The current health crisis has dramatically changed the way self-storage operators need to conduct business. A myriad of differing state pricing regulations has made it difficult for self-storage operators with stores in multiple states to manage prices and rent increases. All the while, business expenses continue unabated.
Broadly speaking, self-storage operators have adopted one of three pricing strategies during COVID-19. Risk management is now the primary driver of pricing strategy. The question then becomes: What specific risks are self-storage operators prioritizing and managing?
Pricing Strategy #1: Don’t Change that Rate!
Some operators chose a relatively simple option: Don’t change starting rates or customer rents from where they were at the start of the shelter-in-place orders, until the state-of-emergency is lifted. Rely on move-in promotions to build occupancy rather than a lower monthly rate to stimulate demand, even though a concession may result in further depressing short-term revenues. A conservative approach for sure, but it affords protection against inadvertent legal exposure to price or rent increases beyond those that may be legally allowed.
While this strategy may minimize the legal risk of inadvertently violating a price gouging law, it does increase the financial risk of operating successfully. Minimizing legal pricing risk can mean less revenue than could otherwise be earned when acquiring new customers who are willing to pay higher rates for unit groups with few vacant units. This strategy tends to be relied upon by self-storage operators that don’t have the analytical and information technology capabilities to know how and where prices can be actively managed so that state regulations are not violated. While not a particularly desirable strategy, this has been one that some companies found necessary to adopt.
Pricing Strategy #2: Aggressive Starting Rates
Some operators have taken a slightly more active approach, lowering rates for new customers where unit groups have high vacancy levels. This strategy is intended to help build occupancy where it is needed, without providing more of a concession than necessary.
While this strategy is frequently employed during economic downturns, state-of-emergency restrictions can make it much more difficult to increase prices as vacancies decrease. As shelter-in-place restrictions are eased, even while the state-of-emergencies remain in effect, it can prove difficult for operators to determine by how much prices can be increased as vacancies in a unit group decrease. Unless the self-storage operator maintains easily accessible information regarding the extent to which prices may be increased under the state-of-emergency, prices will likely be managed with much greater caution than necessary – that is, operators are likely to be much more reluctant to increase prices than would otherwise be warranted.
Relative to Strategy #1, this approach tends to better manage cash flow risk and is likely to lead to greater financial success. However, it can still fall far short of maximizing financial success.
Pricing Strategy #3: Balanced Risk Approach
Some operators have been able to actively manage their rates for new customers – both increasing and decreasing rates where and when appropriate. To ensure compliance with state regulations, they may not be increasing their rates on highly demanded unit groups as much as the marketplace might support, but they do not shy away from rate increases where and when possible.
These operators have found active price management to be a critical element of their ability to manage their operations in the current business environment and achieve maximum financial success. Even if revenues and profits are down (and in some geographic areas revenues and profits may be up), they are not nearly as depressed as they might otherwise be.
If Pricing Strategy #3 is the path towards greatest financial success, why don’t more (or all) operators adopt this strategy?
So why isn’t a balanced risk approach strategy adopted by more operators? We have identified two primary reasons. First, some operators simply believe that now is not the time to increase prices. In their view, many in their communities are having to deal with enough hardship that raising prices, even if justified in normal times, is not currently a business practice they want to adopt. While such a philosophy may not be widespread in many industries, it is worth noting that to a very large extent, philanthropy is very important to individual operators, as well as the industry as a whole. Consequently, there are operators who may simply feel more comfortable holding off on any price increases in the current business environment.
The second reason is a practical one. Without easy access to the necessary information, it can be difficult to determine how much of a price increase is allowable. Especially for operators with stores in multiple states, tracking the maximum allowable price for each unit group can require quite a bit of effort. Operators who have easy access to such data, such as those that use VRMS or some other revenue management and pricing analytics software, are far more likely to adopt this strategy. Revenue Management software becomes a critical element of ensuring the long-term financial success of the operator.
Veritec is committed to doing what it can to help our clients obtain financial success. Our staff are not merely technologists; we are educators and seek to share our expertise and knowledge with those that work with us. We look forward to hearing from you so that we can jointly determine the best way we can assist you and your business.