Revenue Management: Why It Works
Revenue Management: Why It Works

9 minute read

Satisfaction for residents, leasing agents or operational staff has never been higher for those using revenue management to set rents. 

There was a time when revenue management made regional property managers uncomfortable. Creatures of habit, some felt their rent-setting methods worked fine. No need for a deeper dive into the numbers.

Leasing agents and property managers also resisted the new, data-driven approach to growing revenue. “We’re a people-first industry,” they would say. “Deciding where to live is a personal, emotional thing. We can’t become so automated that our residents become nothing more than a ‘number.’”

Raising someone’s rent is confrontational. It’s not easy. It usually causes friction. For example:

Mrs. Jones has lived in Apt. 303 for two years. She’s never been a problem. She pays her rent on time. Who’s going to tell her she has to pay an extra 4.6 percent in rent after her lease runs out?

Today, those resistances to revenue management have faded.

Apartment communities—in nearly any market, any size or under any condition—find that revenue management—through the software-based programs that set apartment rents daily based on current supply and forward-looking statistics such as lease expiration timing—puts a smile on nearly everyone’s face.

True, rents offered are generated by a computer, but the management companies putting revenue management to good use say that residents (prospects or those renewing) play an important role in driving price. Allowing residents to essentially determine their own rent based on when they can move in and how long they will stay—given fair and accurate market conditions—plays well in the minds of those choosing to rent.

While these rents suggested at first might seem too “pie in the sky” high, leasing agents are growing more and more confident that the options they are giving residents are acceptable.

“The revenue management system is set up so that our leasing agents don’t have to say, ‘No,’ anymore,” says Heidi Jehlicka, Director of Marketing for Advenir Real Estate Management, a midsized, regional apartment operator based in Florida.

“Before offers are made, it’s important that we find out three things from the prospective resident: What would be their ideal apartment (size, floor, view, etc.); when can they move in; and how long do they want to live with us. Knowing that, the software can generate an offer customized just for them based on available apartment stock. It’s not us saying we only have this or we only have that.”

Michelle Dabroski, National Director of Revenue Management for national management firm Lincoln Property Company, says that while revenue management software on its face might seem cold and impersonal, it is really the exact opposite. Revenue management is about offering customized options, not negotiations.

“It’s a customer-friendly process,” Dabroski says. “Cliché or not, it’s like some airlines. A traveler (or resident) might ask about a fare for a flight leaving on a Tuesday, but the website suggests that the traveler could pay a cheaper fare if they are willing to depart on a Wednesday. By offering options, the resident can choose what works best for them.”

Your Choice

John Lawler, Pricing Manager, Kettler, a mid-sized regional management company based in the Mid-Atlantic, says consumers today are more accepting of rapidly changing pricing in the things they buy—even apartments.

“We offer our prospective residents numerous options,” he says. “Maybe it’s too many. But in this day and age people prefer it. Having multiple options offers a scenario that works for both of us (prospective resident and community). At the end of the day, it becomes clear what prospects are willing to pay and it’s our responsibility to facilitate that process.

“Revenue management systems are what we make of it. Constantly evaluating to ensure your property is operating to its maximum potential is vital. The systems have the ability to take your company to the next level, but you have to understand the inner workings and implement the right strategy. One strategy doesn’t work for all communities. Having that knowledge along with the ability to adapt is paramount.”

Amy R. Smith, CAPS, Managing Partner, Bella Investment Group, LLC, says that during her revenue management system due diligence, “We were warned that the biggest hurdle is overcoming the emotions and instincts of experienced property managers. Many managers and regional staff will see rents rising at a rate greater than they are used to, and may want to override what the system suggests we charge. Because of the rent-based parameters we set within the system that is generally not necessary.”

Bella is a small apartment management firm based in Flagstaff, Ariz.

“We also have found that often in an effort to bring compassion to the business, some managers will make assumptions about income levels of existing residents, foregoing rental increases or offering concessions on renewals in response to the pushback they get from prospects. Again, this is not necessary. The system takes the human emotion out of the equation, and adds human choice, offering different pricing structures based on the algorithm.”

Lawler, who has worked within the revenue management field for 10 years, says Kettler executives depend on it to reach their goals.

“Managing apartments, we’re all busy,” he says. “Supervisors are realizing that these systems can aid in streamlining the ability to manage their communities. If a regional manager is in charge of rents at eight or 12 properties, they might have distractions that cause them to take their eye off of pricing every once in a while. With the software, we can price the property on a more consistent level as opposed to making an ‘impulsive’ or ‘gut’ decision.

