What Revenue Management is NOT

By Donald Davidoff

Note: The following are strictly the personal opinions of the author and do NOT represent any official opinion or position of Archstone or any other Archstone employees.

As revenue management is increasingly adopted by the industry, it’s interesting to see how various mythologies about what “revenue management is” have spread. Some are unintended, in that ideas form and get passed on from person to person without any real vetting and suddenly become “conventional wisdom.” Others have been carried out with intent, as vendors co-opt the term for marketing and sales purposes and multifamily housing operators co-opt the term to look like they’re doing something cutting edge. Both are actually avoiding the change necessary to implement a true revenue management system.

Here are three things revenue management is NOT:

Revenue Management is NOT just software and technology.

Instead, it’s a strategic program that happens to involve technology. Anyone viewing it as a technology project will be sorely disappointed. Revenue management is a way of thinking about the apartment business, and realizing that  a box is NOT a box is NOT a box. Rather, other important dimensions matter: when the box is rented, how long it is rented and whether it is renewed. Those aspects drive differences in value.

Revenue management fundamentally changes how you view your multifamily business. It will change not only how you price, but also how you budget, how you staff and what kind of reporting and business intelligence you need. And while it does affect your IT department and resources, that’s a necessary, albeit not sufficient, condition to succeed. Revenue management requires CEO or COO commitment – not  just involvement. A technology project, on the other hand, just needs money and a sponsor somewhere in the organization. Not sure of the difference between commitment and involvement? Just think about bacon and eggs: —while the chicken is involved, the pig is committed!

Revenue Management is NOT simply tracking and responding to your comps.

Knowledge of your comps’ pricing is important in setting rents, but it’s far from the most important piece of information for revenue management. Understanding your own value proposition, your own demand stream and your own supply behavior (e.g. what percentage of your leases will terminate early) are all more important, by a long shot. In fact, you can operate a good revenue management system with no comp data if you have to—we’ve done that at Archstone in places where it is very difficult to find reliable comps.

So while comp data can be useful — and a comp data tracking and response system is  better than nothing — it is NOT revenue management.

Revenue Management is NOT cheap.

It’s an alluring idea: maybe I can  get 70-80 percent of the benefit at a fraction of the cost. If you don’t really believe in RM, it sounds like an even better idea because, at least you’ll learn something along the way, right? Even if you ignore the fact that leaving 20-30 percent of your revenue lift on the table results in negative ROI, the simple fact is that the idea just isn’t true.

There is no such thing as a “poor man’s RM” because you can’t get most of the benefit with only simple tools. A good revenue management system involves sophisticated math that takes highly trained modelers (both RealPage and LRO have highly specialized staff for this very purpose) and programmers to develop the technology. That costs something. We all may want something for nothing, but it’s important to remember you get what you pay for. I know all multifamily companies need to be cost conscious, but I’m always surprised when an otherwise smart executive thinks  buying pricing software from a salesperson who emphasizes the low cost of their product is a good idea.

If you’re trying to maximize your own revenues, does it make sense to choose the option whose primary advantage is its low cost? A good system takes time, effort and money to develop. Just ask the two current software providers how many thousands of hours have gone into developing their systems. Execs in this industry, as in others, should be prepared to pay a fair price for them.

The author is Senior Vice President, Strategic Systems for Archstone.

With the spring lease up season upon us, MFR.com was lucky enough to huddle with Waterton Residential’s Barney Pullam. With 15,000 units in markets from Washington, D.C. to Southern California, and the core of his portfolio in Chicago, he’s got a balanced, diversified view on what’s happening with rents now, and how revenue management tools are gaming the recovery.

A 20-year vet in multifamily, he gave us the inside scoop on pushing rents as much as 20 percent, the incremental mind-shift that comes with implementing revenue management, and how to toe the line with renewing residents in today’s rising market.

