It’s Not Just About Occupancy Anymore

by Alden Chang

Setting Self Storage Starting Rates Based on Occupancy

It has been a common practice for Self Storage operators to set the starting price, or rate, for vacant units based mainly on occupancy conditions. If units were highly occupied, the starting rate would be higher. Conversely, if occupancy was low, so too was the starting rate.

Occupancy-based pricing is intuitively appealing and relatively easy to implement. Stagnant occupancy due to a lack of move-ins for a unit type over a long period of time can also precipitate a price decrease. Some Property Management Systems have automated rules, even today, which enable such an approach.

However, this approach today may mean leaving money on the table.

Dr. Warren Lieberman, in his article “Pricing and Revenue Management: Recent Trends in Self Storage”, published in the Spring 2019 issue of the Florida Self Storage Association’s magazine INPRINT, starting on page 8, identifies additional factors to consider and competitive pricing insights.

Limitation to the Existing Approach

The occupancy driven approach has widely recognized limits. For example, it fails to anticipate future demand (i.e. move-ins) and changes in unit vacancy levels (i.e. move-outs).  That means pricing may be reactively, but not pro-actively, adjusted for seasonal fluctuations. Pricing changes are delayed and revenue opportunities lost.

Now increasingly, Self Storage operators are systematically incorporating additional elements into the pricing process, such as demand and supply forecasts, enhanced understanding of recent price changes on occupancy impacts, and perhaps most commonly, competitor prices.

A Focus on the Competition

In the past, obtaining competitor pricing was labor-intensive often requiring store managers to call their competitors directly or manually review websites. While these activities proved useful, due to the time required they were only carried out periodically–perhaps on a weekly or monthly basis (and often less frequently!)–and only for the more common unit sizes.

Today, competitor prices on websites as well as move-in promotion offers are far easier to obtain via a variety of automated methods. Self-Storage operators can easily obtain up-to-date information without relying on the efforts of staff. Electronically captured data, moreover, is far more comprehensive and typically more accurate as well.

For example, at Veritec Solutions we collect web-based pricing data from over 1,500 self-storage companies across the United States. We cover companies whose portfolio size range from 1 to over 2,000.

Pricing Based on the Competition

Without knowing competitor prices, low occupancy of a unit type might lead an operator to lower its price, even if it already has the lowest price in its market.

While it might not be necessary to match or be priced less than a competitor to maximize revenues, it is typically the case that an operator should be “appropriately priced” relative to competitor stores.

If the competitors in your area are actively managing their prices, not only might you want to also do so, you might want to ensure that you are managing your prices with an understanding of what your competitors are charging as well as incorporate some of the other factors mentioned earlier in this blog.

So, how actively are prices managed by self-storage operators? We will look more closely at this question in future blog(s).

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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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