Given both my history as the leader of the team that built LRO® and the company that has built REBA RentTM, I’ve obviously been watching (and commenting on) the evolution of the legal and legislative environment w.r.t. pricing and revenue management (PRM) software in the rental housing industry (often referred to as “algorithmic pricing” to make the software sound scarier).

In past blogs and white papers, I’ve commented on both how the civil lawsuits in federal courts in Tennessee and the state of Washington are rife with gross misunderstandings of how revenue management works and how it’s virtually impossible for companies in this industry to collude through the use of PRM software. On the legislative front, I’ve pointed out how the actual legislative efforts are much less challenging than the titles and press reports would imply.

Today, I want to turn our attention to how the industry is reacting to these challenges.

Industry Reactions

After an initial period where individual companies largely hunkered down to determine their defensive strategy and generally avoided talking about things even in many private conversations, we are seeing a natural development to a phase with more, and more varied, action.

Having gotten past the initial shock and anger at the situation, executives are now well enough educated to understand the core set of options available. And with the passage of time, we now see and can evaluate the variety of reactions. Not unlike the early tech adoption cycle with the first PRM software systems, we saw some very early adopters make quick changes and are now entering the first stages of “mass adoption” of new approaches.

At the risk of overstating my own team’s role in this process, I believe one of the key things driving this new phase of industry decision-making is the presence not only of credible options other than the legacy systems from the two main software providers but also options that have purposefully taken lessons from 20+ years of PRM software experience to deliver user experiences and results demonstrably better than systems largely unenhanced since their introduction in the early and mid-00s.

Yet as with the mass adoption days of the legacy systems, there are still many companies sitting on the sideline or, worse, making decisions that run counter to their best business interests. Specifically, we see four types of behavior, presented in ascending order of the danger/risk of damage to the business presented by this behavior.

Inertia

We get it. Everyone, particularly executives, is busy. The legal and legislative situation is slowly evolving with a conclusion perhaps years away. Current software is not yet illegal anywhere (except in San Francisco), and it still works. Operators can still operate their business, and there are so many other issues pressing on us. Add in the complexities of analyzing this kind of software along with the natural challenges of change management and succumbing to the forces of inertia are a natural and logical response. In my most cynical moods, I may conclude that this tends to be the “go-to” move for many in our industry.

In response to this, however, I am reminded of a story from my first time whitewater canoeing when I was 12 years old at summer camp. As the youngest in the group, the head counselor put me at the front of his two-man canoe. He told me that, no matter what, when we were in white water I was to keep paddling. The front person in the canoe was the engine while the back person was more the steering. As long as we were going even slightly faster than the water, he had at least some steering control; as soon as we were going slower than the water, we were at the mercy of wherever it would take us. I realized even then what a metaphor for life that was. We may not ever be fully in control of where the “whitewater of life” takes us, but as long as we keep paddling, we have some control.

While it’s easy to rationalize succumbing to inertia as a “wait and see" approach, the reality is that executives and companies exhibiting this behavior risk being subjected to the whims of where this goes. That’s why we advise “captaining your own ship” and taking active measures to plan for the next phase of your pricing process and tech stack.

Fear About The Optics Of Changing

Some portion of the industry has been involved in active research and decision processes and made the decision to hold off for fear that changing horses mid-stream could somehow be used against them as “proof” that they admit guilt/liability from using the legacy software now in question.

While it’s easy to see how this has some internal logic to the argument, we strongly believe it’s simply a fear with no supporting legal reality behind it. While we are not attorneys, we have spoken with several anti-trust defense attorneys from blue-chip law firms, each of whom had multi-year experience at the DOJ in investigative and prosecuting roles before joining these private practices in their now-defense-oriented roles. They tell us that suspicion of past practices doesn’t stop companies from having the right to run their businesses and make appropriate changes, especially when those changes enhance their operations. They also point out that resolving the current legal morass could take years, so taking this logic to its natural absurdity would mean freezing one’s tech stack for perhaps years into the future.

They do advise that, given the extra scrutiny the lawsuits bring, anyone switching PRM systems should document the range of reasons for making those changes. The good news there is that contemporary options, such as REBA Rent, offer a plethora of features different from, and superior to, the legacy systems. That makes it easy to write a decision memo with multiple, defensible reasons for making the change completely independent of any allegations against the prior system.

Going To Manual Pricing

In what I can only describe as capitulation to the fear, a few companies are going back to manual pricing. While understandable, this is the proverbial “throwing the baby out with the bathwater” of this blog’s title. We have tremendous sympathy for this reaction as it’s understandable for executives to just want to get out of the firing line.

The simple fact is that anyone going this route is giving up substantial revenue. This isn’t just the biased opinion of a lifelong PRM advocate. It’s demonstrably provable. Back in the 2001-2006 period, I was personally involved in eight different formal “test vs control” pilots of PRM software across seven different companies. Each test involved 6-8 test properties on PRM software with each having a pre-selected sister community control property that continued with manual pricing. Tests lasted anywhere from 6 to 12 months, and we compared average revenue (not just rent) growth of the communities on the software versus those continuing to do manual pricing. Results ranged from a low of 2.45% to a high of 5.65% with the overall average in the low 3% range.

As for the fear of future legal issues, the proof there is provided by AvalonBay. They were dismissed from the lawsuit based on their insistence on contractual provisions prohibiting the use of non-public data in their use of software. The need to react to the fear brought by the current situation is very real…just act on it by insisting on the right software design and contractual terms; don’t overreact by throwing the baby out with the bathwater.

Build Your Own

We’ve heard that a very few companies are pursuing building their own pricing software. We see the allure…it’s just pricing, right? From having been involved in building PRM systems across several industries and leading teams on four system builds in rental housing (two in multi-family, one in scattered home single-family and one in senior living), I can tell you that the complexities involved in the math and the process are much more in reality than they will appear to be on a PowerPoint slide with a “happy path” paradigm.

Not only is forecasting and statistics math complex, but it’s made that much more difficult given the reality of the small datasets we have in multifamily housing. And the special cases eat up a lot of time and cost—concession management, lease-ups, renovations, various rent control rules, unit amenity pricing, etc. Even the people side can be challenging—how do you recruit (and more importantly, retain) top modeling and software talent when competing with the opportunities tech companies offer? And how much can you afford to invest in ongoing enhancements when amortized over only a single portfolio?

That’s why we believe it’s best to partner with a company that has many years of PRM experience, understands the industry and is underwriting its investments based on an existing or expected install base in the millions of units.

These are definitely challenging times for executives to navigate. But as the proverb goes, “We can curse the wind, or we can set a better sail.” It’s these kinds of times where leadership really matters. Join us as we set a better sail!