Watching pricing performance since the downturn started and reflecting on all the things we've done with our clients over the past three months reminds me of a key lesson I learned about pricing and revenue management (PRM) in the 2002-03 and 2008-09 recessions. The opportunity to outperform competitors with PRM is actually GREATER in a downturn than in growth conditions.
That may sound a bit odd until you consider a few realities of PRM and recessions. For example, we should recognize the psychological bias that PRM systems are there to help increase rents. In reality, they exist to maximize rental revenue. Most of the time, that means controlling the pace of rent increase, but there are times when maximizing revenue means lowering rents to grow or protect occupancy. Not surprisingly, a recession is one of those times.
"Outperformance" does not necessarily mean sequential growth. My experience from the two past recessions was that LRO helped our sequential reduction in rent to be materially lower than the competition. We outperformed the competition, but it didn't feel good because revenue was still down. Growing revenue by 4% when comps are up 3% feels great while reducing revenue by 2% when comps are down 4% doesn't feel all that good, even though the latter is outperforming comps by an extra 100bps!
When PRM Systems Come Into Their Own
Since the current downturn started, on this blog, we've counseled system users not to blindly "trust the system" as they manage through unusual market conditions. It's critical to understand how the models work and what they do and don't do effectively. PRM algorithms and software are particularly well suited to taking the emotion out of pricing decisions, and pricing is much more emotional in a recession than in growth periods.
Specifically, good PRM algorithms:
- Operate at a lower level of granularity (some PMS aggregate units up to floorplan up to unit types while others use a lexicon of units to unit types to floorplans). Whatever the terminology, these systems do not implement sweeping, across-the-community price changes the way humans often do. A good example of this was Atlanta in the 2002-03 recession. My company back then outperformed the market by a couple of hundred basis points. Our system saw demand for 2-bedrooms far outpace that for one-bedroom and studio homes. So while the comps were lowering prices across the board, we were only doing so on the low demand unit types. In some cases, we even raised rents on 2BRs during that downturn!
- Algorithms "see" changes (both up and down) and adjust more quickly than humans. Towards the end of the Great Recession, I learned that the recession had started in December of 2007. We did not feel like we were in recession during the summer of 2008, so that surprised me. However, a review of backend data in LRO provided confirmation. De-seasonal demand had risen steadily from 2003 through 2007, peaked in December 2007 and then started declining. So while seasonality was still supporting monthly sequential growth and lulling us into a false sense of security, LRO was not fooled. It saw the declining demand and was making adjustments long before we realized the need to do so. It had our back!
So what does that mean to PRM Directors (and their C-suite bosses)?
- We believe it's unwise to plan on a V-shaped recovery. While we certainly hope for one, recent spikes in COVID-19 and the resultant slowdowns and reversals in economic opening coupled with uncertainty about what the fall brings means we could be in for a bumpy ride. I'll leave whether that's U-shaped, W-shaped or W-W-W-W-shaped recovery to the pundits. As PRM practitioners, our emphasis is on recognizing that it will be a while before a steadily rising tide is lifting all boats. We should plan for a prolonged period of volatility.
- PRM models and software respond to these ups and downs more quickly, but only with the right configuration. These are the times when those who really understand their model and how to configure parameters to implement shifting strategies will outperform those who don't. That's why it's a good idea to bring in a second set of eyes to review settings, strategy and implementation!
- Because of the volatility in market conditions, strategies should likely change more frequently than the normal seasonal adjustments. This puts a premium on communication between senior executives and their pricing team. A good pricing team can implement any strategy by properly configuring their pricing system. However, if they don't know what the strategy is supposed to be, or if senior executives waffle on, or simply don't communicate the need to change strategy, the system will not perform well. In this case, the fault lies with leadership, not the software.
So as you plan for the variety of scenarios that could come this fall, be aware of the opportunity that this uncertainty offers. Now is a time when great leadership and great PRM teams can truly leverage their systems to beat their comps!