MultifamilyRevenue.com: Given its life-cycle so far, it seems revenue management was born into a recession in our industry early on, before gaining some momentum during the boom. But it seems like the current recession has stymied that enthusiasm again. Is that an accurate assessment?

Rich Hughes, AMLI: It is. For me, the interesting thing is that obviously, all revenue management tools are multivariate systems. Basically, you’re looking at a subset of the past, and trying to form an inductive model to predict what you should do in the future.

Given the fact that we came out of a very good time and went into a very bad time, I wonder how well some of the models responded. Did they still induce from a good time, and use a “good time” set of rules to try to predict what you should do in a bad time?

Anecdotally I’ve heard of people turning their revenue management systems off during the bad times. We certainly did not, but I think the confidence in revenue management’s ability to make money went down.

Of course, during the bad times, a revenue management system should manage the downside as well as it did the upside. That’s really what we are hoping for.

MFR.com: How did Rent Cheque respond?

Hughes: It made the right directional changes. I think with hindsight, we can ask whether the magnitude of the changes was large enough. Again, sometimes people think they can outperform the system. They may feel their product is worth more than it is. But it’s the market that tells you how much your product is worth, and we have to be very, very clear about that.

Getting caught in the vanity of the past is a loser’s game. Personally, I think all of our product is worth a lot more than you can rent it for right now. My advice would be, if anyone is looking to rent an apartment today, get in there quick while you can still get a deal.

MFR.com: The commercial and retail sectors measure results on a square-footage basis. From a revenue management perspective, would it be useful for us to measure ourselves on an NOI per square foot basis, for example?

Hughes: Again, it’s a bit of a different animal. Commercial and retail, when they’ve got blocks of space, have the ability to divide and subdivide that space, and find the cleverest fit for their tenants to make the most money from it. When a tenant moves out, they can elect to do that all over again if they want. So they’ve got flexibility in their product.

We don’t. We have one bedrooms, two bedrooms and three bedrooms, and I can’t make a three bedroom into a two bedroom and a one bedroom. That’s just not going to happen.

Also, we know empirically that small apartments have higher rent per square foot than larger apartments. The reason for this is that every apartment has certain capital intensive requirements; things like bathrooms and kitchens cost a lot of money. Bigger apartments can divide these costs across a lot of square feet, and smaller apartments divide them across fewer square feet.

The interesting thing is, if you run a regression analysis, you’ll find there’s actually a fixed component for any apartment, regardless of size. We did it with one of our high rises.

Let’s say that fixed component is $500 for every apartment. Once you subtract that out, the variable, per-square-foot rent is actually very linear, regardless of apartment size. But of course, the industry doesn’t look at it that way at all.

MFR.com: Does revenue management have the potential to change the focus of “keeping the heads in beds” in the apartment industry, to say, maximizing the yield per unit instead? Do you see that happening now or in the future?

Hughes: That’s a great question. I think that you’re basically asking whether NOI is a helpful number. The answer is, for development and underwriting, it is the helpful number.

The problem for us from a pricing standpoint, though, is that a lot of the expense side of NOI is built in by the time we get to the equation. Of course, to set price, the only expenses we really care about are the ones that influence the demand function, such as marketing.

For instance, one of the great questions of revenue management is, ‘Would you spend a dollar in marketing or customer acquisition to get two dollars in rent somewhere in the future?’

‘Absolutely,’ is probably the right answer.

The trouble is, marketing is not NOI. You can say the same thing about certain amenities. Can you get extra rent if you have a 24-hour doorman?

For costs that have a demand corollary, you may be able to get a better quality resident, or higher paying resident, or just more residents. But those costs are really just a very tiny subset of the overall expense structure, which includes the physical structure, maintenance and everything else.

So when you use NOI, you have this tiny bit on the expense side that’s good and meaningful in terms of revenue management, and then this whole massive part that you can’t affect at all. NOI, from a pricing standpoint, becomes very nebulous.

I would certainly make the argument that we should start looking at breaking out expense categories so that we can look at just those items that influence demand. That would be absolutely legitimate. NOI as a whole is just too cumbersome and holistic to be meaningful for revenue management.