MultifamilyRevenue.com: Waterton’s been using revenue management for the last two years, which I imagine was an interesting window of time to implement this technology. I understand you use the LRO solution from the Rainmaker Group. How has it performed in the current environment? What did you see on the way down, and what are you seeing now?

Barney Pullam, VP of Business Process, Waterton Residential: That’s right, we began implementing LRO in Q1 of 2009, and had it fully deployed by Q3.

As you can imagine, most of our markets at the time were caught up in the slow economy, and had higher exposures. What was interesting was that LRO started reducing rents in an effort to get those exposures down, but it did it in an incremental way, testing each level of lower rents as it went.

The result was that it started moving our rates more often, but by a lesser degree. Prior to LRO we would adjust effective rents by adding or reducing the amount of the concession. Concessions might increase from one month free to two months free as our vacancy increased. In actuality, that meant a swing in revenue of about 8.5 percent.

LRO, on the other hand, came in and adjusted rental rates just 2 or 2.5 percent during a given week, and then gauged any resulting change in occupancy before setting the next week’s prices. Basically, it took baby steps, which was interesting.

The other lesson learned we’ve learned from running revenue management is that it puts greater emphasis on the availability of a specific unit type. I really think that helps you to see the trend early, and react and capitalize on the changing market.

On the way back up, LRO did substantially the same thing: it made lots of little adjustments in the range of 2 to 3 percent per week. If those new rents were well received, then it pushed rents higher in an effort to maximize the overall income.

Regardless of the direction, we found the adjustments to be more frequent but at smaller increments than our prior approach. It tests the waters, figures out what the market is willing to accept and goes from there. It gives you a very systematic approach to pricing.

MFR.com: What are you seeing in terms of renewal rates using your revenue management tools today? Leases priced a year ago were presumably much lower.

Pullam: We implemented a more aggressive renewal pricing strategy in Q4 of 2010. Renewal rates have varied by market, of course, and we’ve seen a broad range. We’ve seen renewal offers of just 3 percent in our softer markets, but up to and over 17 percent in our stronger regions.

MFR.com: What’s the average renewal increase that your revenue management tools are recommending across your portfolio now? Are you following them? Are you going beyond them?

Pullam: For our most recent renewal offers on leases expiring in June, we are seeing average increases at 6 percent or better. In general, our communities have been following the renewal offers generated from LRO; any deviations from what the tool recommends have to be approved by the regional manager.

What’s interesting, though, is on new move-ins. In some instances, we have seen our communities push new rents even beyond what the tool recommends.

MFR.com: How is turnover tracking compared to past periods? Are residents “stickier” today? Why do you think we’re seeing this trend now?

Pullam: We have noticed turnover remaining relatively flat. Waterton has averaged a retention rate between 43 and 46 percent of our expiring leases.

I think residents are stickier, and are more accepting to renew at the higher rent levels today. We’ve even seen residents renew leases at rates 20 percent higher than what they had been paying. That’s pretty encouraging.

Of course, we’re also seeing some turnover as residents shop for a lower rate. But that’s fine, we can’t meet everyone’s price point.

I think there are a few reasons why residents are staying put. The first point is that they’re taking their time to shop and understand the going rate for apartments in their respective market. Also, I do think most people realize they received a better deal last year as a result of the economy and therefore are willing to accept a reasonable increase.

From there, it’s really just this economy we’re in. There’s been minimal job growth, and fewer opportunities for advancement at the jobs they have. In a growing economy, you would see people move in because of a new job. Today, they’re not moving out until that opportunity comes along.

MFR.com: You wrote a recent article for your company newsletter that was pretty interesting. You wrote, “We don’t want to be 98 percent occupied as those higher occupancies are reached by compressing rents; nor do we want to achieve a renewal conversion percentage greater than 60 percent.” Can you expand on that? How do you determine the right mix of renewals vs. new leases?

Pullam: It’s interesting. When you start using revenue management, you’ve got to break away from managing toward occupancy. Instead, it’s all about the overall availability of that specific unit type.

