Deriving A Price Through Signals

by Alden Chang

Big Data is not always available, or practical.

Many industries, where pricing and other data is abundant, use big data analytics to help model an “optimal” price.  They can use big data analytics to examine large, complex, and varied data sets.  Then, use the analysis to reveal pricing drivers, concealed patterns and correlations.

But many companies and smaller businesses do not have the big data, or the resources, for such analysis. We use Self Storage companies here as an example.  Demand at the unit group level is relatively sparse, and therefore pricing data at that level is sparse.

We do have enough data to forecast demand as well as move-outs. However, we have found that the inherent variability of such forecasts is sufficiently great to warrant supplementing these detailed forecasts with other critical and informative pieces of information. 

For Self Storage companies, we have devised a set of pricing “signals”, developed over years of experience, that help determine a more profitable price.

The signals fall broadly into three categories. The first category reflects specific conditions associated with your assets and customers. The second category are market signals, such as those based on competitor prices and promotions. The third category would be factors specific to your current and future business condition.

Examples include effectiveness of your current price, the amount of inventory available, and forecasts of demand and turnover (e.g. move-outs), how a customer’s rent relates to the current web rate, how long a customer has been renting their unit, and potentially many other factors.

A mechanism of inputs that you use time and again to derive a price.

If the signals are intuitive and easily understood, then they are more likely to be used. This becomes especially important in the face of staff turnover.

For recommending the best starting rate for new customers, combining these signals into an overall measure of “Demand” or “Price Pressure” helps guide you to a price for your product. Over time, you will find that you will be making responsive pricing changes to reflect your market’s and business’ changing conditions.  Changing conditions include an expanding or slowing economy. The key is being responsive and disciplined.  You are then on the road to maximized revenues.

In self-storage, where customers are on month-to-month leases, similar arguments can be made for developing insights on the appropriate amount by which to increase the rent of a specific customer.

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Who Should Be Doing Pricing In Self Storage?

by Alden Chang

Pricing is such an important endeavor.  Yet organizationally, assigning the Pricing role and determining who should be held accountable for Pricing decisions can often be tricky. Pricing responsibility is especially an issue for large Self Storage companies.  These organizations can manage hundreds or even thousands of stores.

A core element of this decision often boils down to whether regional “field” staff versus centralized “corporate” staff will assume primary responsibility.

Argument for Regional Pricing Responsibility

Regional staff may include senior positions such as vice-presidents and district managers. Their main argument is they know their area better than any centralized group would.  Only they:

  • Really know the customer. They have direct interaction with customers and know their price sensitivities.
  • Actually know the competition as they have “boots on the ground”.  Therefore they know how to better price competitively.
  • Have superior operational understanding. They know their cost structures better than anyone else and can better factor those into Pricing.
  • Can respond quicker as they are closer to the customer, competition, and operations.

Argument for Corporate Pricing Responsibility

Conversely, the arguments for corporate are that have the “big picture” perspective .  Only they:

  • Can ensure corporate-wide marketing and branding consistency, of which Pricing can be a key component.
  • Have the company-wide view of the competition. Regional competition may or may not be an immediate concern.
  • Are well-positioned to balance region to region factors, of which pricing may be one.
  • Can assess any scale considerations.

Our Recommendation

In our experience with clients using the Veritec Revenue Management System (VRMS), we find that, given the right analytical decision support tools, it is far better for primary responsibility for Pricing to be assigned to corporate staff, so long as field staff understand and contribute the type of input that is needed and expected from them.

Pricing is inherently a quantitative and analytical task, in combination with key elements of consumer psychology. When Pricing is the primary responsibility for an individual or department, decisions are typically more timely, and profitable, than when Pricing is only one of many responsibilities. Furthermore, when these other expectations include operational and customer service responsibilities, such efforts will often overshadow the Pricing responsibility and capture most of the attention of the individual or department.