“Kettler has used revenue management for almost 4 years. Early on, there was a bit of hesitation due to the unfamiliarity. However, that hesitation didn’t last long once our teams realized the number of ways they can benefit from using revenue management.”

Rent Bumps and Bonuses

Those included in this article agree the minimum revenue bump that a community will gain from using revenue management is 2 percent. Several have seen increases in lower double-digits. The norm is somewhere in between.

At some communities, some staff members’ bonuses, in part, are indirectly tied to performance.

C-suite executives, including Lincoln’s Scott Wilder and Kettler’s Cindy Clare, and others, insist that the employee charged with reviewing override requests not be one whose bonus is tied to revenue performance. 

Dabroski says Lincoln has considered tying bonuses to revenue growth, “But we would consider the revenue growth at a property in comparison to the market. For instance, if the property shows 7 percent revenue growth within a market that had 4 percent revenue growth, then the bonus should be applied to the difference.

“You want to be cognizant of the fact that part of the revenue growth could be attributed to an emerging market and you do not want someone penalized for minimal revenue growth in a declining market.”

At Bella, “Property- and regional-level managers often have a portion of their compensation tied to property performance, occupancy and/or revenue,” Smith says. “We find that this can bring a level of caution to rental rates that they might set. Until they trust the system, there will be temptation to override the algorithm if rents appear too aggressive.”

During regular calls (some daily, others weekly) a property manager who is worried about their performance might seek approval for an override for the rent generated by the software.

Smith says her marketing director makes the final call on overrides and her compensation is not directly tied to the performance of any one community, thus allowing her to be more objective in her decisions.

“The marketing director consults weekly with each property manager, as well as the regional supervisor; but ultimately, pricing is in her purview and she has final say,” Smith says.

That approach is common.

“We typically accept most of the pricing models recommendations,” Lawler says. “However, there are circumstances when overrides are necessary. The most common override we see is due to evictions.

Typical notice time is 60 days. Unfortunately, with evictions, it is closer to seven to 14 days, leaving us with very little time to market the unit.”

Other common overrides occur because the property’s dynamics have shifted (i.e., staffing, disposition, refinance, new comp, renovation), Lawler says.

“At one community, eight residents moved due to military orders at a rather small property,” Lawler says. “The software accounted for increased notices. However, this is a time when we need to analyze the recommendations and determine if the decrease was too much or not enough. Sudden jolts are fairly uncommon, but they do occur and it is our responsibility to make the necessary change in order to soften the blow.”

Lawler adds, “A couple of years ago, the federal government instituted sequestration, where military budgets were slashed across the board. This was a unique situation for this particular submarket. Having a revenue management system allowed us to measure the negative impact of sequestratio and position ourselves in order to remain competitive.”

Override Anxiety

Override requests are rejected, too, when they are driven in part by anxiety among leasing staff who feel the “rent ask” would be too great, especially during times of limited availability, Lawler says.

“This generally occurs when leasing has been stagnant for a couple of weeks,” Lawler says. “When it happens, I will challenge the team to look at the big picture and recognize that they are in a position of strength which allows us to test the market.”

Dabroski says she denies requests if they are based on the previous rent paid in that particular unit, or if goals are being met (occupancy, trend) and an associate is basing the override only on a select few tours or specific comp data.

“The software doesn’t care what the resident who lived in the vacant unit before was paying,” she says. “And it doesn’t know, and shouldn’t know, whether that resident signed a lease in June or December. The software is forward-thinking and is setting rents based on what current leases we have and when they expire.”

It’s fair to say that revenue management can over-think a situation. But ultimately, it usually is for the community’s own good. For example, the software might suggest moving the resident into the vacant unit sooner (in two weeks rather than a month later) and might price the rent lower for that move-in date to get the resident in the door, especially if he or she prefers a shorter lease term.

Because, in turn, by having the leases expire sooner, or during a given time of the year, this might enable the system to offer a higher rent at renewal time.

It Won't Work

Revenue management systems work best when the community is doing a good job of setting its criteria, and is inputting all of its rental data in a timely manner.

Dabroski says one rare situation where revenue management wouldn’t work is at properties where the management is setting too many unreasonable restrictions on its criteria, such as that it will never accept anything less than $2,000 per month when it knows that there is little chance of getting even $1,800 per month for that unit. Jehlicka says another instance—and the industry understands this—is using it during new lease-ups.

“There simply isn’t enough available inventory and too many factors are changing day-to-day in terms of occupying the property,” she says.

Even then, however, a new property filling up quickly in a competitive market brings smiles