TO INCREASE OR NOT TO INCREASE, THAT IS THE QUESTION
Written by: March Chase Posted: 7/9/2018
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When it comes to rate management, I have witnessed both ends of the spectrum. On one somewhat unapologetic and borderline greedy end, there are frequent and aggressive rental rate increases and the market generally permits this. On the other end there were no increases which is seemingly prehistoric when it comes to the understanding of and reasoning behind rate management.
Let us examine the antiquated practice of limiting rate increases. I am fully aware there are facilities and operators that still use a ledger card system in 2018. However, that outdated operational practice should not deter that same operator from conducting street rate or customer rental rate increases. Logically speaking, if someone has chosen to bypass technology and remain on ledger cards, you would think an effective rate management strategy most likely does not exist either and in this case you would be correct. My thought is that it does not have to be this way. Do not let an aversion to technology keep you from making more money.
Recently, I was conducting some market research for a client and I stumbled across a competitor website with a homepage tagline that read, “We’ve kept the same low rates for 15 years!” My question is “WHY?” Mistake number one is believing that this strategy is a customer service feature. Customers do not really care if you slightly increase your rates over the years. Most people understand inflation and anticipate it. Why deny yourself a more profitable business? I would love to conduct the exercise of taking his financials for the last 15 years and comparing them to a proforma of his operation had he simply stayed in line or incrementally above inflation over that same period.
Now for the good part. Sliding all the way down to the other end of the spectrum, we have operators in a market I recently shopped that, quite simply, are BOOMING. Please keep in mind that the facilities are not doing anything “special” to create or maintain this incredible pricing structure or occupancy. They are simply catering to a demographic and demand that is willing to accept their current rate management levels and strategies. I point this out because I think it is critical to understand that those operators at the other end of the spectrum could have a similar, all things being relative, experience in their markets if they would adapt a similar mindset when it comes to profitability and customer value.
So, as an example to those operators who need to reassess and make upward revisions in their rate management strategies, I provide you the following market data: the lowest occupied facility we encountered was 95%. The market consisted of all types of facilities from Class A to Class C. The features varied dramatically, as did the customer service, but the most shocking aspect above all was the consistency in rental rates. On average, from five highly visible, clean and safe facilities, we found the monthly price for a 10 x 10 climate-controlled unit to be $201 or $2.01 per square foot, which annualized is $24.12. Most likely, this will make you wish and want to be in this market, but it should also encourage you to rethink your rate management strategy and how critical it is to the success of your facility.