The Demand Solutions Blog

It’s the (Revenue Management) Strategy, Stupid!

Posted by Dom Beveridge on Aug 14, 2019 11:03:51 AM

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Revenue Management Strategy in MFHYou reach an age when everything reminds you of something in the past, often for reasons that aren’t immediately obvious. A few weeks ago I was talking to a seasoned pricing and revenue management (PRM) practitioner, and I found myself reminded of an old political slogan.

Most readers of this blog are probably too young to remember the 1992 US general election. But after Bill Clinton won it, it came to light that the mantra “It’s the economy, stupid,” had been drilled into campaign staff. The slogan was intended to remind them never to stray from the core theme of the campaign, which was the plight of the American worker. An overarching strategy begat an overarching message that dominated an ultimately successful campaign.

PRM is a technical domain. You can’t do it without understanding things like seasonality, system settings, critical metrics and reporting. You have to understand and enact policy decisions like hold times and lease expiration profiles while working with operations to handle renewals. It’s easy to get lost in the minutiae and end up paying too little attention to strategy, which should be guiding your PRM efforts.

The operator in this story had been doing well for many years, but following some staff turnover, they were concerned that their PRM system settings were no longer appropriate for their business. As the conversation progressed, it became clear that this operator’s problem was really with strategy rather than system settings or personnel.

Why it isn’t the settings

Uncertainty is everywhere in PRM. You could argue that renewals could be above or below new lease pricing. You could argue that avoiding vacancy loss is more important than finding a resident who will pay a premium for their apartment. But you have to make strategic choices.

Imagine, for example, a value-add operator where the need to achieve renovation premiums is critical to the firm’s financial model. The need to achieve premium is obvious, but make ready schedules for renovated apartments can be unpredictable; and when delays occur, exposure increases and the risk of vacancy looms.

In this environment, the instinct to avoid loss may put downward pressure on rents for the newly-renovated units. But what if the company had been achieving success with relatively high renewal premiums? Could a property continue with this strategy as new lease rents appear to fall?

If the questions like the examples above are unresolved for a property, then PRM system settings will always be wrong (because there is no way they can be right).  Under these circumstances, properties will face uncertainty and probably suboptimal results. To resolve these and other issues, we must focus on the pricing strategy.  That requires pricing managers to have the skill and experience to lead stakeholders (from development to asset management to operations) in formulating and implementing a strategy. If you don’t have a pricing strategy that everyone agrees on, your PRM has little chance of implementing tactics properly.

Two schools of thought

So far, we have talked about the need to define pricing strategy and tactics, particularly those that end up impacting the PRM system settings and outcomes. But readers of this blog will be familiar with the idea that many issues that are diagnosed as “pricing problems” turn out to be problems with something else. Marketing impacts lead volumes, service impacts closing ratios and ultimately renewals, for example. Both impact revenue profoundly but are not directly tied to pricing.

From our experience observing the implementation of pricing strategy, we can broadly identify two schools of thought: 1) “I want pricing to solve my problems and react accordingly to maintain an occupancy goal,” or 2) “I want pricing to remain as stable as possible so I will try to identify and fix my operational issues before I consider a price change.” (As a sidebar, these two mindsets are frequently determined by the PRM system in use by the operator, but that is a subject for a separate conversation).

Mindset 1 tends to underplay critical factors like traffic, closing, marketing and make-readies. When operators sweep these basics under the rug, they often do so with the expectation that the PRM system does the heavy lifting for them. It seldom does.

Conversely, when PRM focuses on pricing to support long term revenue growth, they dig more deeply into the fundamentals 4 Ps (not just price!) to find where the issue lies. In a recent panel at NAA APARTMENTALIZE, we discussed how one operator uses a 40 point checklist before operations approach either marketing or PRM to deviate from the original strategy.

As we discussed in our previous blog, there are core attributes that tend to define successful PRM operators. After a decade of growth too many companies have fallen into PRM tactics that stem either from habit or - worse - because they are “dictated” by the revenue management system. Focus on the strategy (stupid!) and your downstream tactical decisions will usually improve as a result!

Floor Plans and Multifamily Revenue Management

Photo by Michał Parzuchowski on Unsplash

 

Topics: Revenue Management, pricing and revenue management, Future