By Elizabeth Ferrin
Some self-storage managers have adopted a strategy of using sophisticated algorithms and demand analyses designed to maximize revenue when calculating their rents. This means that customers will receive a different rate for storing at the same facility. A customer who calls twice in a single day may receive two different quotes.
Though still limited in use, an increasing number of stores are reviewing and updating their approach to rental rates to maximize the bottom line. “Managers need to provide input,” says Brad North, president of Advantage Consulting & Management. “They need to give their opinion on what sizes should be raised and they need to shop around.
Shopping The Competition
Keeping tabs on the street rates and pricing policies of neighboring facilities is crucial to understanding where your rates fall in the marketplace. “You’ve got to look at the three-mile market surrounding your self-storage facility,” explains Ken Nitzberg, chairman and CEO of Devon Self-Storage.
He adds that in addition to rental rates, it is important to have some idea of the giveaways and move-in incentives being offered at all of the self-storage stores in the area. “Promotions have become almost a requirement to rent space in most markets,” says Nitzberg. “That’s been the most competitive piece in many markets across the country.”
It is also important for self-storage managers to have a good handle on the type of market they serve. “If your site is in a retirement area in Florida, your customers might call 20 different sites looking for the lowest price,” says Nitzberg.
Rental Rate Philosophies
When it comes to raising prices, there are a variety of philosophies that drive rental rates. Some storage businesses roll out an annual rate increase for every customer; while others look at each unit size individually to determine when and where to adjust pricing. Other facilities may reevaluate pricing only sporadically.
Since there is a level of apprehension that often accompanies a rate increase, North explains that he advocates managing rents selectively and adjusting rates only on a size-by-size basis. He uses a unit’s economic occupancy, which takes into account any discounts renters are receiving, as a guide. He uses an economic occupancy rate of 85 percent as a benchmark number to signal the need for a higher rental rate for that specific size. “Don’t think that because the competition increases rates on 10-by-10s that you need to do it as well,” says North. “It all depends on your occupancy.”
Another strategy involves annually increasing rates across the board. “We raise rents on every unit each year,” says Brenda Scarborough, CEO of Accountable Management. “No one jumps up and down with excitement about it, but we’ve found that if we keep it small enough, everyone expects an increase.” She found that large, irregular increases are less accepted by customers and says she is now committed to yearly increases for all tenants.
On each tenant’s anniversary date, the computer generates a reminder about the new, higher rate that will be assessed going forward. “Unfortunately, many stores have reduced their rates in the economy,” says Scarborough. “However, we still have a small increase every year.”
Adjusting Street Rates
Many operators draw a distinction between street rates and existing customers, preferring to adjust rents only for new customers to keep current tenants from revisiting the necessity of maintaining a storage unit. “You won’t lose many tenants over a $5 to $10 increase,” says Nitzberg. “But, an increase makes customers think, ‘Do I really need this?’” He recalls a Self-Storage Association study which found that the sector’s single biggest competition was the dumpster.
Nitzberg warns against going toe to toe with the dumpster in the name of a small rent increase. “You don’t want to force tenants to make this type of decision based on $5. That’s why we tend to be more aggressive with new customers than existing tenants—new customers don’t know what the old rate was.”
Communicating Rate Changes
The most common way to communicate the increase is with a well written form letter on company letterhead. This keeps correspondence consistent and takes responsibility out of the hands of the manager, who can simply say, “This was a corporate decision. It’s out of my hands.”
It is also important to include a phone number or email address on the letter and invite tenants who are concerned about the new rate to get in touch with the facility. If and when a customer calls, the manager can then go over the new pricing, explaining that the store’s costs are also on the rise and that the higher rates are necessary for the storage business to cover its expenses.
Fearing Negative Feedback
Some managers also worry about potential backlash from customers who will be angry about the new rates. However, it is important to remember that those few angry customers were in the minority as the majority of tenants likely willingly paid the higher rate with no questions asked.
Some managers also worry that a drop in occupancy will accompany a scheduled rent increase, but managers need to remember that keeping a store as full as possible is less crucial than maximizing profits. “Occupancy is important, but revenue and net operating income are very, very important,” says Nitzberg. “I would rather be 85 percent full and have $1 million in gross revenue than 100 percent full and have $750,000 in annual gross revenue.”
Timing Rate Increases
Proper timing of rental rate increases can also make them more palatable for customers. Many suggest implementing higher rates when demand for self-storage tends to be highest. It can also be a good idea to roll out a new rate after the fifteenth of the month rather than the first so the facility is not competing with other monthly bills.
According to North, good communication and understanding is the key to a successful rate increase. When everything is done in order—meaning tenants are sent letters 30 days or more ahead of the rent adjustment explaining the increase—most rate changes are met with very few questions and very little resistance.
It is also important for the manager to understand and concur with the higher rental rates. “It’s the manager’s job to eagerly sell the rates and the manager is the single most important factor in the equation,” says Nitzberg, adding that a successful increase is the result of the combination of the right rental rate and an excellent facility manager leading the way.
From “Moving Up: Raising Self-Storage Rents” by Elizabeth Ferrin, a freelance writer based in Maple Grove, Minnesota, who is a contributing writer for the annual Self-Storage Almanac and other self-storage publications. This article is provided courtesy of Setnor Byer Insurance & Risk with the permission of Mini-Storage Messenger Magazine.© MiniCo, Inc. All Rights Reserved. It is not intended for further reproduction/distribution without the exclusive permission of MiniCo, Inc. www.ministoragemessenger.com