However, for corporate staff to have maximum success with Pricing, the Self Storage organization must have the following in place:

  • A data-driven Pricing methodology, measurement, and information system.
  • Easy access to data for all stores across the portfolio and the ability to implement decisions efficiently; that is an information system with strong prioritization and workflow.
  • Strong mechanisms to encourage, obtain, and use feedback from all relevant parts of the organization, especially field staff.

Doing so will best utilize all your assets, both centrally and regionally.

While much of this guidance is applicable to smaller Self Storage organizations (and yes, even single-store organizations), there are critical caveats that need to be made, as Pricing will necessarily be only one of many responsibilities assigned to an individual. We’ll cover those in more detail in a future blog, but perhaps most critical, is that Pricing responsibility be assigned to someone who has good quantitative and analytical skills in combination with a strong understanding of the business.

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The Yield Curve Has Inverted: Impact to Your Pricing Strategy (Part 1)

by Alden Chang

Pricing Considerations for An Uncertain Economy, Part 1

In an earlier blog we discussed how an inverted yield curve could presage an economic recession. We noted that there can always be a debate of when a recession will occur, but there is no debate that recessions do and will occur. If an inverted yield curve does accurately predict a recession, there is usually a one to two-year lead time. So now might be a good time to discuss pricing strategy.

Our short answer: Have a pricing methodology, strategy, and supporting information technology that you execute consistently and with discipline, regardless of the economic conditions. Although you may adopt different pricing tactics depending on the strength of the economy and demand, the data-driven strategies you use during expansionary times may often be the same or similar to the ones that are best used during recessionary ones.

We will use Self-Storage pricing practices as an illustrative example. Your pricing methodology, strategy, and supporting information technology should have the following key attributes:

  1. A consistent and disciplined use of a time-tested methodology.
  2. A mechanism of inputs that you use time and again to derive a price.
  3. A supporting business process and information technology system.

In this blog, we will expand on the first item of methodology.  Regardless of industry and business, you are likely following, or are considering, a comprehensive pricing methodology. In our example, we have a self-storage pricing life-cycle model that centers on the phases of attracting, closing, and retaining the self-storage customer.

Phase 1: Attracting the Customer

This first phase reflects a variety of factors, typically including the competition’s advertised pricing. It is fairly common that potential customers evaluate multiple price/value alternatives as they shop. (There are, of course, customer segments (think “walk-ins”) and geographic locations where competitor pricing may have relatively little impact.)

This means you need to be price competitive, but not that you are necessarily priced lower than the competition. Equally important, competitor pricing will often be a natural indicator of the market economy as it applies to your business. A growing economy inspires confidence in higher advertised pricing, and a slowing economy drives more competitive pricing.

When you consistently price with an eye towards the competition (as applicable), you naturally respond to market conditions, be it up or down.

Phase 2: Closing

This phase provides an opportunity to up-sell the customer by offering additional, upgraded storage options. Although it may seem counter-intuitive, both a slowing economy and a growing economy provide many opportunities to up-sell.

The opportunities may simply be different: This is a key mindset for you to have. Take stock of the products segments you have.  Some may perform better in a growing economy; others in a slowing economy.

For example, in a slowing economy, customers may be downsizing their living arrangements so self-storage becomes a increasingly important factor for them. Have a segmented product (or services) strategy with products of varying value. That way, you strengthen your ability to sell into multiple customer segments.  You maximize your up-selling options in varying economic conditions.

Phase 3: Retaining the Customer

There are additional opportunities to increase prices over time. This, of course, applies more to longer-term rental situations than one-time transactions.

Remember that customers do not all react the same to rent increases. Understanding which customers are more price sensitive than others allows for a differentiated rent increase strategy.  This can then lead to several percentage points of additional revenue over time.

We use a “signaling” mechanism to determine price sensitivity.  This mechanism can also factor in economic conditions so that you price accordingly.  We will discuss this mechanism, and the other attributes of a supporting information system, in later blog(s).

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