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%.