Ten Questions Asset Managers Should Ask About Pricing
by Dom Beveridge | September 10, 2019
Recently we have written extensively on the skills that are needed to run an effective pricing and revenue management (PRM) organization. We normally take the perspective of an organization looking to bolster its PRM capabilities - something that we feel companies should focus on after a decade of growth in multifamily. But there is one important stakeholder group whose perspective we have not addressed as directly as the others: asset management.
Through our industry connections and our growing roster of institutional ownership clients, we have come to pay more attention to the asset management perspective over the last year or so. With regard to revenue management, asset managers have the often unenviable task of overseeing the revenue management decision-making of third parties, usually either management companies or software vendors.
In either case, an asset manager has to understand enough about market conditions and strategy to be able to evaluate a property’s pricing tactics. They must resist getting into the weeds, of which there are many in the case of PRM, but still provide oversight. With this problem in mind, we recommend asking ten questions that will help you understand where your PRM opportunities might be.
1. Is senior management in the loop?
The biggest problems tend to arise when strategy moves out of step with the tactical decision-making processes of PRM, often the natural and logical consequence of ownership not explicitly stating the revenue strategy. Asset management should be getting an in-depth briefing at least quarterly about market conditions and the PRM response as well as updating any strategic guidance to PRM.
2. Is PRM paying enough attention to seasonality?
Demand changes from season to season in most markets, and that means that you need a structured and transparent process for reviewing seasonal changes in PRM system settings.
3. Where do you draw the line with “pricing” decisions?
Pricing is one part of a property’s demand management toolkit. Is PRM involved in other key demand management activities and decisions like credit screening, long-standing vacant policies and short-term rentals?
4. Are you using hold-times as well as you can?
Operators often under-rate the use of hold times (ie the amount of vacancy that you will accept when entering a lease agreement) as a lever when market conditions change. It should be part of a regular strategic review.
5. How is pricing compliance?
A property’s pricing compliance with should be the subject of regular reporting. Where non-compliance exists there should be a robust and proactive process to address it.
6. How frequent are system overrides?
Properties have to override pricing recommendations from time to time, but not too much. Stakeholders should feel confident that the level of system overrides is neither too high or too low.
7. Are you happy with the renewal caps?
Renewal pricing can be an arduous process as multiple stakeholders tend to be involved in the process. But properties should not lose sight of their strategy - in particular, renewal caps should never be lower than 8% (and typically no lower than 10%).
8. Are you paying close enough attention to expiration profiles?
Bad expiration profiles consign properties to suboptimal performance - and a surprising number of property managers fail to pay adequate attention to this critical driver of performance. Properties should report regularly on expiration profiles and should have a reliable toolkit for fixing sub-optimal ones.
9. What about sales and marketing?
PRM should collaborate with sales and marketing to resolve occupancy and exposure issues without resorting to unnecessary price changes.
10. Do you have a plan for the next downturn?
There is more talk of a downturn today than at any point in the last decade. Nobody knows when performance will soften, but PRM teams should have a plan and the system knowledge to formulate and implement strategy when the market changes.