The Demand Solutions Blog

What Santa Claus Can Teach Us About Pricing Math

Posted by Donald Davidoff on Sep 4, 2019 10:02:57 AM

Pricing Math in MFHI’m looking forward to the upcoming Maximize revenue and asset management conference September 23-24 in Atlanta. Kicking off the conference late morning on the 23rd, I’ll be presenting another session in a series of deep dives into the math behind pricing and revenue management (PRM).

This presentation series started a few years ago. I had observed that while conferences were including multifamily housing PRM content, they studiously avoided any math or equations in the presentations. I thought that this was severely limiting - restricting sessions to only “beginner” level material. Math lies at the heart of all PRM systems and software, so its omission from conferences felt like a significant oversight. 

I started by running a session at Maximize a few years ago that was designed for advanced PRM practitioners, sharing the stage with my colleagues and good friends Annie Laurie McCulloh and Rick Hughes. I was pleasantly surprised to find that many of the people who attended the session were not those directly responsible for pricing. And I was even more delighted to find that they found the session valuable. My favorite quote of feedback was, “I’m not sure I understood all of it, but I’m really glad there are people in the business thinking about this stuff!”

That told me that, whether or not someone was directly involved in heavy analysis, there was value to hearing and even partially understanding some of the deeper concepts behind these systems. And the math can often be used in other functions, e.g. optimizing marketing spend, analyzing bad debt risk, assessing ROI on renovations and modeling development and acquisition pro forma.

What to expect at this year's show

This year we’re really going to get our inner geek on as we cover three deep subjects:

  1. Optimization algorithms
  2. Regression analysis
  3. Ensemble modeling

Optimization algorithms lie at the heart of any analytically driven activity designed to maximize a positive result (e.g. rental revenue) or minimize a negative (e.g. cost) when there are a variety of decisions that can be made subject to some constraint (e.g. a supply constraint on the total number of leases).

Optimization math is obviously useful for PRM (maximize revenue subject to supply constraints); but I’ve built optimization models for PPC spend (maximize leasing results subject to budget and forecast results constraints) and marketing channel allocations (similar approach to PPC).

Optimization math itself can be quite complex, but the basic principles are not as hard to grasp. To demonstrate this, we’ll be conducting an exercise to help Santa Claus prepare for his upcoming road trip December 24th. A bit of whimsy to go with some serious math! 😊

Regression analysis is a term most people have heard but few truly understand. We’ll talk about what regression is good for and what its limitations are. We’ll also show how to do simple regressions in Excel’s chart function and more complex regressions using the Data Analysis pack. Analysts will leave with a “how to do it” understanding, enabling them to create regression analyses back at work. Executives or other stakeholders will leave with a much deeper understanding of the business meaning and use behind regression analyses.

Ensemble forecasting is the notion of using multiple simple and inexpensive models and “clubbing” them together to create an equally good (or better) result than that from a much more complex and thus expensive single model. Think of it as the analytical equivalent of “crowdsourcing” an answer. We’ll go over a specific approach that could be useful for forecasting demand and thus feed pricing and marketing decisions.

If you’re able to make it to Maximize, please come and join me for what I hope you will find a fascinating session. If you can’t make it but find these subjects interesting nonetheless, please reach out and I’ll be able to discuss them with you!

See you in Atlanta!

Multifamily Revenue Management Maturity Scorecard

Photo by: Markus Spiske via Unsplash

 

Topics: pricing and revenue management