Revenue Management and the Human Touch
Revenue management software continues to grow in use and importance in the multifamily housing industry. Achieving the right balance between the technology and human input, though, remains a challenge for many. Neither software nor human capabilities alone are as successful as when they are working in tandem. No one knows this better than Bryan Hilton, Senior Vice President of Revenue Management at Simpson Housing, who recently sat down with us to discuss this very topic:
NATIONAL APARTMENT ASSOCIATION: Could you please introduce yourself to our readers?
BRYAN HILTON: My undergraduate degree was in Psychology, and I actually practiced as a psychiatric social worker for several years before getting my MBA. So, I feel especially tuned into the softer side of implementing revenue management. I came to multifamily from the travel industry. I had been in the car and truck rental business for 15 years where I started doing revenue management. Revenue management was new to that side of the travel industry so there were many parallels to the early days of multifamily adoption. In travel, I learned the principles of revenue management and how to implement them operationally as well as how the software super-charges the revenue management process. About 12 years ago, Simpson Housing saw that Archstone had started using revenue management and developed software for multifamily revenue management. Seeing the positive results, they wanted to get into using the discipline, as well. Simpson Housing recruited me, and I changed industries. So, I've been in this business for about 11 years now, and we've been on revenue management for nearly 11 years. Archstone developed and tailored a revenue management software called “Lease Rent Options” (LRO) for multifamily that was somewhat based on the platform that was used for the car rental industry that I worked in. So, I was familiar with how the algorithms worked. It's in a very different setting, of course, but it works very similar. Simpson originally purchased the software from Archstone.
NAA: How does Simpson Housing use revenue management software?
BH: We use a collaborate approach. Our revenue management department sets up the system for each individual property with input from the team who will operate the property. We have all of our properties on the system including lease-ups. Some properties have been on LRO for over 10 years. The collaborative approach means we do pricing calls at least every other week with a stable community. With a lease-up or a new community, we do calls every week. On the pricing call, we review all of the metrics that the system looks at to determine pricing. We look at what the demand is, what kind of traffic we are getting, what the competitors are doing in the submarket, if there are any new competitors, if there any changes in demographics or economics of the area such as a major company moving into or out of an area. We work with the community and actively seek their feedback on what they are seeing in the submarket. They give us a synopsis of what they see the competitors are doing and what they're hearing from our customers. In conjunction with those two points of view, we look at what the system is recommending for rents. On the property level, we'll review what our one-bedrooms are doing, what our two-bedrooms are doing, how many we've leased recently, and if the pricing is working to achieve our strategy. If not, then we work together to find out what may be the issue.
NAA: What usually turns out to be the problem when there is one?
BH: It could be the settings in the system need to be adjusted to be more optimal for a specific property, or it could be we have a competitor that is doing something that is negatively affecting our market or property. Typically when we look at all of the factors, we can agree that most of the time the system is doing what we want it do. It's raising the rents where we have the opportunities.
NAA: Can you expand on how the human element comes into play with revenue management?
BH: The human element is the feedback we get from the communities, as well as working together to set a strategy to optimize revenue. If they say they think the pricing is too high or too low, we'll look at what we've been able to lease them for recently versus similar apartments. We'll look at what the competitors are leasing for. We'll look at our inventory and make sure all of the operational factors such as make readies are in line, that we actually have the apartments available for rent in our marketing systems, and all of the systems are working so there aren't any glitches in technology that is slowing down our traffic like a phone line that was going to the wrong number or an incorrect web address.
NAA: Do you have any anecdotes about how the software has been able to really show some improvement in a property?
BH: When we began using the software, we did a pilot. We had six communities and six control communities. One of the communities was very similar to another community. They were only a block away, they were built by the same builder, same floor plans and advertising sources, and so forth. In the community we turned on the LRO system, the communities were competitive before the test, and they both wanted to outperform each other. The community that was on the system was outperforming the other community. The other community got a great idea. They said, 'We'll call them up every day since we're friends with them, we'll ask them what the prices are, and we'll just use that pricing and perform as well as they do. What they didn't realize was, they had a different expiration profile. People's leases were expiring at different times, different unit types were expiring at different times and different exposure levels. So, just copying the pricing didn't work. The revenue management system is individualized to each specific property. The control community began falling further and further behind, and they couldn't figure out what they were doing wrong. What they were doing was shooting themselves in the foot by just trying to copy what the revenue management system was telling another community. Our LRO test communities outperformed our control communities by 3 to 5 percent. That was enough proof to rollout our entire portfolio.
NAA: Is there also a danger in "gaming the system?"
BH: There might be some people who don't fully believe in the system, and there are ways to manipulate the system.
NAA: Such as?
BH: Such as entering competitor that may not be current or manipulated in some way. If the competitor raises the rent and you don't put that higher rent in the system, LRO is designed to handle some of these issues since this usually develops an unintended consequence that become visible. There are those instances where people feel they know what the system is going to do. If they think the price is going to go down at a certain point in time, they may tell the customer to "come back next week when the prices will be lower." This has decreased as our teams have gained confidence in the system and we have developed exception reporting to encourage accurate and timely data inputs.
NAA: Our exit question is, what level of balance do you personally advocate between the technology and the human element?
BH: Revenue management is a discipline with as a software program which helps implement the discipline to leverage the technology for maximum benefit. I tend to lean towards what the system is doing because we've been using it successfully for so long. We feel since it is a proven model, and that comes from our senior management team down to our community teams. Our CEO, our president, all of our senior management believe in the system. They don't believe it's correct 100 percent of the time. They want us to use our skills and our technology to make the best decisions we can make. But we believe we are looking at all of the right factors. If we feel something is not working, we'll look at reasons why. In the system we use, there are a couple hundred parameters that are set for each community, and you need to set them up differently for each community. Different communities have different needs, different traffic patterns, different competitors, and you should customize the parameters to that community. We try to let the system work as much as possible. If we have to deviate from what the system is doing, we look for a way to do it within the system to maintain system integrity. Revenue management is a tool to help us manage our markets to the highest level we can, but it doesn’t work without people.
By Teddy Durgin