Introduction to Revenue Management
What is revenue management? Simply put, it means thinking about how to maximize rental rates while maintaining high occupancy levels. Many facilities have a tenant who’s been there for the last 15 years, and is paying significantly less than street rates (what a new tenant would pay, based on your current prices). You don’t want to raise their rent in one increase to the current price because you don’t want them to leave, but you also could be renting out that unit at a much higher rate to someone else if they were gone. This is one of the many types of customer scenarios that require a revenue management plan.
What are the elements of a revenue management plan?
How do your prices stack up against your competitors? If you don’t know, you’re leaving money on the table. Finding this out is as simple as using a spreadsheet with your competitors’ names and phone numbers on it, and checking their prices at least monthly. Typically you’ll want to track competitors within 3-5 miles of your facility, but you will learn quickly that some are more active in changing their rates than others. Many self storage operators post their rates online, but if they don’t, you will need to mystery shop them over the phone or have an employee or family member do so for you.
Please note that your rates don’t need to match your highest-priced competitor. If your facility isn’t as accessible or aesthetically attractive, you may need to set your rates just under your competition. However, if you have the latest technology, full amenities and your facility is nicer than your competitors, you can charge a few dollars more per month. Determining your rate schedule is both an art and a science; and you need to monitor the marketplace in order to make informed decisions.
Are your competitors implementing rent increases to existing tenants? While this information can be difficult to obtain, it can prove extremely valuable while designing your plan. There are several ways to acquire this information. The quickest and easiest method is to mystery shop your competitors and ask them, “Do you increase your rates? How often and by how much?” If that doesn’t work, the next step might be to rent a storage unit from your competitor. Go with the smallest unit size they have, and see if they raise your rent within thirteen months of renting from them.
Creating A Strategy
With all this information on hand, it’s time to make a decision about how to manage your rates. Do you want to increase rates across the entire facility or just a portion every month? What percentage rate increase do you want to apply? If you have high occupancy, you can consider more aggressive increases. Do you want to set a cap for the maximum amount of rent to charge tenants? Some owners set it at street rates, and use rental increases to bring long-term tenants up to street rates. However, it’s perfectly acceptable to increase existing tenant rates above new tenant rates. Remember, we have advised you to shop the competition, which also means that your rates will adjust frequently. New rental rates should be fluid, and they will rise or fall based on occupancy levels. You’ll want to sit down and write a plan for managing your rental rates, including how you’ll manage them in the future. Most management software packages include a revenue management option.
How will you know if you are ready to implement your new plan? The first step towards increasing rates on current tenants is to make sure that your lease allows for it. If not, you’re probably out of luck – contact the Self Storage Association to find an attorney who specializes in self storage and can write you a new lease to start using with all new tenants. If it does, and in most cases it will, anticipate your tenants’ reactions. They’ll expect to see a reason why the rent has increased; increased operating costs or perhaps an improvement in service. If you have a troublesome gate, you’ll want to fix that before you increase rent. If you don’t manage the property yourself, you will want to sit down with your staff to discuss handling customers’ reactions.
Now you’ve got a plan, and a system, for managing your revenue. Put it into place. Start tracking the results and how much more money you’re making since implementation. Experiment with the format, including your percentage, and the time between increases. It may take trial and error until you find the system that works best for you and your market.
If you need help developing your revenue management plan and don’t quite know how or where to begin, contact us today and our team will be glad to help you out.