MFR.com: Revenue management has obviously been a game changer for the industry. How has revenue management changed the way that you do business at AMLI?

Hughes: Our focus seems to have gotten more and more granular. Back in the old days, we looked at the portfolio or asset level, and said okay, AMLI at Happy Acres is doing okay.

Of course, that’s a very broad statement. Maybe the one bedrooms are doing great, and the three bedrooms are doing terrible, and it averaged out to be okay.

As we’ve gotten more and more granular, we’ve started optimizing unit types. Then, we’ve used amenities to optimize units, and now, we optimize leases and lease options.

So when you rent a unit, you look at the specific unit you want to rent. We have a basket of potential options that you can choose to customize your lease. We know that you can only pick one of those options, but we make sure every option we offer is profitable, or at the very least cost neutral, for us.

People talk about submarkets of one, and micromarketing and things like that. We are actually getting there. As we try to de-commoditize our product and move from renting blocks of space to the selling of apartment homes, which is what we all really want to do, it’s about tailoring a very, very specific offer to the customer. That may be a little bit more retailing than revenue management, but that is the pathway that we’ve been following.

MFR.com: What would you say to young professionals who want to pursue a career in revenue management in multifamily today? How should they prepare themselves?

Hughes: It’s funny. Not every company agrees on where revenue management lives and who should be in charge of it.

Some people think it’s an IT function, because it certainly is very technologically heavy.

Others would put it in more of a finance role, because it’s about making money.

Some people put it in operations, because it’s all about managing people and process.

And then there’s the fact that marketing is clearly a part of revenue management, too. It’s a part of the demand function, and that’s revenue management.

I think the right answer is, be prepared to embrace all of these disciplines. Be able to bring all of them to the table in a way that those departments can all feel vested in the outcome, and be stakeholders in the process.

It’s not one very specialized pathway, although it sounds that way from the job description. It sounds like a very specialized job, but you will touch a lot of other departments and a lot of other disciplines in order to fulfill your revenue management goals.

Revenue management works when the system works, when people have faith that it’s working, and when it has upper management support. So there are a lot of moving parts, and a lot of  cross-disciplinary aspects to good revenue management. I think you have to bring all of them together in order to be a success.

MFR.com: Thank you.

Hughes: It was my pleasure. Thank you for the opportunity to share my thoughts.

New White Paper: Archstone Test Shows 1.5% Revenue Increase from Call Center’s Capture of Incremental Leads

Revenue gains in 40-community trial validated by international independent consulting firm

Emeryville, CA, February 25, 2010 – Multifamily strategy consultant Steve Lefkovits, operator of MultifamilyRevenue.com, announced the release of a white paper documenting a nine-month test by Archstone, a leading multifamily operator.  The test evaluated multifamily revenue management using The Rainmaker Group’s LRO (“LRO”) lease rent optimization system and professional prospect guest card creation utilizing Level One’s Central Leasing Office.  Results of the study showed that Archstone’s communities that used Level One’s call center and automated lease rate optimization from LRO generated 1.5% more revenue than test communities relying on self-management of inbound phone call leads.

“Archstone’s nine-month, 40-community test of professional lead handling and guest card creation proved that increased lead volume can drive higher revenue per unit, even in a soft or declining market,” said Steve Lefkovits, who authored the white paper documenting the test. “Archstone’s 1.5% revenue boost resulted from harvesting new leads from existing marketing sources and automatically feeding that prospect traffic to the LRO system.  LRO moved rents in response to demand, increasing revenue per unit in the test properties. “We estimate that on a “typical” property, this kind of result would equate to an incremental $45,000 – $67,500 in annual net operating income.  This new white paper (linked here) lays out the analysis.”

The Archstone trial compared 20 test properties with 7,200 units using Level One’s call center against an equal number of properties in a control group that did not use the call center Level One answered the phone 98-99% of the time, versus 50-60% of the time at the control properties.  Additional guest cards were captured, effectively increasing demand for the properties.  LRO set rental rates based on scientific demand analysis in both the test and control groups.  The 1.5% revenue increase in the test group was validated by an independent international consulting firm.  “The revenue increase was not from increased occupancy, it was from real-time visibility into the new, higher demand,” Lefkovits explained.  It’s exciting that even a sophisticated company like Archstone can increase prospect leads and income by having 98-99% of their inbound sales calls answered.”

