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.

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.