Self Storage is a retail play as much as a real estate play.
I know the majority of us come from a real estate background, but believe me, if we are going to make it in this business today, we had better start thinking like a retailer.
Or at least like a business owner.
We are not managing tenants and real estate; we are running an ongoing business with customers.
We don’t have leases, we have contacts.
But most importantly, we don’t have tenants, we have customers, unless you have a mixed use project with retail or office space in a self storage project, and then you have some tenants with your customers.
Benchmark Numbers
As a business owners, not a landlords, we need to alter how we relate to our customers today. We know that we have the best facility out there, but to many of our customers, especially people who have never used self storage, they relate to our product as a commodity.
So as you know, in most submarkets today, we are competing with other self storage projects for the same customer base.
Most of us have had to increase our marketing budgets and offer specials of some kind, or discounts.
The problem I see with many operators out there today, is they just pick something to offer without a lot of thought on it.
If their competitor is offering one month free, they do as well. If the competitor is offering a 10 x 10 at $70 per month, they do as well.
Believe me, I know if can get scary sometimes and you have the feeling you have to do something. We had a project once, where we were getting $149 for a 10 x 10 climate controlled. A new REIT managed property opened close by and started offering first 2 months free and $70 per month for a 10 x 10 climate controlled.
What would you do in that instance?
Match it? Beat it?
Well like most questions I raise in these episodes, I think the answer is… it depends.
When I am working with someone in a situation like this, the first question I ask them is “What is the value of a customer?”
I am still amazed at how many Owners do not know the answer. Do you? What is the value of a customer at your facility?
There are two or three main factors that should inform you how to react to a situation like I described above.
First, what is the value of a customer. Second, are you profitable yet (i.e. making money after operating expenses and debt service). Third, what is your current occupancy.
If you know the answer to these questions, you can design a valid strategy.
Most people know the answer to the second two questions. But most people I talk to don’t know the answer to the first question.
And it is so simple to figure out with the software we have today running these facilities. Let’s take a look.
Value Of A Customer
At the facility we were talking about, when we were figuring out what to do, the average stay of a customer there was 652 days. We took the net occupied rent and divided it by the number of customers to get an average monthly rental rate. Net occupied rent is what we are getting if everyone who is renting paid their actual rate we are charging them. These numbers are usually on the daily close except for the average number of days rented, which is on another customer demographic report.
For that facility the average rent was $151.06 (the facility was a conversion, so it was 100% climate controlled).
Then we took the average rent times the average stay of a customer to get the value of a customer. At that time (it is more now), the average value of a customer was $3,238.05.
So in other words, every time someone signs a contract to rent space at that facility, we were going to receive $3,238.05 from that customer.
That informs us what we could spend in advertising. Would you spend $500 to make $3,238.05?
What if you were in early lease up on a new facility, and the average value of a customer was $800. Would you spend $500 then? Probably not. In that case you may be better off offering lower rates to attract rather than more marketing expense.
We decided on the facility we are talking about, not to try to match the rates our competition was charging. We spent more on marketing, focusing on the differences between us, and we offered things like no price increase for a year (or six month) … guaranteed.
Our decision was to keep close to our current rents, let the occupancy go down but keep the value of a customer high and income per square foot high. Our occupancy went from mid 90’s occupancy top mid 80’s occupancy, but for us that strategy worked.
Today, the value of a customer is higher, and our income per square foot is very high. Our occupancy is not in the mid 90’s, but we never put in our Proforma that it ever would be.
Conclusion
Now what is important is that we were informed what to do because we were tracking our numbers.
In another situation where we are in lease up, the value of a customer is below $1,000 and we are not at break even, so our strategy is totally different as we adjust to competition. But that is because we are not just guessing (for the most part). Our data informs us what the most likely strategy to take.
In that case, we are more focused on getting tenants than the value of a customer (which is already low) and price per square foot can come up later.
But we are not just reacting. We are making decisions from our numbers.
My coaching is knowing your numbers, especially the value of a customer. If you are in a market with REITs, believe me, they know their numbers and are making decisions based on that data.
We now have the software available to operate at the same level. I truly believe that the operators who up their game and start making decisions based on data will be the operators who still remain relevant and in business over the next five years or so.
Part of what motivates me to do this work with these articles and videos, is to help do my part to close the gap between smaller operators and larger ones in how we run our facilities. This will allow the smaller investor to reap the rewards this fantastic business offers for the long term.
So if we meet and I ask you the value of a customer, I hope you answer is something like “At which facility I own? They are all different running from ….”.
I’ll see you then.
