Tech Report: Revenue Management Today and Tomorrow
- Nov 13, 2013
Once utilized only by the largest property management companies, revenue management is now being embraced throughout the apartment industry.
Revenue management systems allow companies to maximize rent revenues on a day-to-day basis, while also providing them greater market insights and the flexibility to accommodate the needs of a broader spectrum of potential renters. As much as the technology has done to make industry pricing more efficient, it has the potential to accomplish even more in the years ahead.
How does revenue management profit property management companies? “We pull in the data in our customers’ property management systems and run it through our sophisticated models, which forecast supply and demand,” says Andrew Rains, president of Alpharetta, Ga.-based Rainmaker LRO.
“Based on those inputs, we produce an optimized price for the apartment unit on a daily basis, which optimizes revenue for the owner.”
In addition to maximizing revenue, additional benefits include consistency, discipline and transparency throughout the organization as to how rent prices are being set, he says. The result is that leasing professionals can say “Yes” more often. Some prospective renters might not want the traditional 12-month lease, but three-month, eight-month or 11-month leases. Revenue management allows leasing agents to more often meet the needs of these prospects.
With Rainmaker LRO, “the model looks into lease expiration management, which forecasts future demand and aligns supply in equilibrium to match that forecasted demand,” Rains points out.
Before revenue management
Before revenue management systems came into being, lease pricing was handled manually and involved looking at only a few variables in the absence of reliable market data and a true understanding of that data. So says Dharmendra Sawh, industrial principal at Santa Barbara, Calif.-based Yardi Systems. Even though the intent and methodology were fundamentally correct, the ability to consolidate data correctly and analyze it appropriately did not exist. “The insight needed to successfully execute a pricing methodology was missing,” he says.
In addition, because the flexibility provided by revenue management did not yet exist, only six-month and 12-month leases were offered, Rains says.
“There were very limited models,” he adds. “For instance, they were quick to offer one month of free rent to generate demand, and that may not be the best approach. As well, they were using a heavy reliance on what competitors were doing. If I’m in a position of pricing strength, why would I focus on competitors?”
Once Irvine, Calif.-based Western National Property Management (WNPM) adopted revenue management, the company committed to not return to the old-school incentives offered before.
“What’s the sense of having it if you’re overriding the pricing the system generates?” asks Julie Manthey, vice president of operations for WNPM.
“If you are watching it and making effective moves based on the lease expiration models we have in effect, that makes more sense than manipulating the pricing structures that are provided each day through the system.”
Embraced by all
Large companies, in particular REITs, were the first to adopt revenue management systems, and they helped to bring a broader understanding of the importance of revenue management to the real estate industry, Sawh says.
Today, the use of these systems is widespread, from small to large portfolios, and for every type of interest. That’s true whether the stakeholder is an investor, owner-operator or property management firm.
“The adoption of revenue management is expanding rapidly, and will likely continue to do so for the foreseeable future,” Sawh reports.
For his part, Rains says the adoption is “absolutely across the board. We have an equal distribution across small, medium and large companies. We see it working equally well in 1,500-unit as well as 25,000-unit portfolios.” In fact, some believe revenue management systems have the ability to make small companies operate like much larger corporations.
Rains has a different take. Some large companies operate efficiently, and some don’t, he says. Morever, some small companies intentionally remain small. “Revenue management allows you to apply the best practices of pricing optimization available in the industry, no matter your size,” he says.
Sawh believes revenue management “absolutely” allows small companies to operate like much larger ones. Before, small companies did not have the resources to focus on strategic rental pricing that would maximize revenue and occupancy without sacrificing either. With revenue management systems, smaller companies can achieve real-time insight into their revenue performance relative to their inventory, market or other business criteria, enabling them to adjust as quickly as any other player, large or small, using revenue management.
Manthey believes some companies avoid revenue management systems for fear their pricing will be controlled by a computer.
“They still want to be able to make pricing swings based on market changes and human objectivity,” she says, adding that some small companies manage their portfolios to emphasize occupancy rather than rent growth; they don’t want to risk available units even if that could lead to growth in rent rates.
These companies, she says, are the very ones that might benefit most from having a system that removes emotion from decisions and helps managers become more dispassionate about issues of occupancy vs. rent growth.
A number of developments will impact revenue management in the years ahead. Rains believes mobile technology will lead the evolution. “No one disagrees, mobile will be the status quo,” he says. “Every onsite person will have some type of mobile device in their hands, enabling them to have prices at their fingertips, [as when] they’re walking the property with the resident.”
Reporting strategy and analytics will also be key. Industry-wide, everyone is seeking business intelligence, the capability to visually and graphically examine performance and determine how their apartments are comparing to one another. “It’s having the analytics to manage their portfolios,” Rains says. “Business intelligence is giving managers great insight into how their properties are performing. It’s the old adage: ‘You can’t manage what you can’t measure.’”
Sawh, too, sees business intelligence becoming an increasingly important part of what revenue management can provide. Leading revenue management systems are evolving to incorporate not only a company’s current performance, but to also benchmark performance relative to the industry as a whole, he says.
This trend will blend exceptionally well with progressive business intelligence solutions, as in Big Data.
The most beneficial systems will also reveal the upstream impact of an asset’s pricing power, taking into consideration marketing and screening data.
They’ll use this information to not only adjust, but also recommend upstream changes that will have a favorable revenue impact. According to Sawh, “This holistic view of a company’s operations will no doubt help drive significant efficiencies across the enterprise, today and going forward.”
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