Yield & the Yield Breakeven Point
This week's blog is going to focus on yield. The reason for this is that throughout last week's training (both on- and off-line), yield was the most asked-about topic. This makes sense, as there are many people out there who are experiencing a "tightening of the market".
I use the phrase "tightening" rather than "death sentence" (or similar), because I've worked in Self Storage during the nineties (makes me sound old, doesn't it!?) and I have experienced, first hand, facilities that are overseen by good management companies or staff, could do quite well in the current circumstances (economic climate). There are a whole lot of reasons why they can, but the most important reason is that they understand one very important thing - yield.
What is Yield?
First things first; it was made obvious to me last week in training (3 new sites and one existing site) that those operators did not know about yield or what effect yield management has on their facility and, in turn, what effect things like upselling or discounting have on their bottom line (and consequently, their yield).
So let's start with the basics: what is yield?
In a Self Storage scenario I would define yield as being:
The financial return created per net lettable square metre within a given facility for Self Storage rental fees.
This can also be expressed as per the formula below:
[Total number of net lettable square metres in your facility] x [Monthly rental fees gained from the Net lettable Area] x  = Annual yield per square metre.
I am then normally asked what net lettable area is - which I define as...
The total area that can be rented for the purpose of gaining a Self Storage rental return.
In other words, it is that area within a facility that can be rented. It does not take into account stairwells, lifts, walkways, driveways etc. Knowing this helps us determine a couple of things.
The first of these is found on the Key Statistics Report (KSR) within StorMan, under the section titled "Yield at Full Occupancy". This field will show the Operator / Manager three things...
The first of these is a "per square metre rate" per month, which, in the graph below (near the end of this article), is $11.50. On the KSR, this is then calculated to show the yield over a 12 month span. This particular figure is not shown in the graph below, as it is irrelevant for this discussion, but it is a simple multiplication of the "Yield at Full Occupancy" x 12 to give the full 12 months.
Secondly, this allows us to understand the "Yield Rented Units Only" row of the KSR. This line shows the Operator / Manager the yield per square metre that they would be achieving as at the time the report was printed and it takes into account any discounting that the manager has done.
The third thing that the KSR will show us is the "Current Occupancy Yield" row. In essence, this shows the economic occupancy of the facility. In other words, it shows the yield in relation to which unit size codes have been rented. This is important because as we will see when we determine the yield break even point, some unit types have a much larger effect on yield than others do.
Yield Management - Why is it so important?
While yield management is crucial to any facility, it is very important to a new, start-up facility. The reason being that many operators and managers confuse cash flow with yield. As we have seen, there are three different types of yield in a facility and sometimes these can get confused with cash flow. Many owners want to have the best of both worlds and many managers just want to "fill the facility", so it's important to the business that we do all three... and the key to that is maintaining the yield.
As the old saying goes - "look after the pennies, and the pounds will look after themselves", and this is exactly the same with yield. Many Operators / Managers will try and fill the facility by doing "the deal" in the first few months of opening (which often times involves the manager giving away some sort of discount to attract the customer to store with them). I am in no-way saying that we should not discount, however I think it's important to place an emphasis on discounting intelligently rather than just giving it away.
There will be some who read this and will argue that by giving discount you attract customers (which in-turn gives good cash flow and therefore makes the business grow). However, there are other aspects of discounting that may outweigh this view ...and now we get to why yield management wins out here, as opposed to plain discounting.
A yield-aware manager will understand that each dollar they give away does at least two things - the first one means that overall it will remove a certain amount of value from the valuation of the facility (as each dollar of discount will affect the bottom line and therefore the valuation due to the capitalisation rate).
Secondly, it's one more dollar that needs to be clawed back from the customer come rent-raise time 6 months from now. Generally, I have found that broadly discounting your rates attracts a lower class of client and generally, facilities that have a high discount rate also have larger arrears problems. Yield-aware managers take a different approach to discounting and this is what I am trying to explain using the yield break even point graph below.
What is the Yield Break Even point (YBE) and how do I find it?
The Yield Break Event point (or YBE) is the point at which discounting in your facility revolves around. In simpler terms, this means there will be unit-types in your facility that have a positive affect on the monthly yield when you rent them, and there will be units that have a negative effect.
Take these two extremes as an example:
- I have a 1m x 1m space or locker that is rented for $44 per month. Remove the tax component and I am achieving $40.00 per metre every time I rent one.
- I have a 6m x 3m space that is rented for $203.50 per month. Remove the tax component and I am achieving $10.27 per metre every time I rent one.
Great... so I just build my facility full of 1m x 1m lockers, right? Unfortunately, this probably won't work out too well in real life because many customers will object to you cutting their leather lounges into 1m x 1m square chunks! Unreasonable, I know - but they're the customer and they're generally always right (well, most of the time)... ;-)
So where does that leave us? As managers who are using yield management to run our facility (rather than discounting), we can use the graph below to understand the impact we are having on our yield. Let's look at Table 1...
Table 1: Unit types (sqm) vs. Yield ($) per square metre
Square metres Yield ($) at full occupancy Yield ($) per square metre 1.00 11.5 40.00 4.50 11.5 14.44 9.00 11.5 12.00 12.00 11.5 10.00 15.00 11.5 9.33 18.00 11.5 8.89 21.00 11.5 8.81 24.00 11.5 8.13
This data is actually taken directly from two reports within StorMan. The first being the Key Statistics Report that I mentioned above, and the second is the Occupancy Report. On the Occupancy Report, you'll find your unit types (from lowest square metreage to highest square metreage) but more importantly, you will find the Occupancy section.
