Knowing what to expect from revenue management—and what’s off the table—can help apartment companies make knowledgeable decisions about investing.
As revenue management is increasingly adopted by the industry, it’s interesting
to see how various mythologies about what “revenue management is” have spread. Some are unintended, in that ideas form and get passed on from person to person without any real vetting and suddenly become conventional wisdom. Others have been carried out with intent, as vendors co-opt the term for marketing and sales purposes and multifamily housing operators co-opt the term to look like they’re doing something cutting edge. Both are actually avoiding the change necessary to implement a true revenue management system.
Here are three things revenue management is NOT:
Revenue management is NOT just software and technology.
Instead, it’s a strategic program that happens to involve technology. Anyone viewing it as a technology project will be sorely disappointed. Revenue management is a way of thinking about the apartment business and realizing that a box is NOT a box is NOT a box. Rather, other important dimensions matter: when the box is rented, how long it is rented and whether it is renewed. Those aspects drive differences in value.
Revenue management fundamentally changes how you view your multifamily business. It will change not only how you price, but also how you budget, how you staff and what kind of reporting and business intelligence you need. And while it does affect your IT department and resources, that’s a necessary, albeit not sufficient, condition to succeed. Revenue management requires CEO or COO commitment—not just involvement. A technology project, on the other hand, just needs money and a sponsor somewhere in the organization. Not sure of the difference between commitment and involvement? Just think about bacon and eggs—while the chicken is involved, the pig is committed!
Revenue management is NOT simply tracking and responding to your comps.
Knowledge of your comps’ pricing is important in setting rents, but it’s far from the most important piece of information for apartment revenue management.
Understanding your own value proposition, your own demand stream and your own supply behavior (e.g. what percentage of your leases will terminate early) are all more important, by a long shot. In fact, you can operate a good revenue management system with no comp data if you have to—we’ve done that at Archstone in places where it is very difficult to find reliable comps.
So while comp data can be useful—and a comp data tracking and response system is better than nothing—it is NOT revenue management.
Revenue management is NOT cheap.
It’s an alluring idea: maybe I can get 70 percent to 80 percent of the benefit at a fraction of the cost. If you don’t really believe in revenue management, it sounds like an even better idea because at least you’ll learn something along the way, right?
Even if you ignore the fact that leaving 20 percent to 30 percent of your revenue lift on the table results in negative ROI, the simple fact is that the idea just isn’t true.
There is no such thing as a “poor man’s revenue management” because you can’t get most of the benefit with only simple tools. A good revenue management system involves sophisticated math that takes highly trained modelers and programmers to develop the technology. That costs something. We all may want something for nothing, but it’s important to remember you get what you pay for. I know all multifamily companies need to be cost-conscious, but I’m always surprised when an otherwise smart executive thinks buying pricing software from a salesperson who emphasizes the low cost of their product is a good idea.
If you’re trying to maximize your own revenues, does it make sense to choose the option whose primary advantage is its low cost? A good system takes time, effort and money to develop. Just ask the current software providers how many thousands of hours have gone into developing their systems. Executives in this industry, as in others, should be prepared to pay a fair price for them.
Donald Davidoff is Senior Vice President, Strategic Systems, for Archstone.