The Complexities of Managing Maximum Revenue
- Jan 14, 2011
Ever notice how the price you paid for your airline seat can be different than that paid by your friend across the aisle? The anomaly flows from airlines’ computerized pricing systems, which mix multitudes of supply-demand factors and spit out the highest price the flier is likely to accept. As these factors are ever-changing minute to minute, prices for the same flight change regularly, too.
The same forces are at play in revenue management, a technique being embraced by more and more property managers. Revenue management is the perfect blend of occupancy, rent and lease terms in order to achieve maximum revenue across all market conditions, explains Bruce Barfield, principal at Alpharetta, Ga.-based Rainmaker Group, maker of LRO, a revenue management solution.
“It’s a process considering supply, demand, price sensitivity, seasonality, expiration, renewals and other statistical factors such as skips, evictions, early lease terminations and the like when determining lease prices,” he says.
While the adoption of revenue management technology was initially slow, “growing recognition of its benefits among multifamily property owners and managers could produce double-digit implementation growth over the next 12 months,” predicts Brad Setser, vice president of marketing at Santa Barbara, Calif.-based Yardi Systems Inc.
Steve Lefkovits, editor-in-chief of MultifamilyRevenue.com, believes it’s only the early adopters who have seized on revenue management’s potential. Of the professionally managed apartment communities in the United States, just 10 percent to 15 percent are using some revenue optimization system. “The future will bring broader adoption,” Lefkovits predicts.
Agreeing with that assessment is Janine Steiner Jovanovic, president of Carrollton, Texas-based YieldStar. She reports that the vast majority of investment-grade, conventional multifamily properties with more than 100 units are expected to deploy a revenue management solution within the next five years.
One of the factors fueling that adoption will be the industry’s greater comfort with employing pricing systems. Another is that property owners and managers who have adopted revenue management are experiencing a revenue premium vis-à-vis those who still rely on traditional pricing methods, she says.
That premium will be hard to ignore among non-adopters. “Innovative modeling capabilities and new products will continue to fuel growth in the category, letting owners and managers optimize rents and achieve the overall highest yield, or combination of rent and occupancy, at each property,” she says.
The future will also likely entail deeper integration of marketing and revenue management, as these are two sides of the same coin, Lefkovits adds.
This integration will manifest itself in the feeding of prospect lead data from marketing materials into revenue management systems. It will also be witnessed in efforts to test special offers as a component of revenue management and to gauge marketing efficiency and the number of leads needed to fill units, he says.
Testing special offers as one component of revenue management is important, because every consumer is different and is likely to respond to different kinds of marketing offers, Lefkovits says.
“Revenue management lets management try out different lease terms, for instance,” he says. “Whether it’s free garage parking or cash discounts on rent, all can be tested out in a revenue management system, to determine whether they’re viable marketing strategies. That’s what revenue management is: it’s trying to find the right inducement.”
Barfield is another observer who believes coming years will see revenue management solution providers striving to marry the pricing and marketing functions. “Going forward, we expect to see more reporting and intelligence designed around better integration of pricing and marketing,” he says.
“The information gained as a result of having an accurate forecast of demand and recommended pricing provides executives with a new level of visibility. And this increases the appetite for the slicing and dicing of data. The same holds true for benchmarking and measurement.”
The visibility Barfield mentions will undoubtedly bring new opportunity for profit. “We will see a lot more attention paid to revenue management systems by not just property managers, but also by sophisticated investors,” Lefkovits says. “Revenue management provides transparency into additional revenue opportunities, which explains interest among sophisticated investors.”
For example, revenue management will fit with the industry’s ongoing focus on green initiatives and the desire for paperless offices, Barfield predicts. “We expect that much of the leasing and renewing activity will be done online,” he says, adding that pricing solutions will likely be accessible in easy-to-use formats on iPads and other hand-held devices toward which the industry is moving.
Importantly, revenue management will be used not just with new but also with existing residents, to retain the latter at optimized rent levels, Lefkovits says.
In addition, “next generation revenue management solutions will include the flexibility to offer a variety of leasing options, with optimized pricing for amenities, rentable items and other variables,” predicts Setser. “These areas have historically been treated as fixed-price items but could be included in an automated revenue management solution.”
New, improved revenue management solutions continue to be unveiled. Among them are second-generation revenue management solutions. Multiple-term solutions, rather than single-term, allow operators to account for seasonality adjustments, short-term lease costs, future move-in surcharges and more, explains Setser. It is a response to requests to eliminate manual steps in gathering and analyzing data.
“We are combining price administration with price optimization,” Setser says. “Price administration refers to the automated data collection process and analysis of all the trends that drive their pricing recommendations. Price optimization takes those results and generates daily term-based pricing, which includes adjustments for seasonality, unit-turn costs, future move-in surcharges and occupancy-expense levels, unit by unit.”