5 Top Pricing Tips for Getting Through Low Season
by Donald Davidoff | December 17, 2020
Here we are about to go through the lowest part of our season, all while still dealing with pandemic effects. While there are clearly smoother seas ahead--improved seasonality and a likely exit from the public health crisis once vaccines are widely distributed--we still have 2-3 months of low season and several more before we can talk about the pandemic in the past tense.
So based on more than 20 multifamily revenue management low seasons, here are five key things all revenue managers can do to get through these difficult periods:
Adjust your Revenue Management System (RMS) parameters
All of the off-the-shelf RMSs can be configured to implement different strategies for different times of the year and different business cycle phases. These are NOT "set and forget" parameters. The single best thing revenue managers can do for the low season is to be on top of changing to more conservative settings in the low season and then shifting to high season parameters at the appropriate time. The best time to make changes (and how big the changes should be) varies with the year and market. Proactively managing these settings is key to outperforming comp sets.
Focus on the market, not the budget
Budgets matter, but (as we have written elsewhere) they are forecasts based on a point in time that is essentially arbitrary. RMSs (rightfully) don't care about what we thought was going to happen "n" months ago; they are built to take all current state data into account and make decisions to maximize future operating revenue.
That said, revenue managers need to be sensitive to the operator's natural focus on performance versus budget. Almost all operators are bonused specifically on that performance. Virtually all revenue managers' variable comp is based on something else. Sensitivity to that goes a long way to creating the collaborative culture all revenue managers need. Sometimes it's important to take the long view to "win the war," not necessarily every battle.
Recognize renewals are already in spring 2021
You are probably sending (or have already sent) renewal offers for March as you're reading this. There's a tendency to price conservatively in the low season. However, today's rents are already near the nadir of the year, so there is a risk to piling conservative renewal parameters or strategies onto decisions concerning March. That doesn't mean we should go wild on rent increases. However, it does mean that low renewal increase caps almost certainly leave money on the table.
Be good at collaborating with ops
The low season is always scary. Rents are dropping, occupancy is hard to hold onto, the holidays bring outside stress and typically a depression in demand. It's natural for human beings to extend those trends in their head. And remember that site teams tend to be younger and have been through fewer seasonal cycles.
The biggest challenge is the "FUD factor" (FUD stands for "fears, uncertainties and doubts). Help operators overcome their FUD (and maybe a bit of your own) by sharing stories and data to remind everyone exactly how this happens every year and how the seasonal recovery works. And I can't help but emphasize the importance of stories. As analysts, we tend to rely on data. Data provides important evidence for the brain, but stories truly win the heart!
Communicate, communicate, communicate!
Trust is truly the "coin of the realm," and the best way to earn and maintain trust is to communicate. Communication is always important, but it's even more critical in the low season. With tensions higher and the aforementioned resulting increase in the FUD factor, constant communication is the key to overcoming this. Show metrics but put them in perspective.
For example, when I ran a pricing team for a large publicly-traded REIT, we wanted the operators to recognize that good lease expiration management (LEM) meant we didn't need as many leases as we needed in the high season. As much as we said that, it was still hard to get it to resonate with everyone. So we invented a new metric that we called "weeks supply." It took the count of available units and divided that by the trailing 7-day net lease volume. Even though leasing was lower in the low season... that's why they call it the low season!...so was the availability. We could visually show that weeks supply in Jan or Feb was very much in line with what it was in June or July. That picture was definitely worth a thousand words...and more!
Over the next few weeks, we will be writing extensively about how to plan for what promises to be an unusual 2021. We are optimistic overall, but we will have to weather the storm through the low season as an industry. There are many ways to do that, but follow the five above, and you'll be putting your best foot forward.