The ABCs Of Revenue Management For Small Operators
There are a number of reasons to improve revenue and profits. Here are just a few that should be meaningful to all owners and managers, regardless of property size:
- The need for improved revenue to pay for increasing taxes, healthcare, utilities, payroll, and other expenses.
- To have on-hand money for repairs and replacements of aging roofs, driveways, technology, website improvements, and to remodel every 10 to 15 years.
- The need to upgrade systems to stay competitive. The 2013 SSA Demand Study highlights the fact that customers will pay more for access control and technology as it improves their sense of control and security.
Nearly double-digit same-store sales increases (revenue or gross income) are common to our company and all large operators within recent years. Look to see how your income has improved, especially over the last two years, and then compare that to the chart below that shows the largest public companies or REITs (Real Estate Investment Trusts) and our company, Universal Storage Group.
This graph shows the improvement to sales, (gross income) versus the prior year for the same stores by company.
This will help you make a comparison to your own store’s improvement in recent years. Print your management summary for Dec. 31, 2015, and compare it to the same data in 2016; then divide your 2016 income by 2015 income. The result will be your sales increase year over year. For example, if you had $650,000 in total income for 2016 and $600,000 in 2015, the same-store sales increase is 8.33 percent.
The REITs and other large operators have complex algorithms with up to 100s of variables in their revenue management systems. Some of these push and manage rates constantly, day after day, and you can see these changes online with any public company in your market area by checking their prices frequently. Others might be less frequent, but all large operators have revenue management programs in place.
What does your revenue management look like? Gone are the days when owners would send out an annual increase to everyone at the same time and once a year raise their street or asking price. Why is this an antiquated model? Because it leaves too much money on the street and doesn’t take advantage of demand for various sizes or the length of stay for the customer.
As a size type or size code, i.e., climate-controlled 5-by-5s or non-climate-controlled 10-by-10s, approaches full occupancy, anything with an occupancy of 90 percent or greater should have a street or standard price increase. The marketplace is telling you they love that size at that price and are keeping it full at over 90 percent. Thus, you would want to raise the asking price before you run out of that size and have none left to sell. You never want to be 100 percent occupied, because that will mean you are out of inventory and have nothing to sell at any price when new customers arrive ready to move in. By most in the industry, 90 to 92 percent is considered fully occupied.
You can easily do what the big companies are doing on a smaller scale in three simple steps.
B. How And When
Once a month, at minimum, you need to look at your two rate systems. There is a rate for pricing available on vacant spaces within the market for new customers coming in and the rate you are under contract with for your existing customers.
We need to identify those rates needing adjustment based on some basic criteria; sizes that are full or almost full for street or standard rates needing increased and the length of time at the existing rate for current customers, so that each customer is raised at least annually or more frequently if the market demands.
Remember you have two rate systems: 1) the new or market priced customer called the Standard Rate, and 2) your existing customers or tenants rates called Contract Rates managed by both length of stay and percentage discount.
Step 1 – Work Your Standard Or Street Rates.If you are a SiteLink customer, you can use the Rental Activity Report as a worksheet to make things easier. Here is what the report looks like and the information you will be focusing on:
Size Codes Grouped
Together By Type
1- All The Ground
2- All The Drive-Up Units
All of these size codes above meet the requirement for either 90 percent occupied or three or less vacant. All sizes would get an increase to their asking price. With monthly reviews of this pricing you can take advantage of higher demand for the sizes you have available. Some facilities that remain highly occupied will look at these numbers more frequently such as weekly.
Here only two of the four sizes meet our requirements for being full with 90 percent occupancy and three or less vacant. The few dollars you increase each of those sizes can make a big difference at the end of the year in your overall income. If you use other software, just ask your vendor where to find this information and what report has the same or similar information for your use.
C. Who Gets An IncreaseNow that we have adjusted our selling prices or Standard Rates we can move on to Steps 2 and 3, which deal with our customers’ contract rates. It is always best to handle the Standard Rates first, before dealing with the customer’s rate as it will show the difference in their current rental rate to your new Standard Rate (not your old Standard or selling rate).
Step 2 – Work Your Customer Rates. Again, using a SiteLink report, we find out how long has it been since the customer’s last rate increase or how many “Days Same” as SiteLink calls it. To achieve this, we use the Occupied Units Report and we sort it by Days Same. Once we can tell how long it has been since the last increase, we want to find those that qualify for an increase. We are currently doing every 11 months; others do a raise five or six months after move in and then again every nine months, while some do once a year or 12 months. We gauge the market conditions and our operating parameters to establish our schedule. Whichever trigger date you choose, we all agree that all customers get at least one increase per year. Here is the sample report, we are looking for anyone with 300 or more Days Same. If you take these actions in the middle of each month, working the few that qualify each time, the work load is easier and you are gaining the benefit of constantly improving rates or revenue management. Don’t allow your income to slip away by ignoring these profitable processes. Mid-month is usually the least busy time for us, and it works nicely in our schedule.
