50 Shades of Pricing

50 Shades of Pricing-1

 

I know many of you are rolling your eyes just thinking about a blog with 50 shades in the title. Others of you are snickering thinking how in the world is she going to relate 50 shades to pricing and revenue management in a relevant manner. Regardless of where you sit, if you’re reading this, the title did what I intended for it to do – it caught your attention.

The English definition of shades of grey reads, the fact of it not being clear in a situation what is right and wrong.

Grey is a color. It has many shades. From light grey to dark grey to everything in between. Some people only think in black and white, when in reality most things are different shades of grey.

In pricing apartments, we encounter many situations which are some shade of grey – there is no black or white; it depends on your point of view.

Think about the long standing vacant apartment. Traditionally, operators discount units that have been on the shelf for a long period of time. Vacant units are treated like they are going out of season or like spoiling produce.

Alternatives to dropping the pricing hammer on long standing vacants include:

  1. Walking long standing vacants to ensure nothing is physically wrong. If there is something physically different about the unit, a negative amenity may be appropriate.
  2. Reviewing lease history. Does it always sit a long time? Has the unit leased/canceled several times so it just looks like it’s been on the shelf when it really hasn’t?
  3. Featuring the vacant apartment to draw attention to it to lease. Waived fees; extended hold times; mini models are some of the preferred feature methods for select apartments.

I priced apartments in the DC-market for about 5 years. At one particular asset, everything was humming along nicely – exposure was well in check, rents were climbing, lease expirations were nicely aligned; revenue management and operations were a well-oiled machine. On a pricing call, it appeared that the bottom fell out of the market. Traffic dried up; leasing activity slowed; exposure surged and the revenue management system lowered rents to try and boost demand. The on-site team encouraged me to offset the pricing decrease and hold rents. Based on the data, I pushed back. They then explained that a road construction project had begun over the past 2 weeks and essentially, customers were unable to access the community. They felt confident that when customers were able to physically access the leasing office, things would return to normal. Because the road project was short lived and because we were in peak leasing season, it made sense to weather this anomaly and hold pricing. By examining the grey area and collaborating with operations, we were able to better understand the key drivers behind the market fundamentals and make a decision drawing from all available sources.

We often talk about revenue management as being a blend of art and science. Data provides the hard facts behind the rent recommendations but people on the front line leasing apartments as well as asset specific strategies combine to form the bigger picture.

David W. Earle summed it up nicely when he said, Black and white thinking limits understanding and feedback, two necessary ingredients for successful resolution in creative conflict and successful understanding ….

When I learned about the grey existing between the black and white of absolute terms, I began to experience more peace.

In pricing and revenue management, the more one expands their grey areas (more than 50 shades), the more clarity they have around the bigger picture leading to sounder, more comprehensive approaches to asset strategy and pricing.

 

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