This article originally appeared in the July 2014 issue of Mini Storage Messenger Magazine.
Revenue management is the act of adjusting your storage unit rates for current tenants. Rate management refers to this same process for your unoccupied unit rate (or street rate) and yield management encompasses both rate and revenue management.
According to Donna May, contributor to Learn Self Storage (“The One Resource in Self Storage”), your “ability to increase income and/or decrease expense helps generate the greatest potential return on investment.” In an industry where you have to balance your online presence, facility maintenance, incoming customers, and outgoing tenants – sometimes for several different facilities at once – it’s important to recognize that the simple act of revenue management will directly and powerfully affect your profits.
Even with immediate financial gain aside, regularly increasing your unit rates actually enhances the value of your storage facility as a whole. If you were to keep your rates stagnant over the course of your facility’s life, you’ll walk away from it without having added value to it.
If you were to institute a moderate rate increase even just once a year, you would add thousands of dollars of value to your facility. While that may not affect your ledger in the near future when you consider factors like inflation, it will be of vital importance once you pass down the family business, seek a buy-out from a large management company, wish to sell the property, and much more.
Along with the less obvious factor of increased facility value, one of the main benefits of revenue management is the potential for increased profits.
By raising your rates on occupied units by just 7%, you really aren’t imposing a large rate increase on your customers. But take a look at what those small changes can mean for your bottom line:
Of course your specific data will be different. These occupancy rates are fictional and this table supposes that you raise all of your rates at the same time. But with a modest rate increase on each tenant, you can add a few thousand dollars to your profit each month.
If you’ve been racking your brain trying to find an area to generate some additional income, revenue management may be your answer.
While my previous examples table and graph could elicit a simple way to incrementally increase your facility’s value and profit, don’t let the math alone make up your mind. There are several factors to consider when you’re thinking about raising your rates. As always, there is no “one size fits all” answer for how to run your storage facility. If you want to make the best possible decision for your market, you’ll need to do some research.
Tom Cox, Director of Marketing and Technology for Strat Property Management, Inc. claims that you need to base your revenue management decisions on at least two key factors: occupancy rates and competition. These factors will be specific to your local market, which means that owners with multiple facilities will need to dig into these for each of their locations.
Throughout my research, I’ve found a few other areas that prove to be important elements in your revenue management equation. Here are some things to consider:
• Occupancy rates. These rates are a great place to start when you’re thinking about changing your prices – whether it’s for incoming or existing customers. They provide a quick snapshot of the demand for your units. But don’t limit yourself to your facility-wide unit occupancy. Look at the rates for each of your unit sizes and types for a more accurate understanding of which units could probably stand a small increase in price.
• Competition. The Self Storage Association’s “An Introduction to Self Storage” remarks, “People will select a facility (not just the closest one) based upon specific features and advantages. They will knowingly pay more for those features.” Do you find this be true in your market? Look at what your competitors are offering in terms of amenities, customer service, and price, and weigh that against what you offer as you make your decision.
• Current street rates. One thing that I found consistent on those self storage forums was the idea that your current tenants should never be paying more than the current street rate for those units. There may be some exceptions, but in general it’s a smart idea to watch both your street rate and your occupied rate before making any price changes.
• Market analysis. You can conduct your research once per quarter, once per year, or just anytime you’re thinking about an increase. Many owners find that this process helps them put some hard data to use. A bonus with this approach is that you can use these reports to justify your new rates to your tenants.
In general, you may want to embrace trial and error. This topic can be an extremely complex one, and if you’re an owner that’s particularly mindful of your tenants’ feelings, you may feel a fairly intense internal struggle. Some owners would like to find the sweet spot between charging as much as they can while receiving the fewest amount of move-outs possible. Others would rather cut their customers a break and charge them the minimum they need to get by. What do you think?
Of course, if increasing your profits were simply a matter of raising your prices, you’d have an obvious solution. But anytime you think about boosting your unit rates, you also have to consider the potential move-outs that may occur. For many facility owners and managers, it’s this very factor that paralyzes them from instituting a rate increase.
I went to the Self Storage Talk forum and read through just about every thread related to revenue management. The data I found was surprisingly staggered. Some owners found that they were most successful when they stuck to a fixed program – say, a 5% increase after 6 months and then 3% every 12 months. Others believed that you should only raise rent once per year, and even then it should be raised just enough to account for inflation (or about 2-3%). One owner boasted that he never raises his rates because his facility has established a reputation of being the most affordable in town, which is often why he can keep his occupancy so high.
Kenny Pratt, who provides “noteworthy insights about self storage management and investing,” has asserted that nearly all facilities can raise their rental rates by 7% every 9 months and see 0-1% of their tenants move out because of it. These numbers are likely what you’ll find as the standard advice online.
Ultimately, you’re going to have to figure out what your stance is. I also encourage you to experiment with rate increases because the only way you’ll know what your move-outs will look like is to test the waters a bit.
The good news is that you don’t need to put your facility at high risk in order to do this testing. Rather than pushing out one increase for all of your tenants at once, you’ll probably prefer to roll out the price change for a small group of customers (maybe even as low as 5 or 10). This advice is particularly useful if you’ve never raised your rates and have no idea how your customers will react.
By introducing a few of your customers to the rate increase, you’ll clear up time for you to really measure how they react to it. Even if all five of them call you up angrily, you’ll have better means to handle the situation than if you increased the rates for all of your tenants at once.
Some of your tenants will leave over the smallest of price increases. More realistically, however, most of your customers will stick around as long as they’re in need of self storage. According to James Webb, a storage facility owner in Stockton, CA tenants who choose to move out were probably thinking about doing so for a while. For them, the price increase merely caused them to execute their decision.
When handling grumpy customers about your new rates, the typical rules of good customer service still apply. Along with those, a tactic that tends to work well for both you and the tenant is to remind him that he’s still paying less than any of your new leads would be.
Let’s say that, over the course of two years, you raise your rate for unoccupied 5’x5’ units by 15% three times. Meanwhile, you only institute a 7% increase for current customers after they’ve been renting with you for 9 months.
So when John Doe raises his eyebrows at the fact that you’ve raised rent twice over the span of two years, it’s important for you to distinguish the difference between his rate and the current street rate for his unit size. In our example, John’s paying $11.28 less per month – or $135.36 per year – than a new move-in would. Plus you’ve raised your street rate about every six months (so this gap will only widen over time), while you’ve only raised rates on your current tenants once very nine months. You can highlight the fact that he benefits from being one of your loyal tenants.
Handling issues like price increases is part of being a good businessman. You have to understand your business and its needs, all while being sensitive to the needs of your customers and their communities. Because each facility, each market, and each tenant is different, your formula behind revenue management will likely need several small tweaks until you find what works for you.
In the short-term, being smart about your unit rates will help your profits flourish. In the long-term, you can add value to your facility and enhance your business skills along the way. Take the time to learn from your mistakes until you refine a process that works best for you and your brand.