Pricing Your Product

December 1, 2000

7 Min Read
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Pricing Your Product

Pushing the limits of profitability

By Jeff Kinder

Oneof the most important tasks we share as self-storage operators--whether we have1,400 facilities or 1,400 square feet--is deciding how much to charge for ourunits. As the industry matures, convenience remains the No. 1 reason consumerschoose one facility over another. However, as consumers learn more about theproduct, a growing number are adding price and value to their list ofmotivators.

We all want to create value in our properties. We all want to move theprofitability of our own properties and the industry higher. This creates theneed to be more consistent and sophisticated in the way we price our product. Itrequires us to maximize the value of our inventory and avoid the pitfalls ofbeing priced out of the market, in either direction. The famous Sicilianmathematician 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 movingyour property toward profitability and creating value.

Profitability is easy enough to understand. The more you take in and the lessyou pay out, the more profitable you are. Expenses are relatively fixed. Payrolland property taxes are the two biggies. The rest of the expenses all add up, butyou make a bigger impact on your bottom line by tweaking out another 2 percentto 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 areneglecting the top line, you are leaving your best player out of the game.

Defining Value

When we think of value, the first thing that comes to mind is that a lowprice means value to the customer. But what about the value you are creating foryourself and your family? Why did you get into the business? Did you really wantto maximize the value of your investment, or did you just want to buy yourself ajob? As I work with owners and listen to many of the people who attendtradeshows for this industry around the country, I am amazed at how many of themhave not raised their rates in the past few years. Most haven't really thoughtabout it. Some are just happy they can make their mortgage payments, take a fewbucks home and be 95 percent occupied.

Occupancy is a wonderful thing, but I'd rather have the money. A quiet tenantbase is wonderful, but when it comes time to sell, your property is not going tobe worth $X per square foot just because the guy a mile over sold his for thatamount. 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'vetaken your eye off the ball and have to play catch-up, a large increase createsa reason for customers to rethink your value. Even if you are still the cheapestin the market, a big increase will send a lot of people out the gate. Maintainthe value of your property by regularly reviewing your rates and making theappropriate adjustments.

Creating and Maintaining Value

So what are the appropriate adjustments? First, look at the factors thatcreate value. Storage space is a commodity. Supply and demand are the biggestfactors we deal with in pricing our product. If a new competitor opens up inyour trade area, there is new supply. That supply will have to be absorbedbefore there will be excess demand that allows you to raise prices. What we aredealing 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 newclimate-controlled, four-story super storage down the block, doesn't mean youshould put your whole facility on sale. You may have to run a special or reducethe price on your inside 5-by-10s or 10-by-10s to keep from losing too muchmarketshare while the new guy fills up, but you can still increase the pricesfor your drive-up 10-by-10s and 10-by-20s.

Check the market. Determine your value compared to your competitors. If youhave visibility, easy access and great curb appeal, you should not be asconcerned with the property down in the industrial park or out on the other sideof the airport. They can only attract business out of the Yellow Pages. Even ifthey have all the bells and whistles, they have to make it worth the drive to gopast your place to get to them. Let them stay under you. You'll get more thanyour fair share of their business as they drive by, even if your rates arehigher.

If your biggest competitor has 88 10-by-30 units, he may only get $275 apiece for them. But if you only have 15 of the same size unit, you can probablycharge 10 percent more and stay full. Certainly, your sales team can help youcreate extra value in the way they answer the phone and take care of customersat the desk. All storage is not created equal. What do you have that gives yourplace value? How can you and your team merchandise that value so you don'talways have to sell based on price?

Know your operation. How many move-ins did you have last year? If youroccupancy is down, is lower pricing or a move-in special the answer? Maybe youhad a special last spring and you filled up with students. They all moved out inSeptember and now your occupancy is down. However, if you still have goodmove-in activity, lowering your pricing or offering specials is just leavingmoney on the table.

What other changes have you made? New managers and new policies will have animpact. Don't always react to changes by lowering your pricing. If you have goodmove-in activity compared with other years, you may even manage a rate increasewhile your occupancy is lower, and take advantage of all the new customers atthe higher rate. Seasonal activity is a great opportunity. If you know you havemore move-ins in May, June and July, raise your rates in March or April. Don'twait until you are full in July or August. Nobody can move in at the higher rateif you are full. You will have more money in the bank at the end of the year ifyou get the increase in early, even if you only get to 92 percent instead of 95percent in August.

If your average annual occupancy is more than 88 percent to 90 percent, youare not charging enough. If you have not reviewed and adjusted your rates on asize-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 percentto 5 percent regularly.

I've provided some examples and basic ideas as to what and what not to do interms of pricing and value. The key is to make sure you are doing somethingon 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 withbetter systems. I look forward to speaking with many of you and sharing thoseideas at the upcoming Inside Self-Storage Expo in Las Vegas.

Jeff Kinder is the president of Advantage Advisors, LLC, and principal inThe Advantage Group. Advantage owns and operates self-storage facilities in theUnited States and Canada for its own account, and is a fully integratedacquisitions, development, financing and management-services supplier to theself-storage industry, helping individuals, corporations and asset managersmaximize their self-storage investment.

Mr. Kinder has been in the self-storage business since 1986. He worked forNational Self Storage and Public Storage for 11 years in operations managementand marketing. In 1991, he moved to Toronto, to serve as vice president,operations, for Canadian Mini-Warehouse Properties, Ltd., heading up the PublicStorage subsidiary, and in 1997, he started Advantage Self Storage. For moreinformation, call (301) 774-0243; e-mail [email protected].

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