Rate Lag - What is it & how do you avoid it?
This is where all storage businesses can either begin to optimize their yield or cost themselves a whole ton of money!
Imagine you are in the business of selling ice-cream. But not any ice-cream. You are selling the world's yummiest ice-cream. Your ice-cream is, in every way, superior to all others on the market - bar none! So you deservedly charge a 25% premium for it, and the market happily pays.
But then the bottom falls out of the ice-cream market. If you don't review your prices immediately you will be trying to sell your product at a 100% premium. As good as your ice-cream is, you know that your customers aren't as likely to agree to paying a 100% premium as they are a 25% premium. So you do the smart thing and you reduce your prices but maintain your 25% premium. Sure, your business's profit goes down, but luckily for both you and your customers you are a savvy operator and have set up your business to cope with this part of the ice-cream world's business cycle. So, through your good sense, your business makes the most of these lean times.
Or the other scenario occurs, and the ice-cream business is booming. Your competitors put their prices up 25%. Because your product is better, and the market can sustain it, unless you increase your prices by 25%, your business will not realise optimum returns.
In either scenario, if you are not paying attention, you will lose money. It is no different in the world of self storage. Most operators are fully aware that when their facility occupancy is at 95% then there is probably an opportunity to increase yield by raising rents and, at the same time, if tenants are not easy to come by, then discounting can attract much needed new business. Yet very few facilities seem to have a policy of reviewing their rates on a routine basis. Having such a policy, and the mechanisms necessary to effectively implement it, eliminates rate lag. Over time, whether you should be increasing or decreasing rates, rate lag can cost your business a significant sum of money.
We at StorMan believe that the consistent and regular implementation of rate adjustments is one activity that can help your business to reach maximum yield in any economic environment. The regular review of rates is always important but your activity in this area can be of critical importance. This may be especially true in a down market.
When performed properly, activity in this area can improve your yield in a number of ways. Firstly, by regularly reviewing rental rates, you are constantly maximising the return on your investment, regardless of whether rates are going up or down. Secondly, your market will learn that you are, at any given time, providing the best value possible. A good system that properly handles rent reviews will help you to avoid lag induced loss as well as letting your customers know they are in good hands. This entire area of your business is all about maximising yield whilst encouraging customer loyalty.
Merely having a policy on rental reviews is not good enough. Without a reliable system in place for rent reviews there may be restraints on execution of the policy. Such restraints can include a lack of time, will, or know-how. Let's face it. If your facility has 600 tenants are you going to look forward to receiving calls from 600 angry clients each time you want to put your rates up - notwithstanding the fact that you had to discount below your competition to get those 600 tenants in the first place?
Even worse is the scenario where you pay staff to spend valuable time implementing your carefully designed strategy only to find it earns you zip loyalty points in the mind of your customer. If the customer does not understand how you are helping them by regularly reviewing your rental rates then a large proportion of the value you are providing them through this exercise (which should be creating "loyalty points" in the mind of each and every customer) is lost. The art of minimising customer attrition is best approached by encouraging loyalty. When a customer has disadvantaged themselves by moving away from you to a less suitable facility (just to save a few dollars on rent whilst probably costing themselves in other ways) it is far too late to be preaching "false economy" at them - you won't get them back very easily now. In this situation you both lose. Purely and simply that is just bad business!
What we need to do is implement a system that shows your tenants they are getting the best value whilst at the same time you know that you are making the most of your investment dollar. As each customer has a different anniversary date then it hardly seems fair to your clients if you adjust everybody's rate at the same time. So, how might we best go about dealing with this?
The answer is to perform the task of rate review for each qualifying client, every day. Let's say you have 95% occupancy and you know that a 2.5% increase will provide very little in the way of buyer resistance but a significant gain in yield. The first trick is to set your criteria for a rental review. You might decide that, under current market conditions, a 2.5% increase for customers enjoying their 6 month anniversary is reasonable and acceptable. Therefore, what you have to do now is go through your entire client list and figure out which of your tenants are having a 6 month anniversary today.
When you have found out who they are, the next thing you need to do is compose a letter to advise those qualifying tenants of the increase. If you have 600 clients you might find that only two qualify for a rent review today and so you will only send out two letters. The nice thing is that if only two customers receive their review notice in two days time then the highest number of "grumpy customer" calls due to rental review you can expect to receive on the day is two! Let's assume it is a bad day and you have a 100% score for rent review customer resistance. How long will you take handling those two calls?
You are going to repeat this entire process tomorrow and reap the same benefits you did today. And the next day. And... you get the idea. At this rate you are soon to become a favourite visitor amongst the staff at your postal annex because you will probably have the best and biggest smile they get to see on a daily basis.
Here is some more good news. If you have email addresses for your qualifying tenants then you can also save yourself the daily trip to the postal annex as well as the postage! Here is even more good news. Imagine how simple this would be if you could charge your customer's the new rental rate online, via your customer's credit card, or through direct debit straight from their bank account?
A word of caution at this point though. Take legal advice and ensure your contract allows you to do all of this before you begin. This simple idea can be extremely rewarding in financial terms for your business. Yet for many businesses it is difficult to put into action because they don't have a system that can accurately handle this policy reliably, routinely, consistently, and on a daily basis. If you haven't got a system that can do this, then get one - as soon as possible.
The longer you take doing so the more money (and possibly customers when they learn that your competition is doing this) you stand to lose. So go right ahead. Let your customers know that you are delivering the best deal possible at all times while you sit back and enjoy your maximised business returns.
- Wayne (VP Sales and Marketing, StorMan USA; 2007 - 2010)