Analysts and apartment industry executives periodically question the impact of revenue management on the frequency of rental price changes. Does revenue management add price volatility? Or does it tend to smooth out pricing changes that humans make?
Rent price volatility is considered a negative by those seeking predictable price forecasts and budgets. We worry that frequent price changes may cause renters to push back or try to game the system.
On the flip side, revenue management maximizes total yield. Total return is more important than achieving the highest rent rate or price and budget stability. Additionally, anecdotal experience shows that consumers understand receiving different offers once the RM methodology is explained.
Below is a cogent, clear explanation of how Camden Property Trust expects its Yieldstar pricing system to work for Camden. In it, Camden President Keith Oden addresses the price volatility they expect, and why they consider it desirable.
Excerpt from Camden Property Trust Q3 2007 Earnings Call Transcript:
November 02, 2007
(Formatting added, and minor clarification edits have been made to clean up typos)
Keith Oden, President, Camden Property Trust
The Yieldstar system attempts to provide the best possible fit between underlying market conditions and the market-clearing price for our rental inventory at any point in time. In order to accomplish this, it is very much a forward-looking system, and at any time, any given time is attempting to anticipate market conditions five to six months out and make minor mid-course adjustments well in advance of forecast horizons, attempting to avoid price volatility in the future.
In a purely theoretical sense, the results we would expect to see from this tool applied to our communities are as follows:
- As markets begin to recover, and pricing power improves, the forward-looking nature of the pricing engine would raise rents sooner than our competitors.
- At some point out in the future, as evidenced of the market improvement as apparent, the competition will respond and raise rents as well. When market conditions begin to deteriorate, the reverse will happen. Our forward-looking model will begin moderating rent increases prior to our competitors.
Interestingly, the facts seem to support the theory. Beginning in the third quarter of 2005 Camden’s revenue growth was at the top of the sector and this continued through the first quarter of 2007. In fact from the first quarter of ’05 through the second quarter of 2007, Camden’s cumulative revenue increase was second highest of all publicly reporting multi-family companies. So we achieved larger rental increases and we got them sooner than our competitors
Beginning in the third quarter of this year our revenue slowed relative to our peers, which is consistent with a revenue management tool that is attempting to get ahead of the curve of a slowing market. So, it will be interesting to see what happens in the next two quarters regarding the revenue growth rate of us, and our competitors.