If you have a few one bedrooms sitting vacant for a little while, but your overall availability is under 7 percent for one bedrooms, there is no reason to lower the price. Instead, you’ve got to trust it, and let the tool do its job, which is to maximize rents.

If you do that and the apartments still don’t lease, LRO will adjust the pricing down. In some ways, it’s a hands-off exercise.

But in regards to the mix of renewals versus new leases, we don’t have a hard and fast rule. Our experience shows that when retention rates push north of 60 percent, we’re not being aggressive enough.

The challenge with renewals is that you’re putting those offers out 90 days before the lease expires, so you’re really selling a future rate, and that becomes even more challenging when you’re coming out of a slow season and going into a busy one. Sometimes, you need to take that leap of faith and push the higher renewal offer.

We like LRO because it give us the ability to set close to 200 parameters to maximize pricing. We pay a lot of attention to exposure, and leasing velocity and of course, we always have our eye on the competition. But one of our favorite features is looking at the aggressiveness parameter in LRO. It basically helps determines how aggressive LRO will be in pushing your rents, and can be a very useful tool.

MFR.com: We’ve been having an interesting discussion on the site and the LinkedIn Apartment Pricing Professionals group lately about factoring turn costs into your RevMan tools. Are you factoring in turn and marketing costs when you’re setting goals for pricing? How do you determine the point when a new lease starts paying for the cost of turning the unit?

Pullam: We do consider turn costs. LRO allows the user the ability to factor in turnover and marketing costs when establishing pricing for both move ins and renewals. We look at all costs associated with turning the apartment, including marketing, maintenance and vacancy, and input that value into to model.

MFR.com: What are the best practices you’re using to explain the market to residents now, while remaining firm on price?

Pullam: You know, one of our community managers was talking about this recently, and what she said was pretty straight forward, but it made sense to me. She’s really emphasizing the importance of taking the time to speak with the resident regarding the renewal increase. You really can’t just send a renewal letter. You’ve got to call and speak with the resident about the offer. It’s pretty fundamental, but it’s so true, too. Site teams need to sit down and talk with residents about what’s happening in the industry.

We’re reminding them that rents were lower when they moved in because the economy was pretty bad. Now that things are getting better, rents are increasing. We also encourage our residents to shop around to confirm that our prices are in line with the market.

MFR.com: What trends do you anticipate for the rest of 2011?

Pullam: We think the remainder of 2011 is going to show continued, solid growth in both new leases and renewal rates. We’re going to focus on continuing to push rents until we find the ceiling. Once we get there, we’ll focus on maintaining those higher levels.

MFR.com: Thank you for your time.

Pullam: You’re welcome, thanks for the opportunity.

Well, while not quite TMZ material, our very own Steve Lefkovits seems to have spurred quite a bit of discussion himself, at least among those who follow revenue management in the multifamily space.

It started on the Apartment Pricing Professionals page on LinkedIn when Steve asked a seemingly straight-forward question: “Are there revenue managers or pricing executives out there who factor in the cost of new leases when optimizing pricing?”

Steve explained that he had a recent discussion on revenue management and customer acquisition costs. He was wondering whether companies factor that into their systems when optimizing their rents.

“When we look at the expense of marketing to a new renter ($500 – 1000 or more) and the cost of turning a unit ($1500 – 2500) it seems like it’s worthwhile to factor in the relative value of new leases vs. renewal leases,” Steve explained to the group.

The post, as they say in Internet parlance, had traction.

Over the next week, Steve’s question spurred one of the most in-depth discussions of the inner workings and assumptions for using revenue management in the multifamily industry that we’ve seen.

It attracted some of the most respected names in the industry, including Archstone’s Donald Davidoff, AMLI’s Rich Hughes and SatisFacts’ Doug Miller. Finally, it spurred the genesis for not one but two panel sessions, one at the annual Apartment Internet Marketing Conference in Huntington Beach in May, and an in-depth discussion for the Apartment Revenue Management Conference this fall.

