The self-storage industry experienced a surge in demand during the pandemic, but that robust growth has ended. Operators are now grappling with fewer move-ins, declining rental rents, and rising vacancies. The intensified competition triggered a pricing battle among the major players, with each rate cut frequently causing a full-fledged price war across numerous markets.
While the temptation to slash prices to capture customers is understandable, price competition is usually a “negative sum” game that erodes long-term profitability. Cutting prices is easy to implement, but assessing their long-term effects is challenging. Furthermore, reversing the negative revenue consequences of substantial price cuts can be slow and arduous.
Being market-aware and knowing when and where to respond to competitive price changes is crucial. This involves understanding how competitive pricing influences customer demand for your products and responding selectively. Sometimes, the most prudent course of action is ignoring competitors’ price cuts. However, in other cases, offering lower prices or matching competitors’ pricing is necessary.
This article explores proven strategies self-storage operators can adopt to navigate the competitive landscape without resorting to destructive price wars. Operators can achieve sustained growth and success by focusing on non-price actions, implementing pricing segments with differentiated offerings, and optimally responding to competitive rate modifications.
Understanding The Factors Influencing Price Reductions
Self-storage rental rates are experiencing a significant downturn, primarily due to the low prices initiated by prominent real estate investment trusts (REITs). While numerous factors contribute to this decline, the primary narrative revolves around a few key points:
Occupancy Concerns - Occupancy drops when move-outs outpace move-ins. Anxious about their stock prices, publicly traded REITs reduce street rents and increase marketing expenditures to safeguard occupancy levels.
Revenue Juggling - To mitigate the revenue loss, REITs often implement aggressive rate hikes for their existing tenants shortly after move-ins. Although this approach may generate customer backlash and affect brand perception, REITs estimate positive net revenue as the number of tenants vacating due to rate hikes may not be substantially higher than the number of tenants leaving naturally.
Hedging - Large operators do not uniformly reduce rates across their entire portfolio. Instead, they keep higher rates in select locations and products while implementing more substantial rate reductions in others. This strategic approach allows them to hedge against market fluctuations and protect overall rates and revenue.
Slow Response From Smaller Operators - Many independent operators lack sophisticated revenue management systems and cannot promptly and optimally react to rate changes. This delay grants REITs a competitive advantage and allows them to gain a foothold in the market.
Time-Tested Tactics To Outcompete Rivals
Consider Nonprice Actions
Actions unrelated to pricing include honing digital and other marketing tactics, enhancing brand presence, raising value awareness of your offerings, improving customer service, and modernizing technology-based capabilities such as websites and AI-based revenue management. While these endeavors typically build long-term capabilities, you could potentially achieve improvements in these domains in the short term. These initiatives represent “positive sum” forms of competition and should always be on the radar.
Continuously Assess The Impact Of Competitive Price Changes
The alternative strategy is to reduce prices. While cutting prices can be straightforward, the challenge lies in assessing the consequences of price reductions. It is vital to analyze whether such rate moves boost occupancy and whether the increased move-ins compensate for the reduced yield. Furthermore, the strategy requires monitoring the impact of lower prices, especially if competitors respond with further rate cuts.
Neglecting competitors’ pricing actions can be risky, but copycatting is as risky since it often entails delegating the price-setting responsibility to competitors. Instead, we recommend a surgical approach to price adjustments, carefully evaluating the impact of competitive price changes on your demand.
We utilized AI-based revenue management models, analyzed extensive market data involving thousands of stores across diverse self-storage markets, and found varying impacts of competitive price changes on customer demand. In half of the products, competitive price changes have little or no effect on demand, and 30 percent of the products have high degrees of impact.
AI-based revenue management provides these kinds of granular analyses to gain insights into each competitor at both store and individual unit type levels, enabling surgical responses to competitive price cuts, ensuring command over your pricing tactics, and optimizing your financial performance.
Harness The Power Of Price Segmentation
In the event of competitive rate reductions, we strongly encourage avoiding the across-the-board rent cuts. Instead, we recommend a selective pricing response based on the following pricing segmentation strategies, which can be employed individually or in combination.
Store Types - Emulate hotel chains by creating distinct name brands for your self-storage facilities based on quality, demographics, and other store attributes (E.g., Class A and Class B). You can, for example, aggressively compete for Class-B facilities while safeguarding your rates for your Class-A facilities.
Unit Types - Differentiate your unit types based on size and features such as climate control, drive-up access, floor levels, and convenience. We employ sophisticated value-based pricing* by defining sufficiently differentiated unit types and offering highly competitive prices for lower-tiered, harder-to-sell units while maintaining higher rates for premium units.
Promotions - Leverage extensive upfront offers or discounts while protecting your street rates. Customers tend to overestimate the value of upfront discounts since they stay longer than they initially anticipated. This approach incorporates the length-of-stay distribution of the customers in each store, unit type, and customer type.
Sales Channels - Implement distinct pricing strategies through sales channels like in-person, online, and third-party partners. We recommend being aggressive with your pricing online or with third-party partners while maintaining higher rates for in-store sales. You can optimize street rates and use them as strike-through prices to anchor online sales and utilize them for in-store sales or your existing customer increases.
LOS Pricing - Offer aggressive pricing for customers who commit to a minimum length of stay. While it is not widely utilized, some operators have employed this approach in certain countries and markets.
Continue Raising Existing Tenant Rents
We strongly encourage continuing to increase existing tenant rents to mitigate potential revenue shortfalls. This process can optimize the timing and magnitude of rent increases based on the discrepancy between street rent and occupied rent and how a given tenant’s occupied rent aligns with other tenants renting comparable units. The procedure can establish eligible and baseline customer segments and compare their retentions. It can also consider various customer characteristics, including payment methods, whether they are commercial or residential tenants, their length of stay, and number of units they are renting. In addition, we recommend that operators carefully weigh the potential benefits and drawbacks of rent increases and strive to balance maximizing revenue and maintaining a positive tenant experience.
Operators can employ various techniques in a competitive self-storage market to outmaneuver their rivals and gain more revenue. Among these tactics, the price is often the weapon of choice, with price wars constantly erupting as companies compete to gain market share.
While all-out price wars may attract customers in the short term, they are “negative sum” games that destroy profitability and often prove unsustainable in the long term. The relentless focus on price can lead to a race to the bottom. This downward spiral can damage brand reputation and hinder long-term growth.
To avoid the pitfalls of price wars, we recommend that operators adopt a more strategic approach to pricing and first consider “positive sum” forms of competition in marketing, branding, operations, customer service, and technology opportunities.
However, it is sometimes impossible to ignore the competitive rate cuts and necessary to compete on price. In such situations, it is best to avoid blanket rent reductions across their entire portfolio. Instead, we recommend offering complex pricing options by sales channels such as walk-ins, online, and third-party partners. Operators can also employ localized pricing actions based on store, unit type, and customer type to strategically lower prices and offer enticing introductory promotions for specific segments or products facing competitive pressure. Furthermore, it is critical to continue optimizing existing tenant rent increases. Remember, while occupancy matters, the ultimate goal is to maximize long-term revenue and profits.
Ahmet Kuyumcu is the founder and CEO of Prorize, a leading provider of AI-based revenue management solutions that currently empowers over 60 major self-storage operators operating in 24 countries across six continents. The firm’s proprietary software and pricing consultants help clients capture maximum revenue from their assets. Ahmet has pioneered RM solutions across diverse industries, including self-storage, apartments, senior housing, gaming, online retailing, and airlines. For more information, call (678) 819-8875 or email firstname.lastname@example.org.