Do you factor in competitors' rents when setting yours? If so, it might be time to address your apartment community's pricing strategy.
That's because relying on competitor pricing when setting your rents can cause your community more harm than good.
We'll explain the pitfalls of copying competitor rent prices and why you should use your communities' unique data points to set optimal rent prices.
Pitfall No. 1: Competitor pricing lags behind the market.
Occupancy vs. Market Rents of Stabilized Apartment Communities
in Houston (Courtesy of ALN Data)
When you or your current revenue management software factor in competitor pricing information to your community's rents, you—and all other competing communities in your area—begin to form a circular dependency on one another.
Essentially, you're changing rents because another property is changing theirs while another is looking at your prices and reacting similarly. When everyone copies their competitors’ pricing, it ultimately puts everyone behind what the market suggests they should be pricing.
In the graph above, you can see that this plays out in the Houston apartment market. Occupancies are steadily declining. Meanwhile, the market and effective rents increase in a surprisingly similar pattern.
The first issue in this circumstance was just how far behind market prices lag compared to occupancy. Prices should generally increase before occupancy peaks, not far afterward, as what's happening here.
When you or your current revenue management software factor in competitor pricing information to your community's rents,
you—and all other competing communities in your area—begin to form a circular dependency on one another.
The other issue is that the effective rents, or what communities in the market are charging, always remain below the market rate.
So, you have the combination of lagging market rents and properties circularly depending on one another when setting their rent prices, which ultimately causes all to lose out on revenue they could've otherwise taken advantage of.
Worse, it could induce suspicion of pricing collusion—especially if the same management company owns multiple communities within the same area. In today's climate, that is not a reputation you'd want to be known for, whether those accusations are accurate or not.
Pitfall No. 2: Competitors' circumstances are different than yours.
The graphic above does a great job of showcasing the problem. Say your occupancy is only 86%, and you're far below your target. Would you increase your rental rate if you're charging $1,299/month for the 2-bedroom floorplan, and your competitor next door increases their similar floorplan to $1,499/month?
Of course not!
Should your competitor lower pricing without knowing you're in a vacancy crisis, they'd also make a costly mistake.
Your apartment's unique data is better for setting rent prices.
This points explicitly to the superiority of using unique supply and demand factors to set prices. Only you know your community's seasonality patterns by studying organic website traffic in Google Analytics. Only you know your availability and upcoming lease expirations in your property management software.
Both are leading indicators for determining how much to charge and when, if necessary, you should increase or decrease rent. If any community in the Houston market from the example above set prices according to its unique supply and demand patterns, it would've significantly outperformed everyone else.
If you follow this basic rule, you will be surprised to see more communities following your lead regarding pricing strategies. The only difference is that you'll benefit more from being the first to react to market shifts, which could produce thousands more annually in rent revenue. And, ironically, more communities would begin following you!
Pitfall No. 3: Competitor pricing is blind to concessions.
Another risk with making pricing decisions based on your competitors' choices is that the pricing you see on their websites or listing service pages doesn't include discounts from current rent specials.
You could be incidentally charging much more (or less) based upon a listed price that doesn't factor in any special—a mistake that could limit your ability to attract future renters or revenue generation. Again, the best method is to altogether avoid relying on competitor pricing because of instances like this.
RentVision Revenue Management doesn't pay attention to competitor pricing for those reasons.
Instead of following competitor pricing, RentVision Revenue Management uses your community's website traffic data to predict upcoming demand and availability in your Property Management Software to gauge forthcoming supply to set optimal rent prices for each unit. Unit pricing also factors in other things like unit amenities and leasing velocity.
The most crucial benefit of utilizing revenue management software that purposefully ignores competitor or market data is that your prices will change in advance of fluctuations in demand—not when somebody else does something different! That means you'll be able to charge rents the market supports at the right time instead of weeks or months afterward.
Key Takeaways for Multifamily Owners & Operators
- Move beyond competitor data: Relying solely on what competitors charge leads to lagging rents and circular dependencies. Focus on your community's unique data—occupancy, seasonality, website traffic, and availability—to set optimal prices.
- Remember, your circumstances are unique: Don't mindlessly follow competitor price changes. Analyze your own supply and demand factors to determine appropriate rent adjustments. You might even be the trendsetter by reacting first to market shifts.
- Don't be fooled by listed prices: Competitor rents often hide concessions and specials. Rely on your own data and revenue management software that avoids competitor data altogether to set accurate, data-driven prices.
- Be proactive, not reactive: By ignoring competitor noise and focusing on your data, you can adjust rents ahead of demand fluctuations, maximizing revenue and staying ahead of the curve.
Bonus: Consider implementing RentVision Revenue Management, which utilizes your community's unique data to predict demand and set optimal rent prices without getting caught in the competitor pricing trap. Click here to schedule a demo.