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Follow the Competition

April 1, 1998

8 Min Read
Follow the Competition

By Jim Killoran

The following is excerpted from Self-Storage Startup, a manual for thedevelopment of self-storage properties. For order information, contact LeManx InformationProducts, P.O. Box 542, Shelton, WA 98584; (800) 764-1909.

While there are at least five different pricing strategies that are considered to becommonplace, I like to believe that there are about as many variations to these fivestyles as there are self-storage owners and managers. To give you some background, I willdefine each of the five briefly, and then explain, in depth, the variation that I findmost successful.

Follow the Competition

Unless your project was the very first one ever built, or you have the only facilitywithin a hundred miles, following the competition is likely how your rates wereestablished in the beginning. This is certainly an acceptable starting point, and afterall, your customers are going to do the same thing that you did: call your competitors andcompare rates.

Price Penetration

The definition of this strategy is simple: Be the lowest price facility. You target theprice-conscious customer (who in my opinion is not the best-value customer). You are alsosetting the stage, whether intentionally or not, for a price war. As you will learn later,this is a war with a guaranteed result: Everybody loses.

Aggressive Lease-up

As the name implies, this strategy is employed by new facilities just getting underway,or by facilities that have just completed a major expansion. Using this strategy in theformer situation is justified if done properly. However, I am opposed to its use in thelatter situation because it undermines the goodwill that you have with your currentcustomers. We will discuss better alternatives.

Skimming

Also known as market skimming or skimming the cream, the theory behind this strategy ispricing your product such that you attract a clientele that is less price conscious (andperhaps more service conscious). This customer is less likely to be a problem tenant,thereby reducing delinquencies and the associated management headaches. While it may seemto be more difficult to fill your facility with such customers--after all, there are onlyso many of them to go around--the most successful operations have done just that.

ROI (Return on Investment)

Sometimes called cost-coverage, this technique involves determining your costs ofoperation, adding to that the rate of return that you feel you need to make on yourself-storage investment to be a big success, and then setting your rate schedulesaccordingly. Without a doubt, this is the most ridiculous (if not bizarre) pricingstrategy. Nowhere in the formula do you find market-driven factors like supply, demand orcompetition.

You may be able to dazzle some lenders or partners by proposing this method as itneatly covers all of your costs and shows a profit to boot. But the world of reality willnot be impressed by this handiwork. Unfortunately, the saying, "If you build it, theywill come," does not apply to the self-storage industry.

So which should you use?

I haven't coined any cute buzz-words or catchy phrases to identify the method thatworks best, but this is what has been working successfully at our facility:

First, just to be clear, nothing further needs to be said about thereturn-on-investment strategy.

We absolutely do not agree with price-penetration. If you actively seek to attractcustomers via cheap prices, what you will get are cheap customers. Our experience hasshown that this group of customers will have a higher percentage of delinquencies,abandonments and unjustified complaints than the group of customers who are not asconcerned with price as they are with service and amenities. Remembering that your goal ismaximum profits, an impressive occupancy rate pales quickly when compared to a bottom linethat is suffering dismally from delinquencies and abandonments or from a price war. (We'lltalk later on how you can thwart most price-war attempts by competitors before theystart.)

Let me just interject a few words at this point about the aggressive lease-up strategyas it applies to a brand-new facility. If you have little or no competition, or if yourcompetitor's facilities are full, your lease-up pricing strategy need not contain much inthe way of real discounts, freebies or giveaways (whether real or perceived), only thatthe customer base knows that you exist and are open for business.

If you do have competition to overcome, then your grand-opening offers should be morereal than perceived. But the point to take note of here is that your "regularrate" schedule can remain intact during your lease-up period, giving you theflexibility to use it as soon as possible. For example, as the popular sizes begin toreach a comfortable occupancy rate, your lease-up specials for those sizes can quickly beterminated.

Don't Follow, Lead

While it is true that our rate schedule was initially developed directly from what ourcompetition was charging, I've learned, over time, that this should only be a guideline.In fact, I now firmly believe that if you set your rates the same as your competitor's,you are doing them a big favor.