It’s no wonder. Steve’s underlying point harkens back to the value of renewals versus new leases in the apartment industry, a topic that perpetually garners attention among operators. If you’re interested in how revenue management works in multifamily, and some of the things operators need to consider when implementing the technology, make sure to check out this post. You’ll be glad you did.

Speaking of those conferences, have you booked your plans yet for AIM 2011? It’s just around the corner, set for May 2-4 at the Hyatt Regency Huntington Beach Resort and Spa. Last year, more than 400 of multifamily’s best and brightest attended this event, which is known for its insightful look at apartment world through the lens and perspectives of professionals from other industries.

And of course, the inaugural Apartment Revenue Management Conference is set for September 12-14.

Make sure to check out the LinkedIn discussion and then get your plans set to attend both.

Mid-career Americans who didn’t get in before – or have finally gotten out from underneath a toxic mortgage – now see owning a home as more of a nightmare than a dream. For them, renting may seem more desirable – or indeed, be the only option – just as banks continue to shy away from writing more mortgages.

Then, there’s the fact that restricted supply – nobody’s built during the recession, either — helped push rents into the black at the end of 2010 for the first time in two years; they’re now 7 percent higher than when the market bottomed in 3Q 2008, and MPF YieldStar is projecting them to gain another 5 percent in 2011.

For multifamily owners and operators, that perfect rainbow of circumstance equates to the beginning of a golden era in 2011.

At the same time, the industry has been adopting revenue management technologies at an increasingly swift pace. The Rainmaker Group, maker of LRO software, had a banner year in 2010, almost doubling its multifamily client count to approximately 65 companies, according to MFR.com’s internal analysis. And YieldStar chief Janine Steiner Jovanovic says 150 users now tap into RealPage’s price-setting solution. Between the two companies, that represents a combined 1.7 million units whose prices are set using RevMan software.  

A growing number of those new adopters have a different profile than what once was the norm in automated apartment pricing: they’re smaller to medium-sized operators operating in regional markets, not the nationally-focused mega-sized REITs who have been singing the praises of multifamily RevMan for years.

We had a chance to chat with the Rainmaker Group’s Bruce Barfield and Mike Beirne of the Kamson Group, a recent new adopter of RevMan, to get their take on where the apartment industry is on the adoption curve, and where it’s headed in 2011.

MultifamilyRevenue.com: It’s fair to say 2010 was a good year for revenue management in the apartment industry. What does that trend say about adoption of RevMan by the apartment industry in general? Why are we seeing this now?

Bruce Barfield, president, Rainmaker Group: I would attribute a portion of our recent growth to the unprecedented changes in the economy.  Business owners, myself included, have had to approach investment decisions with greater care than in the past several years. When faced with limited investment dollars, it is critical for business owners to have a clear picture of the return potential.  When faced with a decision to invest with the opportunity to grow revenue versus investing in new cabinets or fixtures, revenue management technologies continue to be the logical choice.

MultifamilyRevenue.com: How is revenue management changing the multifamily lease-rent price setting process? How is it changing how residents shop for apartments?

Bruce Barfield: As more and more companies adopt revenue management and as the footprint grows, the concept of frequently changing rents in response to market dynamics is becoming the norm.   The rent setting process is no longer a manual one where rents are determined at the beginning of the month and changed on an ad-hoc basis.  Making incremental changes in pricing is logical from both a revenue management and a sales perspective and allows one to differentiate true market response.

Over time, we’ve seen customers’ shopping processes evolve, as well.  Customers today are more sophisticated in their shopping methods researching in advance and narrowing down their selection criteria to speed up their decision making process.  With the transparency of pricing on line, the major Internet listing sites have real time pricing feeds incorporating lease term options. On site leasing associates are weaving that “prices can change on a daily basis” into their sales process.

MFR.com: Kamson Corp. is an owner and manager of about 15,000 units in New Jersey, Pennsylvania, New York and Connecticut that recently adopted LRO. What led you to adopt revenue management now? What are you expecting in 2011?