To download the white paper, please use this link below:

http://www.multifamilyrevenue.com/wp-content/uploads/2010/02/archstone_increases_revenue_using_levelone_lro.pdf

According to units, each week, Garver calls and incorporates community managers on pricing decisions by confirming the accuracy of the program data and adjusts any part of the program that property managers think are not competitive with others’ rates, or not appropriate for the current market place.

Dave Woodward, CEO of the Laramar Group, attributes their high occupancy rates (high 90s across the board!) to the use of both the LRO system and a pricing manager. “You can’t buy the software, flip a switch and assume it will work,” he says. “We’ve heard of companies that take this black-and-white approach, but it doesn’t allow on-site community staff to have ownership of the system. We’ve taken an approach to empower the field and let them have a say in the pricing.”

Garver echoes Woodward saying a successful implementation requires buy-in from property staff. “We didn’t want property managers left out of the process – they are experts who live in this every day,” she says.”

Read on about Garver and Laramar’s integration of the site staff in their expanding corporate initiative to stay on top in their markets at the following link: Priceless Input

We are delighted that Kevin Geraghty from the digital marketing agency 360i and the author of “Revenue Management & Digital Marketing: Integrating two independent business processes produces marketing magic” has agreed to speak at the Apartment Internet Marketing Conference (AIM).  His experience with deeply integrating marketing with revenue management should provide important strategic guidance for revenue managers who are looking for next steps to increas the value they bring to their companies.

We’ve asked him to present advanced-level case studies from other industries about the integration of trackable digital marketing with revenue management.  Kevin worked a decade ago with our friend Jeffrey Roper (from M|PF Yieldstar) in the auto rental sector, and is now a principal at 360i, a leading digital marketing firm that serves consumer giants.

In his December 2008 article in Operations Research Management Science Today, Geraghty states the problem of having separate revenue management and marketing functions:

“Revenue management is very effective in extracting revenues from strong markets. This often makes up for a key weakness: over-reaction and lack of precision when demand is soft. The response to soft market conditions can be to make price cuts across the board to stimulate demand. In some cases this is appropriate, but in many cases it is extremely expensive. Unlike marketing spend, the impact of price cuts do not show up as explicit expenses. However, price cuts can have a devastating impact on profitability.

When marketing and pricing are integrated, the cost of a price cut is weighed against the cost of driving extra business. In many areas of marketing practice, the level of granularity available to marketers is insufficient to create a clear understanding of the impact a specific investment on tactical pricing and conversion. Direct marketing strategies such as paid search do have the granularity to target specific timeframes and geographical locations to offset the need for price cuts. When this is combined with competitive monitoring, a clear picture emerges of where and when to deploy paid search spend and which products to discount.  By using paid search in tandem with yield management, substantial revenue gains and marketing efficiencies can be realized. “

Last year at AIM, we heard from Kathleen Reidenbach, Vice President of Revenue Management and Distribution from Kimpton Hotels.  Her presentation (video excerpts available) carefully laid out why hotels integrate revenue management with marketing – because they are part of the same process of attracting the right customer and giving the customer the right offer, which may be priced to yield the optimal return.

In lodging, the executive with price information also has demand information and can determine which offers to “distribute” (advertise) in order to get more of the desired traffic.  They drive leads through their low-cost sources first, and then layer on more expensive traffic – if they have statistical support that the investment will yield higher-value customers coming in the door.  In this scenario, advertising is an investment that is justified by higher yield.  Special offers and discounts are structured and distributed knowing the total cost and expected acceptance.  Advertising response rates help to determine pricing.

The ultimate goal is total yield (revenue per available room night) not a heuristic occupancy benchmark.  (I know many people who would rather be 100% occupied with a $1,000,000 rent roll, rather than 95% occupied with a $1,040,000 rent roll.  But that doesn’t make sense to investors who just want their money.)