I'll explain. Occasionally I spend some time driving by or, if possible, through ourcompetitor's facilities. In the world of business there is nothing like having first-handknowledge of what you are up against. While driving through a particular facility, Ibecame appalled at the deteriorated condition that it had fallen into. Huge pot holes inthe unpaved driveways, several obviously un-rentable units (the doors were either missing,or so badly damaged from being backed into that they were inoperable), garbage strewnabout-- and they no longer offered on-site management. The office was now permanentlyclosed and had been replaced with a trailer parked at the front gate, complete with a"caretaker" and his four junk cars that will never see a highway again. As I satthere looking at this disgusting mess, which at one time had been a respectable facility,it dawned on me that they were charging the same as us and getting customers.

It was now obvious that we could easily support higher rates by simply comparing allthe amenities that we had to offer to facilities that did not. And it was an easy sale.

That was a big lesson, and one that has contributed substantially to our bottom lineever since. Customers will pay more if they get more, and the "more" can be inmany forms: service, cleanliness, friendless, security, attractiveness, and so on. It caneven be a perception of "more." For example, if a facility radiates a feeling ofsecurity, whether or not it actually is more secure than the facility down the street, itwill become, in the mind of the customer, the more secure facility. Perception is noteverything of course, but it goes a long way toward making sales.

So, to sum up this discussion of pricing strategies, I believe that the one that willdo the most justice to your bottom line is a variation of skimming, although I dislikethat name. I much prefer to put it this way: If you offer a clean, secure, well-managedfacility, and you couple the delivery of quality service with good salesmanship, you willattract and keep the best customers in your market area, and they will gladly pay topprices to have it.

Rental Rates

In order to establish the optimum rental rates, we need to first examine occupancyrates. Consider the following question:

What is the goal of the facility?

If you're an owner, ask that question to your manager. If you're a manager, ask it tothe owner. If you're an owner/operator, then you need to ask yourself. If the answer is"To be 100 percent occupied," then you're all in trouble. You may as well putout the closed sign, lock the door and go home, because you have all missed the point ofbeing in business.

The correct answer is: To maximize income.

So what's wrong with 100 percent occupancy? Several things. Put aside for the momentthe fact that being fully occupied is the wrong objective, and that it is not the reasonthat you built your facility. Let's examine what happens when you achieve an occupancyrate of 100 percent, or even 95 percent: The phone rings. It's a potential customerinquiring about the rate and availability of a storage space. You politely respond thatyou currently have nothing available. You might even offer to put his/her name on yourwaiting list.

Look what you've done. You've sent the prospect to your competitor. And not just fornow, but likely for any future storage needs as well. You might say, "Well, I had nochoice. There are no units available!" In a moment, you'll learn how to correct thissituation by correctly pricing your product.

To state this in another way, suppose that you call on your favorite widget storebecause you need widgets, but the widget store is out of widgets. So you try again in afew days and still no widgets. How long before you throw up your hands and seek outanother supplier of widgets? Not long, I'd say. It should be noted that our society is abit impatient in these matters.

Incidentally, I have been a victim of this very scenario. Some years back when we wereenjoying full occupancy, kicking back with our feet on the desk, all smiles because wewere "doin' well," it was brought to our attention that the word around town was"Don't bother to call them, they're always full." The lesson we learned fromthat was: raise our rates or expand. We did both.

There is the potential of another problem with full occupancy, and that is managercomplacency. The manager's job becomes considerably easier without having to fuss withrenting units and marketing and all that. That statement probably just put me in bad favorwith some of the managers reading this, but I believe that I can redeem myself when Isuggest owners instill a manager's incentive program.

Jim Killoran is the owner of LeManx Information Products. Based in Shelton, Wash.,LeManx specializes in providing information to the self-storage industry. Mr. Killoran isalso the author of Self Storage Success and Self Storage Startup. Inaddition, he has been in the self-storage business for 15 years and is co-owner of FreewayMini Storage in Shelton, Wash. For more information, call (800) 764-1909 or write toLeManx Information Products, P.O. Box 542, Shelton, WA 98584-0542.

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