A while back, we talked about convenience and the Internet. Co-founder of Twitter Evan Williams all but said that the Internet is not about doing new things. Rather, it’s about people doing what they already are doing, but with (much) more convenience.
Indeed, online move-in orders have increased dramatically over the last few years. While some self-storage providers are more online focused than others (does your company take on-line reservations yet?), the trend is clear. In the “Value Pricing on the Internet” panel at the 2019 SSA Fall Conference and Trade Show, where our own Dr. Warren Lieberman was a panelist, a number of data points were cited:
- Bargain Storage Move-in Rate from Online Rentals: 97%;
- STORExpress Online Reservation Conversion: 75% in 2019 (to August), 62% in 2018;
- Five Star Storage Percentage of Move-ins from Online Reservations: 22% in2019 (to August), 19% in 2018.
In our last blog we discussed Dynamic Value (or Convenience or Differential) Pricing in self-storage. This is where the same unit type (same size and features) may be value priced differently because some are more convenient than others, mainly due to accessibility. The customer, usually at the store, gets to first understand, and then choose the price and convenience level they’d like.
The question then becomes, is the self-storage industry ready to offer value pricing choices on the Internet?
Let’s first look at other industries that are currently incorporating value pricing capabilities into their websites. For many, airlines first come to mind. When you book your flight online, you will likely receive multiple options to upgrade your ticket. Translation: Opportunities to increase your convenience during your flight. These options range from being able to check-in luggage to upgrading your seat to pre-ordering a particular meal.
Two other industries that also come to mind: Hotels and rental cars. When you book an online hotel reservation, you are given the option to upgrade to a larger room with more accoutrements. The same can be said for rental cars, as you are given larger car and insurance (peace of mind) options, for example.
The online Value Pricing success factor.
What’s the common element in all those industries? According to Warren, customers of these industries receive prior knowledge of opportunity to enhance the product or service they purchase (that is, prior to the actual use). When their customer books online, he or she is introduced to the upgrade options and given a chance to think about them. Remember Evan Williams, co-founder of twitter: People use the Internet not necessarily to do new things, but rather to do existing things more conveniently.
For the self-storage industry, the customer base tends to be less informed than in these other industries. Although Value Pricing works very well even though it is generally not currently incorporated into the on-line rental process (roughly one-third of customers currently choose to upgrade), our strong expectation is that doing so will enable Value Pricing to yield even greater incremental revenues. Once Value Pricing programs include an online education component that describes the upgrade options and their convenience benefits, we would not be surprised to see upgrade rates of 40% – 50% at mature stores.
The first foray into online value pricing is The Storage Group’s 3-D Value Pricing Map™, which provides a real-time, 3-dimensional and interactive view of a storage facility layout and pricing options. (Think of how online stadium and theatre seating is done.) Veritec Solutions has integrated its self-storage revenue management system VRMS with the 3-D Value Pricing Map™. As such, we continue to look forward to the self-storage industry’s advancement of value pricing online and are very excited about what the future offers.
In a previous blog, we discussed the importance of convenience and how it often drives our everyday decisions. Of course, what constitutes convenience varies significantly for different self-storage customers. And it can often be difficult to guess what convenience means for any particular customer without understanding the reasons driving their purchase.
For the self-storage customer, convenience is frequently achieved through variations in unit size, accessibility, and environmental factors (climate control and door type are common aspects, but there may be other elements as well).
Value Pricing: Valuing convenience.
In practice, Value Pricing in self-storage typically means, for the same sized unit and climate control status, offering a tiered pricing structure based on convenience. Through the leadership of our own Dr. Warren Lieberman, there is a growing recognition of this concept in the industry. Value Pricing is also known as “convenience pricing” and “differential pricing”.
In our experience, and supported by our patent-pending feature in our self-storage revenue management software VRMS, we advise our self-storage clients to segment the same sized units (same unit types) into three tiers—Good (“Standard”), Better (“Best Value”), and Best (“Premium”). According to Warren, “we should never lose sight of the customer, and this approach balances choice and value in a manner that appeals to customers.”
The basic steps are:
- Define your unit types.
- For each unit type, quantify accessibility. Factors to consider may include:
- Distance from entry or access points (e.g., elevator or stairs) of building to unit;
- Ease of getting to the unit – a straight path is more convenient than multiple turns (tables and couches don’t bend easily);
- Ease of parking a car or truck next to the unit;
- Distance from front of facility to unit;
- Type of door.
- Rank order the units in each unit group based on convenience and comfort.
In the traditional static Value Pricing approach, your lowest priced and advertised units would be the Good units. Then you level up for Better, and further level up for Best units. How much you level up depends on your situation, which includes factoring in your competition and current occupancy rates. In practice, most self-storage operators find it works best to do this for only some of their unit groups and to also limit the division to Best and Standard unit definitions. Units are specifically assigned to the price tiers.
Relativity in Real-Time.
Veritec’s Dynamic Value Pricing approach is quite a bit different, and results in a much higher level of incremental revenue from the Better and Best units.
