We're Dead-Eyes All Right--Right in the Foot

May 1, 2000

6 Min Read
We're Dead-Eyes All Right--Right in the Foot

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We're Dead-Eyes All Right--Right in the Foot

By Harley Rolfe

Most self-storage operators set themselves up for the most vicious type of businesspressure. The story of unbridled price competition needs to be told.

I have usually danced around the subject, trying to avoid any doom-and-gloomexpressions about troubling aspects of the industry. After all, this is a family show. Butwords like "quicksand" and "quagmire" spring to mind when dealing withstraight price competition. The causes and effects are well-known.

"Location" distinguishes some facilities from others, but additional buildingis diminishing that distinction in many areas. There are regular references in thismagazine and in the recent Inside Self-Storage Factbook about"saturation" and overbuilding. The subject is on the table.

Our Soft Underbelly

The industry has this dark side, and most offerings are a commodity. Such offerings arequite susceptible to aggressive price competition. That's the soft underbelly ofself-storage ownership.

Let's trace the buy/sell dynamics of a commodity market. The best example is theagricultural commodity markets. The exchange itself (Chicago Mercantile Exchange) definesfor each category (November wheat, April porkbellies, etc.) all the important features ofeach traded item. Those are primarily the quantity/sale, grade or quality, delivery pointand terms. All are carefully and deliberately standard. People throughout the world canbuy and sell, knowing exactly what they're doing. Bidding sets the price. No one knows inadvance what that will be. Such is the fate of agricultural-commodity suppliers.

And self-storage? We offer proximate identical choices, too, then give callers ourstandard language (6-by-12, 10-by-20, etc.), and often post our prices on the office wall.That's a commodity approach. But we control our situation, farmers don't.

The Prospect Needs a Reason ... Anything Will Do

Every buyer must have a reason, some difference, on which to base his purchasingdecision. He cannot act without one. When confronted with a situation where everything(including price) is the same, the prospect must resort to something exterior to thesituation to permit him to act. He may flip a coin, choose the facility with the name thatcomes first in the alphabet. Ridiculous? Not when the prospect needs to do something andcan't discern any difference. He knows that he's done something goofy, but your marketingprogram didn't give him any choice.

It's Just a Matter of Time

When the first facility goes up in a given area, it probably underserves it. The ownermay have limited capital or ground or is conservative (or his bank is). So there is marketspace for another facility, and when it goes in, nothing much happens. They're both full.It seems that additional units can be added with impunity. But lurking in the economiclandscape is a cliff. And the arrival at the precipice is sudden. When the additionalunits being added finally exceed the area need and facilities are experiencingunacceptable vacancy, any operator's single recourse is to differentiate itself bydropping rates.

How Far Is 'Down'?

The facility has to drop rates below those of its rivals or there is still no reasonfor the prospect to act. By how much? Enough to give the prospect reason to stop shopping.That can be very little if the prospect is tired of bargaining for nickels. Withself-storage, the whole process seems a little silly because our rates just aren't thathigh. Is there a real difference between $45 and $47 per month? Nope. The issue here is inproviding the prospect with some way--any way--to distinguish one choice from another andpermit a prospect to make that decision. It's imperative. He's stuck until he does. That'show the spiral begins. If just meeting the competition were enough, then prices mightstabilize. But the fact that the price must beat the other guy forces the downward spiraluntil something enters the equation to stop it. Is it any wonder that this process temptssuppliers to get with their brothers to stop the rate slide? In so doing, they risk thefarm, but that may seem like a reasonable risk, given the box they're in.

The tragic thing is that as the price drops, no additional units are being sold. Theprice elasticity of self-storage is already very low, so lowering the price just meansthat the amount of collective income from all units sold drops, and nothing good accruesto the facility owners for the sacrifices they make. They just hope that the problem blowsover.

Operators are in that fix because they choose not to distinguish themselves toprospects. Little in the original development cycle is aimed at preventing the condition.There is an inherent attitude that, indeed, we are offering a commodity and the smartestthing we can do is control costs. Initially, refuge is taken in citing their uniquelocation as the distinct feature. But that can be ephemeral.

The Scary Part

How far can prices drop? Where's the floor? Unless there is a demand upsurge, they willdrop until it is costing (in actual cash outlay) a facility more to supply the next unit(called the marginal unit cost) than it is receiving in income. When that happens, somesuppliers will quit. They will not/can not expend cash to stay in the market. They dropout--and save the day for their rivals. The supply is now diminished by the capacity ofthe drop-out and the prices can stabilize.

In self-storage, what is that marginal unit cost? Well, how much in actual cash outlaydoes it take to rent one more unit? Damn little. In those cases where there are facilitymanagers, I suggest to you that that the cost of renting the next unit is zero.Thus, there is no barrier to a drop in prices in this industry. That's scary.

Also, prospects will get onto the act and egg you on for discounts and deals. The devilin that situation is that the representations by prospects while bargaining are notreliable. He says that Pete's Storage just offered him $45. Will you match that? You're at$50. You agree to $45. Pete finds out. Guess where Pete's next rate quote will be?

But do you believe the prospect remarks about Pete? I don't. He says that at $45, thecontract is yours. We know that he needs a clear reason to buy. That means that Pete wasprobably at $47 and he's pushing you to get that distinctive difference. But should youhave met the prospect bid? You, reader, take it from there. That's the price spiral. Forprospects, it's a game; for you, it's a lot more.

Prospects Are Rookies

The prospect's situation affects yours. Most prospects are rookies at buyingself-storage. Because any buying decision can be stressful, the buyer wants the process tobe as easy as possible. Thus, his inclination is to try to boil off all the features inthe various facilities' offering choices to nothing, freeing him to simply choose thelowest cost. Nothing is easier than choosing the "cheapest." Even rookies can dothat. That opens the way for the above sequences to kick in.

Too Conceptual?

Once you are in the price war, there is little you can do. The only indemnity isprevention if you wish to avoid this quagmire. You simply cannot permit yourself to beseen as the same as your competition. To overcome the desire of the buyer to see allofferings as the same takes some effort. Time for a dose of marketing!

Missed some previous issues? Check the web at www.hardnosed.com.

Harley Rolfe is a semi-retired marketing specialist whose career includesexecutive-level marketing positions with General Electric and AT&T. He also ownedlodging and office facilities for more than 20 years. Mr. Rolfe holds a bachelor's degreein economics from Wabash College and a master's degree in business administration from theUniversity of Indiana. He can be reached at his home in Nampa, Idaho, at (208) 463-9039.Further information can also be found in Mr. Harley's book, Hard-Nosed Marketing forSelf-Storage.

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