One of the challenges with pricing and revenue management (PRM) being more than 18 years old is that most of the pioneers in designing and developing the software are no longer involved. In some cases, companies are on their 3rd or even 4th generation of associate (this holds for both software vendors’ and operators’ teams).
The result is that we often no longer have a healthy skepticism that drives deep knowledge of both the software’s capability and the ways various parts of the demand management ecosystem (all the policies, procedures and other activities that affect demand) affect how we should use the software.
After a decade of growth in the multifamily sector - when it's been relatively easy to deliver upside - senior operators might ask how much of their growth comes from proficiency in PRM, and how much from riding the market. As Warren Buffett famously said, “Only when the tide goes out do you discover who's been swimming naked.”
Seven questions you should probably be asking
An excellent place for an operator to start is to ask how well their PRM department really understands its revenue management system (RMS). Our objective here is not to be accusatory but rather to prompt healthy self-awareness that will drive action and improve revenue growth. Here is a list of a few of the questions that operators should be asking:
- How well does your PRM team understand your PMS’ model and the various parameters that users can set? Each of the three most adopted off-the-shelf (OTS) PMSs have VERY different models. LRO® layers a demand vs. supply forecast optimization algorithm on top of a market response model; Yieldstar® offers a control model to achieve a desired occupancy based on historical booking curves and positioning amongst a comp set; and Rent Maximizer® presents a trend-based model. The point of this blog is not to assess the relative strengths and weaknesses of each but rather to make it clear that “revenue management is not just revenue management.” Each model takes a VERY different approach to get to its pricing recommendations. If your PRM team doesn’t deeply understand the model you’re using, they can’t possibly get optimal results.
- How well does your PRM team understand renewal dynamics? In all of our pricing platform assessments and software “health checkups,” renewals are one of the top two items we find under-performing. Most teams do not understand the relationship between pricing and likelihood to renew, and it always seems that teams overestimate the influence of price on renewals. The result is overly conservative renewal pricing which, given that renewals (and MTMs) typically cover 50-65% of the rent roll, means you’re leaving 50-100bps of revenue on the table.
- How well does your PRM team audit unit amenities? Opportunities to improve amenity pricing is the other thing we always find in our assessment. We haven’t had one yet where didn’t find “holes” or inconsistencies in-unit amenities (a good example of a “hole” is when units 201 and 401 have a view amenity, but unit 301 does not).
- Does each of your communities have a good lease expiration management (LEM) profile? For those communities with a poor LEM profile, does your PRM now how to manage them actively? Lease expiration management is one of the easiest things to talk about as a strategy and yet one of the most devilishly hard things to execute. If your team is not reporting monthly on how profiles look, then a) you don’t even know if you have a good profile and b) you are sure to miss opportunities to improve the profile. Another thing to consider is the tactics you employ. The three main off the shelf PRM systems have varying degrees of LEM capability, and even the best sometimes require manual intervention at least concerning lease length strategies.
- How much does your team change settings and strategy for seasonality? If you run your PRM software using just the “factory settings” provided, then you are highly unlikely to be implementing your business strategy. Similarly, if you run the parameters in a “set and forget” mode, then you are equally unlikely to be maximizing performance. Regular attention to both seasonality and the longer-term business cycle should result in occasional changes in parameter settings. This should not be surprising—given that there are myriad business strategies in rental housing, there’s no reason to expect a single configuration to be optimal for everybody. While helped by math, pricing is not a pure science; there’s an art to it that requires knowledgeable human oversight.
- Does your PRM team understand how credit screening affects pricing? The best PRM teams “own” the credit screening settings. That’s because this is a critical component in the demand management platform and directly affects occupancy and exposure and thus rent growth. Yet the majority of PRM teams (and many PRM services) do not look outside the software settings and include credit screening parameters as part of their work.
- Does your PRM team push communities on marketing and sales execution? Just as with credit screen, lead generation and sales execution directly affect demand management and thus rent growth. If your PRM team regularly engages in discussion around marketing and sales, particularly in the context of whether lead gen or training/coaching levers would work better than simply reducing price, then you are among a select few leaders in the industry. If not, you’ve siloed parts of your demand management platform in a way that guarantees you’ll be leaving money on the table.
We should think about these seven critical technical points in the context of one overarching question: How ready are you and your team for the next downturn?
After a 10-year bull run in the real estate rental industry, it’s not surprising our 20 for 20 white paper found a dangerous level of pricing and revenue management complacency. There’s a real danger that your pricing managers (even if you’re outsourcing your PRM function) have not even done pricing in a recessionary environment. If you’re not actively managing PRM and preparing for the next phase of the cycle, you may be caught with your proverbial pants down.
LRO, Yieldstar and Rent Maximizer are registered trademarks owned by Realpage (LRO and Yieldstar) and Yardi. The opinions in this blog are solely those of the author and represent no authorization, endorsement or agreement from any of these software providers. D2 Demand Solutions is an independent project and consulting company with no formal relationship with any of these vendors.