. Stay above 80 percent. When capture is high, see if the market will support higher rates. When capture is low, adjust prices down to avoid missed opportunities.

In Scenario 3, we have half our inventory of 5-by-10s making zero revenue. We’re more or less in the middle of market pricing. Indication would be to lower the rate and, in most cases, that would be correct.

Remember, low revenue is better than no revenue. Let’s get those 50 empty spaces producing. Maybe we initially drop this rate to $47. Through tracking we find we still only capture about 50 percent of our opportunities. A competitor is $45, so I recommend something drastic—say dropping to $37 or $39 to achieve a capture rate of 80 percent or more. Don’t lose opportunities with this many spaces available. Once capture rate and space-type occupancy are above 80 percent, then we begin to raise rates back up to match or surpass competitors.

Rent Increases

Mention rent increases to a manager who’s not trained in revenue optimization and you get a “deer in the headlights” reaction. When customers receive rent increases, they complain. Many threaten to move out, but very few actually do.

Here’s the thing many people have a difficult time wrapping their brain around: Sometimes, having a customer vacate is a good thing. Let’s say the current rate on a unit is $99 and you’re at or near 100 percent on that space type. The customer is only paying $72, and you issue a $7 increase, which is slightly less than 10 percent. If that customer does in fact vacate, you’re going to re-rent that space to someone at $99 for a revenue increase of $27.

Can rent increases be damaging to your business? Absolutely, but not if you’re sensible about making them work for you, not against you. I have a few “rules of thumb” when it comes to rent increases:

  • Avoid excessive surges. Keep rent increases to less than 10 percent of the customer’s current rent.
  • If space-type occupancy is low, don’t increase. If a space type is below 80 percent, think twice before giving increases. Remember, low revenue is better than no revenue.
  • Don’t raise rent on new customers. You’re trying to build a relationship and develop them into long-term customers. Sending an increase to a customer who’s rented with you for less than six months sends the wrong message.

Putting It All Together

When you cut through the minutia and boil it to its essence, our mission is simple: Generate maximum revenue. We work hard to meet customers’ needs and provide a well-maintained property with exceptional customer service. In return, we want to build a company in which we maximize potential, providing higher revenue. This three-pronged approach of occupancy, rate management and rent increases will enable any storage property to its maximize potential revenue.

Monty Rainey is owner of RPM Storage Management LLC, a Texas-based third-party management company that performs self-storage feasibility studies, due diligence, staff hiring and training, and more. Prior to launching RPM in 2014, Monty served as a district manager for a self-storage real estate investment trust and property-management firm. In his career, he’s led the successful management of more than 100 properties in Colorado, Oklahoma and Texas. For more information, call 830.832.9496; visit www.rpmstoragemanagement.com

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