We believe that operations, marketing and revenue management leaders all can boost their personal and corporate prospects by focusing on the integration of revenue management and marketing.  This will in turn create better-yielding organizations if they treat marketing and pricing as part of a larger whole, under
common leadership.

Please come to the Apartment Internet Marketing Conference in Denver, Colorado April 29-May 1, 2009, we’ll talk more about it there!

Below are selected videos taken from a presentation given by Kathleen Reidenbach of Kimpton Hotels. In the short videos, she shares revenue management practices and strategies used by the lodging industry and draws parallels to the multifamily industry.

Revenue and Market Share Lift from Using Revenue Management

Kathleen Reidenbach, Vice President of Revenue Management and Distribution for Kimpton Hotels was kind enough to speak at length to the 2008 AIM Conference.  Her presentation detailed Kimpton’s increased revenue and market share from revenue management, how they optimize pricing using demand information, and the deep integration of marketing with revenue management and the staffing required to reach the right customers with the right offers at the right time.

For those interested in managing advertising in social media, the last video will be especially useful as she details how they use public feedback from ratings sites as a management tool, and how Kimpton manages their brand reputation in an environment with customer-generated content.

Reidenbach’s complete presentation is available on this site to view.  Above and below are four video excerpts of some of the most directly applicable lessons she shared with the multifamily industry.

Revenue Management Staffing and Infrastructure

Automatic Distribution of Pricing
Across Marketing Channels

Reputation Management – Customer Ratings and Comments

Rich Anderson, Senior Equity Analyst at BMO Capital Markets once sarcastically asked Camden Property Trust CEO Ric Campo if Camden execs kneeled and bowed to the revenue management terminal each morning.  (Don’t take our word for it, the exact exchange is quoted below.)

Since then, Anderson hasn’t lost his humorous edge, but he has come around and produced a very thoughtful and comprehensive report on revenue management in multifamily which is a very concise summary of the value proposition, as well as his insights into its impact on the business.  The report includes great data on the revenue lift that revenue-managed properties have experienced.  We think Anderson’s report deserves notice from the industry, and from investors as it contains important insights into operational value creation.  He summarizes his view with:

“The bottom line is that we think multifamily revenue management, in
connection with a hands-on approach, is proving itself a worthy tool for the
industry – with revenue lift averaging something north of 1% depending on
how it is measured. And the more it is used, the better and more efficient the
overall business of apartments will become. In some cases it is a push –
using revenue management to set rents results in no meaningful upside. This
happens about 30% of the time, and is mainly a function of strong in-place
property management personnel. But the problem is, good employees tend to
leave (assuming 60%+ employee turnover) whereas revenue management
does not. So even in those cases where revenue lift from the software is
marginal, it still makes sense to consider utilizing revenue management.”

We will excerpt Anderson’s report from time to time and discuss additional elements of it.  For now, it’s available for you to download and enjoy in its entirety at the link below.

BMO Revenue Management Summary

And here’s the original sarcastic exchange from Camden’s Q3 2007 analyst conference call:

Rich Anderson – BMO Capital Markets

Hi, good morning still for you guys. I guess, the first question is I listen to this and it is like Yield Star has been around for two years, has two years of history, and we’re really hanging our hat on something that doesn’t have the history that you guys have, as real estate professionals.
So, I mean is there a chance that it could be wrong?

Richard Campo

Rich, that is a very interesting question.

Rich Anderson – BMO Capital Markets

I’m picturing you guys going to work every morning and like kneeling in front of the Yield Star terminal and bowing to it or something.

Richard Campo

No, look, Yield Star is a tool, okay? It has to be managed by people. And people have to ask the question every day, on-site manager, your district managers and we have Yield Star pricing specialists that deal with issues that come up, and so it is in fact a tool, not a panacea.

It is not on autopilot. It is managed every single day by the people running their properties. The different in the past was you didn’t have an ability to forecast and you didn’t have an ability to run all of the numbers that Yield Star runs.

What it does simply is forecast and figure out all of the permutations that you need to understand as you’re marketing, as you’re running a property.