This report maintains the same groupings as does the Rental Activity Report we showed earlier, i.e., all the Drive-Up units together, all the Climate or Parking units together, etc., to make analysis easier.
Now we find all the units with 300 or more Days Same and we see on this page only one at 309 days. The rate increase in this sample shows $5 to a rate of $234, and the date it will become effective is March 1, 2017. Use this sheet as a worksheet, showing how much you would raise each one and what date it would become effective; once approved, you can batch print them from the Pending Rate Increases worksheet to send via mail or email as your company’s operating system and rental agreement dictate. We want to raise each one from eight to 12 percent over the existing rate. If you are doing increases every 11 months you would look for 270-plus Days Same; if every nine months, 210 Days Same. You need to provide at least a 30-day notice, and it takes a few days/weeks to get approvals in some cases. This is why we work the files each month, 60 days ahead of effective date, to have plenty of time to review, approve, and distribute them ahead of the required 30-day notice. Once you print and send the letter it will show up as it does here, with the new rate and effective date. How do you treat those paying higher than today’s street rate? We use smaller increases but maintain at least annually for all.
Step 3 – Handling Those With Big Discounts On Sizes That Are Full.Here we are using the same SiteLink report, Occupied Units, but sorted by percent discount. This lets us take an immediate look at where our variances are to Standard Rates and see what size they are in or how long since the last increase. For this sample property, we saw on the Rental Activity Report that most of the sizes were full and needed an increase. We must then ask ourselves why would we be discounting a size that is in demand and sometimes completely full or has a waiting list.
Commonly, when the size and type you are looking at is full, you would find that anyone getting more than a 10 or 15 percent discount qualifies for an increase as well. Instead of sending them a Rent Increase Letter, we send them a Discount Reduction Letter saying, “Dear Customer, You have been getting a 27 percent discount; and effective (in more than a month), you will be getting a 10 percent discount.” This makes it a little easier to swallow, and they know they are still getting a discount (off your new higher Standard Rate in Step 1).
Don’t forget you can also give a Rent Increase Letter (RIL) at move-in to someone getting a move-in special for the first few months.
D. What To SayCustomers will call or come by sometimes and want to discuss their rate change. They may be upset or think it is too much. Arm yourself with all the information you need to handle these calls and customers with confidence. First, once they have made whatever comments they want to make, check the customer’s history. Everything about service and professional management is knowing what kind of customer you are talking to; is it one of your gold star customers who is practically perfect (all their addresses and phone numbers work and they have never been auction processed or had any late payments)? If so, you want to be very attentive and let them know how much you appreciate their business. Begin by saying, “Thanks, Mr. Jones; just let me check your record while I have you on the phone. Yes, it appears that you were sent an increase for $20 becoming effective March 1 this year. What can I help you with?” Mr. Jones replies, “I can’t believe you gave me a $20 a month increase.” Then you can reply, “Yes, that is the right amount; it is lower than others due to your gold star status and due to the fact that we did not pass on any rate increase to you in the last 28 months. That size now leases for $40 more than you are paying, and we have a waiting list on that size.”
OK, he says that’s fine, or he might say, “I still think that is too much.” You can reply, “How much do you think is fair?” Notice: You are not saying that you are not going to give him an increase. You are asking him how much he thinks it should be given the circumstances that it is a long overdue increase and the size he has is full. Mr. Jones then says, “I think $10 is enough.” Your reply would be, “OK, Mr. Jones, I can do that for the next six months; would that make you happy? Or, if I could delay your increase for (30 to 60 days), would that make you happy?” Remember, you can always come back in a few months and raise the rate again as long as you are giving the required notice period of 30 days. These are month to month leases and you have all the control.
The two best tactics are “If I could (delay a few months or lower it for a few months), would that make you (happy or be acceptable)?” or “What amount do you think is fair?” Get their agreement, and then move on knowing you can always come back to it again in a few months and revise.
Always base your reply on the customer’s history. Bend like a reed for those best or gold star customers and set your feet in concrete for the ones who are chronically late or troublemakers.
E = Equals Improved Income And Profits
Improved income and profits come by managing rates, selling prices a little each month, and finding those opportunities for improvement. This is what Yield Management is all about, getting the most possible income from the units you have.
Take some action each month, do your best in customer communication and feedback, and then enjoy the improved income and sales increases each year.
M. Anne Ballard is the president of training, marketing, and developmental services of the leadership team at Universal Storage Group.