Why you might not be ready for Revenue Management yet
Parts of this were taken from a post on Multifamily Technology 360.
I used to own a Magic 8 Ball. For a short while I had myself convinced that it could really predict the future. One of the times I was aware of its power was the day I was in the back of class casting sideways glances at the girl sitting next to me. I was only 5′ 2″ and in the beginning stages of THAT LIFE CHANGE so I was nervous about talking to anyone of the opposite sex. I waited until I got home… yanked the 8 ball off my shelf… shook it as hard as I could, thought to myself “Will she talk to me?” and waited for the answer.
Most decidedly YES.
The next day with my newfound courage in hand I went to school and waited for her….
Get some confidence.
First let’s briefly talk about what Revenue Management really is and where it came from. It’s relevant if you want to understand some of my reasoning later:
Ronald Reagan, Madonna and Revenue Management.
First let’s head on over to Wikipedia to check out its definition.
Revenue Management is the application of disciplined analytics that predict consumer behavior at the micro-market level and optimize product availability and price to maximize revenue growth. The primary aim of Revenue Management is selling the right product to the right customer at the right time for the right price.
American Airlines first created this system in the early 80’s. They used it to to give the correct discount when they had tons of empty seats. (Among other things) Due to its success in the airline industry soon these systems were adopted for the hotel industry. Recently they have created quite a stir in Multifamily. From http://www.hotelmarketingcoach.com here’s a list of 3 things they suggest are needed for Revenue Management to be applicable:
- There is a fixed amount of resources available for sale.
- The resources to sell are very perishable.
- Customers are willing to pay a different price for using the same resources.
How close is our industry to nailing these 3?
1) We do have a fixed amount of resources for rent. An apartment complex only has so many apartments. This fits.
2) Are our apartments perishable? I don’t believe it fits the definition that the Hotel and Airline Industry use. Their goal is 100% EVERY DAY. If they don’t achieve that number then their rooms/flights “perish”. We don’t strive for that. (It isn’t realistic) We will always have vacant apartments. Kind of fits.
3) No they aren’t. Let’s not kid ourselves here. Do you advertise your specials in the office where current residents can see? People can overpay for airline or hotels because it’s last minute, or they need to change reservations. Apartments don’t have this impulsiveness. Doesn’t fit.
Can these systems work for us? Of course they can but I don’t think it’s a perfect marriage…yet. There are some things I have serious doubts about and some things I’d like to see resolved before we all go gung-ho:
Pushing your rents is the fundamental methodology for increasing your NOI.
This isn’t rocket science. It’s Property Management. A lot of industry professionals live by the vacancy percentage. While it is certainly relevant, it is just one piece of the puzzle. It’s possible to have a higher NOI with an 8% vacancy than a 4 or 5%. I won’t go into the how here…that’s for another post. Let me let you in on a little secret. You don’t need a computer system to tell you that it’s okay to push. You know your market, you know your personnel, don’t replace that knowledge with just a computer system.
Comparable information isn’t very reliable.
Revenue Management systems use this data when calculating rents. People who have been in this industry for a while know that this data is terrible. You call around … the agent remembers what the price was last week but it’s gone down (or up!) since then. They’re having a bad day and don’t feel like researching. Or they know you’re the competition and want to mess with you. Pick your excuse … these numbers don’t really tell the whole picture. Use them as a baseline ONLY. Are you comfortable using systems that use this data? Lots are … are you?
Changing your rents daily causes chaos.
This is the biggest issue I have with these systems. How can you successfully manage and market all of your online sites and paper advertising when the price today isn’t the price tomorrow? I understand that hotels and airlines have perishable items to sell EVERYDAY. So these daily and hourly price changes really do benefit them. Let’s dive into this a little further:
- We need prospects to screen themselves.
- Can we stop the price jumping?
If our apartments rent for $1499 a month we don’t want someone calling who can’t afford it. By listing our prices we are helping the prospect narrow their search. If you need to fly to Florida you have a very specific need that can only be satisfied by a smaller number of companies. The only screening a customer does for a flight to Florida is whether they afford to go at all.
The real problem I have with these systems is the pricing volatility. It’s hard for me to fathom conditions that require our prices to jump around so often. From the Marketing/Sales side it makes renting apartments difficult. I truly believe that the 6 through 15 month price grid can be intimidating for some at first. Is there such a thing as too many choices? Prospects just want to know how much it is per month. They saw $899 and they want that … after all, it was just yesterday
Know what it takes.
These systems cost money to purchase and implement. In addition you’ll need someone to manage them. Before you head down this road you should analyze your current process for generating rents. Do you think there’s room for improvement? Are you afraid to push because of “market conditions?” The only one holding back from increasing is you. Do you need a Magic 8 ball to tell you it’s okay?
Do these systems make sense for some? Yes; especially for the big boys. An increase in NOI can’t be a total waste of money; if you implement them correctly and MANAGE them appropriately. The purpose of this post and the one on Multifamily Technology 360 is to create conversation and debate. What things do you love about your system? Why haven’t you gotten one yet? Do you have plans to purchase one? Or do you think I’m out of my stinkin’ mind and you have to vent about it? No matter what I’d love to discuss it with you.
Oh yeah did I get the girl?
No. I said Hi. She said Hi back… as she swiveled back around in her seat she rolled her eyes. Magic 8 ball had NO answer for that. I moved on.