Multifamily housing operations often takes a cue from travel and hospitality management. In that vein, I would like to talk about a business term that is fairly common in the world of travel and hospitality but hardly ever used in multifamily housing. That term is “demand management.”
We’ve borrowed many pricing and revenue management (PRM) concepts from travel and hospitality; however those industries have moved far beyond mere PRM and into the much more integrated and sophisticated world of demand management. The “PRM view” focuses on how pricing translates available demand into realized demand (in our case leases); in contrast, a “demand management view” expands well beyond pricing to include everything else about how we generate demand and convert it to leases.
As with PRM, we’ll need to modify the concept of demand management to the unique characteristics of multifamily housing. Doing so uncovers the key drivers to managing demand within our capacity constraints:
1. Lead Generation
The first part of any demand management platform is the process to create the demand in the first place. The interesting thing about multifamily housing is that we’re really in the “structural demand” business., i.e. we don’t create demand through marketing. Rather, outside stimulus (job change, family status change, etc.) create the demand, we just need to “catch” it. That’s why I’m a fan of a “honeypot” strategy—put as many “pots” out there as possible to catch demand where prospects are shopping. Online that means strong SEO and investments in ILS (including craigslist) and PPC. Offline, it means signage, curb appeal and the like.
2. Call handling
Having generated leads, we now need to respond to them. Unfortunately, most operators only answer about 55-60% of the calls that come in. That’s why I became a fan of call centers. Having conducted what I believe is the only scientific test of a call center, I trusted the approach when the results proved a 150bps revenue lift on the test communities compared to the controls.
3. Reputation management
A critical part of many prospects’ journey is looking at one or more review sites. This can happen pre-lead and affect Lead Generation, or it can happen post-lead during the Lead Consideration phase. Fortunately, there are several very good options for centrally managing review sites. Several allow you to benchmark against competitors and have other functions beyond strictly seeing and responding to posts.
Pricing is clearly one of the most important components of our demand management platform. A big part of why we adapted pricing and revenue management from the travel and hospitality industry is that we share many of the same features in our business model. Specifically:
- We have constrained supply. We can’t just add or drop apartment units quickly, so we can leverage situations when demand is greater than supply to discriminate which prospects will get the product (please note that we “discriminate” based on willingness to pay, NOT the kind of discrimination that is a Fair Housing issue!)
- Residents “buy” the unit ahead of consuming it. That is to say they apply (reserve) a unit in advance of moving in. So we can leverage historical lead time curves to understand whether we are ahead or behind pace for upcoming weeks
- The value of our product (a night in a unit) drops to zero once the night passes. Our product is not like produce or seasonal fashion that loses value over time. It’s worth something one day and worth nothing the next.
Pricing and revenue management also gets us thinking about things like hold times, lease expiration management and even which days of the month (or week) expirations occur. All of these share the purpose of maximizing the value of our limited resource product.
5. Credit screening
Another important piece of the demand management platform is credit screening. Too many operators manage to a decline rate. However, the purpose of credit screening is not to decline a specific percentage of applicants, it’s to manage revenue risk (i.e. bad debt). If your bad debt ratio is less than 50bps of revenue, then your credit screening thresholds are probably too tight. When I ran demand management at a large REIT, I once reduced thresholds and saw a $3.9 million dollar increase in leases at low occupancy communities that we would have otherwise declined; and in the ensuing year, bad debt on those leases was only $300,000. Our overall bad debt ratio only rose 5bps. Credit screening is an oft-overlooked, and remarkably simple, lever for demand management.
6. Sales performance
Often talked about but honestly rarely truly invested in, sales performance feels to me like the ugly stepchild in the demand management platform family. Pricing is the “hard edge” dimension that converts demand into leases while sales performance is the “softer edge.” In tandem, they completely control our leasing results. Yet operators invest dollars per unit per month in PRM software while rarely (if ever) investing in improving sales. As I’ve written before, prospects don’t buy the same way that they did 15-20 years ago, yet most operators still model, train and coach sales the same way they did in 1999. With all due respect to the late Prince, it’s now time to party (i.e. sell) like it’s 2016.
7. Customer experience
Just as sales performance affects how leads translate to leases, customer experience affects how leases translate into renewals. 20-30% of residents will renewal almost no matter what, and a similar number will leave almost no matter what. That still leaves 40-60% “in play.” And the single biggest predictor of whether someone will renew or not is whether they have an unresolved issue. It could be a service request we think is closed, or it could be a policy they take issue with that we don’t even realize. Or it could be that they perceive we are not enforcing our existing policies consistently…can anyone say “dog poop” :)
The bottom line here is that it’s about the customer’s experience, not just about “being nice.” Do our processes and technology make it easier or harder to live with us? Do we truly value our residents or do we “nickel and dime” them? Do we make it easy for them to communicate with us and share their frustrations? These can easily drive a difference of 5-10 points in renewal rate. Think of what that can do to give pricing power to your PRM system!
8. Renewal processes
Lastly, our renewal processes also directly affect demand management. Do we treat this as a sales opportunity or a direct mail campaign? If prices are up, do we face up to the conversation or leave the letter under the door at 5p on Friday hoping the resident calms down by the time we’re back in the office on Monday? Do we allow (even push towards) online renewals (in my experience, online renewals reduce negotiation materially)? And if rates have gone down since the renewal letter went out, what do we do? All of these bear on resident retention.
If you’ve gotten this far, you probably feel a bit overwhelmed. There’s a lot here and many of these items interact with each other. That’s really the point of this blog…why we need to start thinking about our demand management platform as a system rather than focusing on just the individual parts. The sooner we start using this term, the sooner we’ll be more integrated and sophisticated in our approach. Then we can bear the fruit of better NOI growth even in these uncertain times!