The Occupancy Section:
This section appears as a large column near the middle of the report and has two sub-columns which we are interested in. These are the "Value" and "Area" columns. We are interested in these as they will allow us to calculate the Yield ($) per square metre as shown in Table 1 above. We can calculate this quite easily by dividing the "Value" column by the "Area" column.
Once we have these numbers for each of the unit types, we can go ahead and draw our graph. I would suggest that you choose the most popular sizes across your unit mix. As you will notice above, I have tried to give a representative spread right from the smallest unit through to the largest. It is important to note that while I have only done a few here, the more unit types that you calculate for (using the above table) then the more accurate the graph that we are about to draw will be.
So let's look at the graph below. You will notice that the values in the table above are mapped as the red line. The constant green line represents the Yield at Full Occupancy figure of $11.50.
You'll then notice that at some point on the graph, the red line will cross the green one. This crossing point will be the true Yield Break Even point but in reality we will need to round this UPWARDS to the nearest size code. This is where the more unit types you use in your calculations, the more accurate the following will be.
In my graph, the red and green lines cross at approximately the point of the 3x3 unit type. This is great, as it allows us to really concentrate on moving the Yield Break Even point to the right of the graph. Before we discuss that, we should look at the two new areas that are formed by those lines crossing.
The first area (the top left hand section) is basically the extra money charged per square metre for the smaller units in the facility. The area that is now under the green line (to the bottom right) is the money the site is losing (per square metre) due to renting the unit types to the right of the yield break even point at a lower rate per square metre than the green line. So it is important to understand that ideally the goal here is to get as many unit types above the green line as possible as this will increase the money earnt and result in a positive effect on the yield management curve (the red line).
The more unit types below the green line would then logically be detrimental to the money earnt and in turn the yield management curve will dip below the line at a size code less than a 3x3. Let's look at how we can now apply this knowledge to the day to day running of a storage facility.
How can I use this in my facility?
The answer to this question is "every day". Understanding the above graph and explanation of yield management and break even points is great but serves no purpose unless this is practiced on a daily basis. The simple fact of the matter is that "every cent counts" literally in that every cent earnt above the green line offsets one below the green line in a direct ratio that is divided by the total net lettable area.
For example, if I charge a client $15.00 more a month and I have 5000 net lettable metre's and I have 3500 of them rented then the change to my yield is: 1500 cents / 3500 metres = $0.0043 of a dollar (or roughly half a cent per square metre).
Now this won't sound much to most people, however it is important to realise that this example is only one customer and only one lot of $15.00.
What happens to the yield if suddenly I do this for 50 people in my facility?
(50 x 1500) / 3500 = $0.21 of a dollar (or 21 cents for every Net lettable metre in the facility).
If I am 70% full and I have diligently over rented each unit for a little bit then this can have massive effects on the yield.
So how do I apply this to discounting?
As we can see above, there is a point where some units are renting above the yield break even point, and some below. Typically there will be more below the line to start with. That's ok because we can use this to our advantage. For example, a customer comes into our facility and wants a 6m x 3m space. At this point, many managers will automatically reach for the price list and quote the $203.50 inc. tax rate and think no more of it. That is, until that customer asks for a discount ...now we're not even getting $10.27 per metre!
$203.50 - tax = $185 / 18 m2 = $10.27 per metre, less discount
This will definitely impact our yield!
So what should we do here? Firstly, I would suggest that we qualify the customer. See if they really need a 6m x 3m unit. If they need that amount of space, then let's ask another question before you give them the price. Do you need that area as one single space? Some customers will say yes and that's life - however, for those that say no or don't care then let's try the following:
We know that if we rent the 6m x 3m space then we get $10.27 per metre. But what if we do the following? 3m x 3m = $12.00 x 9m = $108 3m x 3m = $12.00 x 9m = $108
You can see here that by renting the two 3m x 3m spaces we could achieve $216.00 per metre before tax is applied. This means that I then have $31.00 to play with as opposed to the 6m x 3m rental.
The reason for this can be found in this calculation: Original rental - $185.00 per month + Tax New Rental for equivalent area - $216.00 + Tax ...giving me a surplus of $31.00 overall. I can then "sell" the convenience of having 2 spaces and potentially get myself an additional $31.00 price rise over the existing rates for a 6m x 3m space.
Alternatively I can now discount intelligently: 18m x $11.50 = $207.00 + Tax and understand that I can now offer the client a $10.00 discount a month WITHOUT affecting the YBE or the yield per square metre!
It stands to reason then, that many managers would not want to rent the unit for less than this price because they understand, as i hope you do now, that to do so is wasting money and potentially not worth "doing the deal" for. Obviously there are a few assumptions here. The first is that we haven't already quoted a price to the customer for the unit type in question; the second is that the customer wont mind having a split area and thirdly our Unit pricing is such that renting 2 x 3m x 3m unit is more profitable than renting one 6m x 3m unit.
In closing, I hope that you can see through this example that using and understanding yield management can result in a big difference to your bottom line. Of course, if you need guidance or some more examples, feel free to get in touch - or if you'd like to have a go, please download my YBE Excel Worksheet and work out your own facilities YBE.
Perhaps this new technique will yield (...see what I did there?) you many benefits!
- Ben (International Sales Manager, StorMan Software)