FAQs

Frequently Asked Questions about Revenue Management in the Apartment Industry

1.    What is revenue management?

Revenue management is the science and art of delivering the right product at the right price to the right person in a way that maximizes revenue under a given set of constraints.

2.    What does the answer to Question #1 mean in apartment talk?

For apartment owners and managers, revenue management means systematically evaluating demand, unit type availability, net rental price, lease term, days vacant, seasonal trends and other factors to generate pricing options that maximize revenue, given the things that you can’t change – like the number of units in a property or the local job market.

3.    We already use a good rule-of-thumb to price units and we’re 97% full.  Why should we trust or need software to help us?

Because revenue management software maximizes yield for an entire property, it doesn’t just set price per unit.  A statistically-driven system can automate the calculations of supply, demand and total rent over the rental period to yield the most possible.  In other words, a revenue management system can help users trade occupancy for yield – to the point of highest NOI.

4.    What do the Oakland A’s professional baseball team have to do with revenue management?

In 2002 and 2003 the A’s had the best record in the American League West, while having the lowest payroll in baseball.  They used statistical optimization to field the cheapest and highest-producing team they could build.  They threw out old ways of building teams that were based on emotion.  Their success was chronicled in Michael Lewis’s best-selling book “Moneyball”.

Revenue management is statistically-based performance optimization for business.  It throws the emotion out of pricing.  And it’s the way you would look at maximizing revenue performance if you were starting the industry from scratch in the 21st century.

5.    Is this new?  Who has adopted software-based revenue management?

Publicly-traded REITs and other large, professionally managed apartment companies have been leading this trend towards using a system to do the heavy lifting of weighting the many factors to consistently generate optimized prices by unit type.  These companies include industry leaders such as:

6.    What are the benefits of revenue management in a nutshell?

• Consistent, unemotional, statistically-driven approach to rent pricing that has yielded 1-4% incremental rent growth for users.
• Replicating a company’s best regional pricing executive across the portfolio.
• Removing the emotional volatility of a typical human response to external economic shocks.
• Providing flexible lease terms (9 months, 10.5 months, 15 months) to match a residents’ desired stay.
• Optimizing lease terms to smooth out renewals so they’re not all bunched up in the summer time.
• Real-time pricing can be delivered to all marketing outlets consistently.
• Creating company-wide transparency and a single source of rents, forecasts and demand information.

7.    Is it only for big companies?  We only have [8, 12, 20….] properties.

Revenue management techniques works on a single property.  Very small companies with just a few properties may not see the time efficiency benefits that a larger one will.

8.    Does software-based revenue management require integration with a property management system?

The two largest revenue management platforms do integrate into a company’s property management platform.

9.    What does a revenue management system cost?

It depends on the system.  And a number of other factors.  But for just the hosted software, expect to pay up to $3 per unit per month. (As of October, 2008)

10.    Does it work consistently?  Why not get the promised initial lift and then just shut it off?

• The discipline provided continues to pay benefits for the entire organization over time.  There’s a reason that airlines, hotel companies, car rental companies, casinos all use it continuously.  Yield maximization is an ongoing effort.
• Software-based revenue management creates organizational efficiencies, transparency and cultural benefits.  Users typically are reluctant to go back to the old way of doing things.

11.    What can we do to optimize revenue if we’re not ready to make the leap to a software system?  How can we garner some of the benefits of revenue management without making the plunge?

• Track incoming customer leads and leases carefully and consistently by price range, source and by time so that you can start to understand patterns of demand.

• Determine the trade-off between occupancy and profitability.  Being 98% full probably means your rents are too low and could be raised.

• Track lease expirations graphically to better understand when supply will be maximized.

• Attempt to spread out lease expirations so that there is less pressure in peak months to re-lease at any price.

• Evaluate sales effectiveness of the leasing staff to determine if there are small training shifts that will result in a higher ratio of sales to prospect visits and calls.