Mike Beirne, Kamson Corp.: We realized that traditional rental paradigms in our markets are changing, and consumer behavior is changing, too. The apartment industry is now paralleling other industries, such as airlines and hospitality; we’re starting to change the way we do business. The old ways of renting seem to be hitting a turning point.

MFR.com: For much of the past five years, large REITs were the main adopters of this technology in the apartment industry. At 15,000 units, you’re not small, but you’re also not running 50,000 apartments. What advantages do you see for smaller portfolios using this technology? At what point/unit count is it cost-prohibitive?

Mike Beirne: Well, I’m certainly not expert enough to say what’s cost prohibitive for others. But I do know if revenue management delivers on the returns we’ve seen with other adopters, in my opinion, there can’t be a point where it is ever cost prohibitive. It comes down to does the model work, and can its processes be learned?  From what we and our competitors are doing, I believe its becoming more the norm, not the exception.

MFR.com: How were you able to justify your investment across your portfolio? What type of analysis did you conduct to ensure you would get a return on your investment?

Mike Beirne: We are still evaluating that, but there’s just a gut check aspect to it. We’re already seeing that given proper guidance, our rental staffs are successful. It’s all about making those incremental gains. You only have to do the simple math to discern how the trend will play out.

MFR.com: How do you plan to support staff at the property level in terms of research and pricing info using this solution? What will they need to do to use and support the solution?

Mike Beirne: I think it’s a team effort. Our market data has to be timely, and we have to become proficient at the key indicators that LRO provides and be comfortable with them. We also have to support a cultural change with our leasing staff so they know how to “sell” based on the information LRO provides, as well as understanding the strategy you’ve built into your pricing decisions. Training is key.

MFR.com: What has impressed you most about using revenue management thus far? Where would you like to see more or better functionality?

Mike Beirne: The Rainmaker Group has been extremely timely and receptive to our questions. Everyone there is very well educated in the product they sell. That’s important to us, because at a company like Kamson, you need to have buy-in from the entire organization.

I terms of my wish list, I’d like to see a stand-alone, leasing agent boot camp for all things LRO aside from the support and training they already provide. As I said, I think training is the biggest key to success, and you have to learn any new technology to leverage it. The Stealth fighter is a great technology, but you’ve got to have highly-trained pilots to fly it. Why not do that for the apartment business, too?

Editor’s note: Don’t forget to mark your calendar for the inaugural Apartment Revenue Management Conference September 12-14, 2011 in Park City, Utah.  You’re gonna wanna be there.

The following is Part 2 of our Q & A with Oakwood Worldwide’s Jeff Young, where we talked about the unique challenges of the temporary corporate housing market, the impact of the supply side on pricing, the similarities of temporary housing with the rental car and cruise line markets, and the contrasts between the temporary and traditional multifamily markets. You can read Part 1 here.

MultifamilyRevenue.com: What’s one of the biggest differences you see between Oakwood’s market and more traditional multifamily?

Jeff Young, Oakwood Worldwide: When you look at corporate housing, one of the things that defines our industry is the opacity inherent in competitive  information.

There is really a lack of transparency out there in terms of what the pricing is. Some pricing is available online, but most of it is not.

At the same time, it’s not like hotels, where you can just shop the property around the corner and figure out exactly what’s going on. It’s a lot of anecdotal evidence. It’s a lot of discussions with accounts in the B2B model, and it’s a lot of picking up information wherever you can. It makes for a lot more detective work to understand which way the industry is trending.

So right now, we’re going out and getting better information. We signed up with Reis, and we looked at MPF Research and AXIOMetrics as well.

Combined with talking to our accounts, and getting input from our experienced professionals we have on the operations side, I think we’ll eventually be able to look at how we are really doing on an inventory cost per-square-foot basis.

