Last week we were talking about the experience of leasing up big projects, and it reminded me of something that I’ve advised companies against doing for years.  It’s to do with the setup of pricing and revenue management systems (RMS) – a set of tasks that do not always receive the attention that they should.

When companies set up new properties on an RMS, one of the most frequent missteps, even for experienced revenue management departments, is the execution of floor plan groupings.  It’s an essential set-up step, as it determines the level at which the system will forecast and make pricing recommendations.

Here’s the problem that I’ve seen again and again over the years: companies tend to form the groups that make the revenue management system easier to manage, rather than the ones that will yield the best results.  There is some logic to this approach: revenue management systems generate statistics, and segments with large unit counts usually yield more reliable statistics and hence results.

However, when 5, 10, or even 15 different floor plans are lumped together in 1x1's or 2x2's and so on, it becomes hard to interpret the pricing recommendations.  The risk is that when managers are unable to make sense of the recommendations, they look for quick ways to affect changes to unit pricing, with mismanagement of amenity pricing a common and potentially damaging consequence.

Why bottom-up beats top-down

Through years of experience, I’ve found that the key to good unit type segmentation is to build from the bottom rather than the top down.  I encourage teams to ask what makes sense to the prospect, and also for the leasing team. If you can still group floor plans together and get a decent unit count while identifying a different demand stream for guest cards, why not make it easier for everyone by separating the units that are distinctly different.  

Urban one bedrooms (like a studio but with a barn door and often no window),  for example, are different from true one bedrooms. The same is true of one bedrooms that also have office space or a den.   It doesn’t make sense to group all of these together when there are notable differences and customer preferences.

We wouldn’t sell shoes this way 

Here’s a good way to think of it – imagine you are selling shoes.  If you think of our current process for segmenting unit types, it’s like we’re separating the shoes by size only.  Imagine putting all of the shoes of the same size into one big bin. It wouldn’t work because that would ignore customer preferences and we’d probably sell fewer shoes as a result.

Although it may feel like we simplify segmentation by having fewer categories, it actually makes it complicated for our prospects and even more confusing to our site teams. When we group according to preference (think heels, flats, boots, tennis shoes), we actually make pricing easier to understand.  And that means our employees could offer better service and hopefully get more sales.

At the end of the day, it is the leasing team's responsibility to sell apartments.  If they don't know what they are leasing or they can't justify the bad amenity pricing, then they lose confidence in the pricing system, and that often leads to lower leasing velocity.  Building from the bottom up rather than top down helps teams to be more successful because they have a better understanding of pricing recommendations and amenity premiums.