Companies using or considering ARM systems have options that allow them to understand and participate in pricing decisions.
As interest and adoption of apartment revenue management (ARM) systems have risen in recent years, multifamily housing companies are actively investigating revenue management products and learning the principles and practices of the discipline. As they become more educated, they become more discerning customers, driving improvements to the products to match the needs and expectations of increasingly knowledgeable decision-makers.
Responding to customer demand, some technology providers have created products that follow a trends-and-rules-based model. This presents a different approach to pricing while upholding the principles of revenue management.
The revenue management method initially adopted in the multifamily industry followed the statistical forecast model as a platform to determine the price. This model generates a predictive analysis from the trends of supply, demand and market conditions, using highly complex statistical forecasting algorithms, before determining how rent prices will move.
In contrast, the newer trends-and-rules-based pricing model determines the price directly from supply, demand and market condition trends without any forecasting. For instance, this model would examine changes in inventory, traffic and competitive pricing for a time period such as two weeks and compare it to the previous two-week period to determine the direction of the price change.
Because rent prices are based on trends rather than forecasts, professionals using the revenue management system have transparency into how the price was determined. If in the last two weeks, for instance, inventory went down, demand increased and competitors’ prices rose, a company’s management would understand why the pricing engine increased pricing.
After recently piloting a new trends-and-rules-based revenue management system, companies report positive results. “We have seen two- and three-percent rent revenue increases in our properties that use the new system,” a professional at one company says. “It enabled us to reduce our concessions and bad debt while increasing our average lease term. Our site personnel have welcomed a tool that takes the guesswork out of pricing.”
Pricing Participation
Regardless of the pricing method, ARM systems are demonstrating that they can assist the property manager in maximizing occupancy, optimizing revenue and even in contributing to resident satisfaction by opening up new leasing options. A company wishing to take advantage of such a system just needs to decide which model works best for its organization and management style.
The newer trends-and-rules-based model has changed rental pricing in three ways. First, the determining factors of the price changes, such as lower inventory or increasing demand, are visible and easily understood. This visibility affects not only revenue managers, but also onsite staff, who are better able to sell to prospective residents because they understand how the price was determined.
Second, the pricing engine is flexible because users have the ability to influence the engine. If a community or company does not want to factor competitive rents equally in pricing decisions, they can choose to mute that influence. This ability can be particularly important for communities with special circumstances, such as lease-ups.
Third, enabling more participation in the pricing process by property and leasing managers balances automation with human expertise and oversight. The trends-and-rules-based model has developed new ARM best practices in which apartment pricing and marketing is complemented by involving community, regional and corporate resources in a process of price reviews and feedback to continually tune the pricing engine.
“We tested the new system on three of our most difficult properties in the middle of winter,” says one professional at a company using this model. “Days vacant as well as overall vacancy loss reduced significantly. Along with that, rental adjustments have been automated and GPR [gross potential rent] has improved, allowing staff to focus on overall NOI.”
Regardless of their philosophy, multifamily managers now have ARM options, and they can choose the one that best fits into their business and budget and brings lasting value to the organization. With a customer base that is becoming more educated and driving improvements to the products and models, and with multiple options making ARM systems more widely accessible, the adoption of ARM systems can be expected to grow significantly throughout the multifamily industry.
Dharmendra Sawh is a Revenue Management Specialist for Yardi.