MFR.com: So you’re managing your costs and your revenue, but not necessarily with an off-the-shelf solution.  Are you considering building a proprietary solution to target the corporate market? Or are you looking for an off-the-shelf tool that you can apply to the Oakwood model?

Young: I think we’re undecided at this point. Right, and I would say that we are still at step two or three out of 10. We have a long ways to go.

We are looking at off-the-shelf solutions, but the reality is the off-the-shelf solutions are not specifically tailored to the corporate and temporary housing model. There is a possibility that a vendor may be able to be modify a solution  to accommodate our model, but there will need to be some development there. I don’t want to say that’s an impediment for us to go with an off-the-shelf solution, but it is a question mark.

MFR.com: You have a very unique outlier, which is the supply side and what you can get for your leases on those non-Oakwood owned units. How would you develop a solution to overcome that hurdle?

Young: Well, from a statistical standpoint, you have a small numbers challenge in terms of the transactional volumes. This isn’t car rental, where the average rental might be a day and a half or two days. If you think about  the decision to sign a lease for an apartment for a month or two in terms of a blackjack hand, you’re putting a lot more  money on each hand.

It’s a very complex and important decision because there’s a lot a revenue it at stake. We need a top to bottom solution that is going to handle the process from bid and negotiation all the way to fulfillment in terms of putting somebody in a unit and at what price.

We need something that helps our sales force in determining what we need to quote for a given market, on a market-by-market basis. We need better granularity in terms of seasonal pricing and better granularity in terms of unit-type pricing.

MFR.com: What macro pricing trends have you noticed over the last eight months? Where are prices going in your business?

Young: There is still a reticence, and a real fear factor out there.  Now, there are some promising signs. We are seeing customers that are willing to consider price increases compared to last year, but keep in mind, last year many of our accounts were flat, or even negotiated reduced pricing in a very difficult environment. We were able to reduce our costs as well, but last year was certainly a very challenging period.

MFR.com: What kinds of drop-offs did you see in the darkest days?

Young: We saw 30 to 40 percent drops, in volume, depending on the market. On price, we were down 10 to 15 percent in many markets. That was the effective rate.

The good news is we saw the pricing really flatten out in the spring of 2010, and we’re starting to see some upward movement in the pricing in select markets this summer.

MFR.com: With the parallels you’ve pointed out between corporate housing and the rental car and travel industries, why do you think corporate housing, and multifamily in general has been slow to adopt revenue management technology? What’s the hurdle that has kept us from adopting it an in a broader way, such as hotels and airlines have done for instance?

Young: I think part of it is certainly scale. We’ve all seen what the Archstones of the world can do with this. But for an individual owner, I’m not sure the impetus is there. I know that’s where the RealPages of the world are headed, trying to go from the bottom up, going after the individual owners, and maybe they’re providing a base solution to some of those folks. But I don’t know if there’s anything off-the-shelf that’s really cost effective for that part of the market.

In the corporate temporary housing industry, I think it’s partly due to the complexity of the supply side of the equation. I think a lot of people think that if they go out and buy a pricing tool, and the inputs on the supply side are constantly changing, it won’t be able to react quickly enough. They’re afraid they’ll get whiplash.

MFR.com: How important is occupancy to you at Oakwood?

Young: That’s an interesting question. Culturally, one of the metrics you hear at Oakwood is ‘vacancy’ instead of occupancy. Well, that’s kind of a negative view, when you think about it. We should be thinking about driving our occupancy up, and not how to reduce our vacancies. Obviously driving occupancy is critical, but at what price?

One of my goals is to manage to revenue potential, because overall revenue potential at 93 or 94 occupancy could be significantly higher — or even just marginally higher – than when we’re at 97 or 98 percent.

Historically, you would go out and take down more units to gain supply, but then get hammered when you had too much vacancy. Determining the sweet spot of an inventory level that allows Oakwood to capitalize on revenue opportunities without unnecessarily diluting the existing revenue stream, that is the challenge.

MFR.com: Thank you.

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