There are four very important concepts to Veritec’s Dynamic Value Pricing:
- Units are not statically assigned to Good, Better, or Best Prices.
- Rather, each day, whether a unit is assigned to a Good, Better, or Best price depends on which other units are vacant and available for rent. This reflects that the convenience of any specific unit is relative to what other choices are available. A unit that is one hallway turn from the elevator might have Best pricing if all the other available units are two or more turns from the elevator; but it might have Good pricing if all the other available units are closer to the elevator. This dynamic reassignment process of unit to price tier offers significant opportunity for increased revenues (but it is very difficult, and typically not practical, to implement this approach without automated capabilities).
- This redistribution is done on a daily basis by the system without requiring time from staff. So long as 3 or more units are available, there can always be a Good, Better, and Best unit. Veritec’s pricing and revenue management software system makes this process automated and seamless.
- As an option to the operator, the convenience ranking of units can also be used to influence rent increases. More convenient units might merit a slightly more aggressive rent increase than the lesser convenient units in each unit type. A number of self-storage operators have found this to be an excellent way to eke out additional revenues and profits.
For a wide variety of store configurations, over one out of three customers will choose to pay more for a more convenient unit when the store manager provides such options to a customer.
Currently, the upgrade process typically happens at the store (although website companies have begun to offer innovative and creative ways to introduce Value Pricing to the on-line rental process). In some cases the customer arrives at the store with a previously made reservation and has a specific price in mind. In other cases, customers simply come to a facility with limited knowledge about rental rates. Although the ensuing discussion between the store manager and the customer in these two situations may proceed along different lines, the store manager’s perspective must be an educational one, especially for first-time renters.
There should never be any pressure selling, as the decision on whether to rent the lowest priced unit (albeit with less convenience) or to spend a bit more to obtain a more convenient unit, should be entirely up to the customer. The store manager, however, can help the customer understand the options and make the decision that’s right for that customer.
Dynamic Value Pricing really is all about the customer, while simultaneously enabling the self storage operator to earn greater profits!
There are many benefits to the dynamic approach to Value Pricing. Customers have a better buying experience because they get to choose the options that best meet their needs. Some customers are perfectly happy with a Good unit because they don’t plan on accessing their unit with any frequency. Other customers may think differently, valuing the ability to easily and frequently access what they are storing in their units.
For the operator, the real-time relative pricing of available units coupled with the chance to upsell means significantly increased revenues, often ranging from four to nine percent. As noted above, at many facilities approximately 35% of customers will choose to upgrade. At lease-up stores, we often see upgrade rates approaching, or even exceeding, 50%.
Evan Williams, a co-founder of Twitter, once famously implied that convenience decides everything. This is in reference to, understandably, the Internet. He said, “The internet makes human desires more easily attainable. In other words, it offers convenience.” He further adds, “…Convenience on the internet is basically achieved by two things: speed, and cognitive ease.”
Williams sees the Internet not as something new per se. Rather, it is another way for people to do what they already do, but more conveniently. For example, when you shop you can compare many products and prices easily, have relevant product suggestions at your fingertips, and have the product delivered to you the next day.
Last year, in Forbes’ corporate Reputational Quotient Survey, Amazon came out on top. (Amazon came in at #2 in 2019.) According to Forbe’s, “Amazon continues to lead because convenience is not only an ideal, it is, as The Wharton School’s Katja Seim points out, their ‘core product.'”
Let’s go to the actual definition(s) of “convenience”:
- Oxford: “The state of being able to proceed with something without difficulty.”
- Merriam-Webster: “Something (such as an appliance, device, or service) conducive to comfort or ease.”
- Dictionary.com: “Anything that saves or simplifies work, adds to one’s ease or comfort, etc., as an appliance, utensil, or the like.”
It’s interesting that both Merriam-Webster and Dictionary.com includes “comfort” as part of “convenience”. In the physical world, comfort indeed becomes more relevant.
For the self-storage provider, the service provided is fundamentally one of convenience. Self-storage providers offer customers the space to store their possessions, so they can be free of clutter in their homes and have (significantly) less to carry if they are in transition. And, in the case of commercial businesses, it enables goods to be stored and accessed more conveniently than would otherwise be possible.
But even within a self-storage facility, there are differing levels of convenience.
While convenience “on the internet is basically achieved by two things: speed, and cognitive ease,” convenience in the self-storage facility is essentially determined by unit size and configuration; accessibility; and environmental factors (think climate control).
Self-storage facilities typically offer varying sized units, such as 5’ x 10’, 10’ x 10’, and so on. But, even for the same sized unit, there are differing levels of convenience due to differences of accessibility (e.g., number of hallway turns from an elevator or access point) and climate control.
So indeed, the same physical unit may in fact be viewed differently based on the factors we discussed, and thereby be valued differently. A customer might even be willing to spend more to use a smaller unit that is very easily accessible than a larger unit that is less so. For many, the idea that a 100 square foot unit could be rented for more than a 150 square foot unit may come as a surprise, but in our experience, this is actually the case more often than you might imagine. And with that in mind, we will discuss what different levels of convenience means to pricing in a future blog.