The ultimate aim of any effective pricing strategy for a BtR development is fairly simple: keep vacancy rates low and net operating income high. However, the simplicity of the objective belies the complex art involved in determining the correct pricing strategy to guarantee the initial success and long-term viability of a BtR scheme.
In the US multifamily sector, sophisticated solutions have developed over time to help providers optimise their revenue management. It is relatively commonplace for large developers to employ ‘dynamic pricing’ tools and strategies to make live adjustments to pricing for units as they are released to market. These dynamic pricing models facilitate the strategic modification of unit prices according to live data on market conditions and scheme occupancy in order to boost the development’s ERV.
With the UK BtR space still in its infancy by comparison to the more established US market, few analogous solutions exist to support schemes with pricing models and structures. As pricing structure is so critical in determining the overall scheme’s ERV, it is incumbent on BtR partner agents to add value by offering accurate and actionable pricing based on sound, data-driven analysis. With that in mind, and led by the axiom that necessity is the mother of invention, Home Made have developed a proprietary, BtR-dedicated tool to help our partners effectively price and release units to increase their ERV.
The initial lease up stage is crucial to the long-term viability of any BtR development (see here for expanded discussion from Jo, our Head of Business Development). Scheme operators need to price units strategically to generate maximum yields on each property and maximise longer term revenue growth for investors.
The impact of voids, both implicit and explicit, must be factored in as there are significant property-related costs that can accrue during void periods:
- Loss of rent.
- Cost of utilities.
- Council tax.
- Marketing expenses and promotional incentives, e.g two weeks’ free rent.
The resulting balance that must be struck is a delicate one. It is imperative not to price units too low, but voids must be balanced in order to ensure that top line targets are met.
Compounding the challenge is the fact that residents don’t just measure value for money against the available stock in a given development, but also across the full variety of available options in the desired area - including stock owned by highly reactive private landlords who are quick to adjust pricing in the wake changing market conditions. Consequently, targeted ERVs are readily achievable during high season but much harder to meet during low season.
There is also more to consider than just external competition. If a large number of available units are released onto the market simultaneously, particularly in locations with limited overall supply, developments become their own de facto competition. Residents are, generally speaking, rational economic actors and will seek to maximise the value they receive for money by optimising their choice between different buildings and units available in the same scheme.
With the above in mind, an effective pricing strategy should enable real-time, market-based adjustments in pricing throughout both the initial lease up cycle and into the stabilised asset stage.
The Home Made Solution - Smart PRiSing
We have developed a proprietary dynamic pricing tool utilising advanced analytics and a broad catalogue of internal and external data. The primary objective is to enable our BtR partners to maximise their ERVs, minimise their void period, and stabilise their asset. Using localised market and scheme data and customisable client input criteria, our Smart PRiSing tool can help our clients to understand the best price points for each unit in their scheme throughout the marketing cycle from initial launch though to full occupancy.
Functionally, our tool assists in both the marketing and operational delivery of a scheme by offering proactive ad pricing change for each unit and advising the optimum order in which to release units onto the market for let. Its recommendations are based on advanced analysis of the following criteria:
- Local market (seasonality).
- External competition (comparable stock and competition levels).
- Building occupancy rates.
- Client ERV targets.
- Rent increase targets ahead of expected vacancy dates.
Existing clients have already experienced tangible benefits as a result of our Smart PRiSing innovation. Where the product has been trialled, we have charted a 12% average ERV increase across developments where PRiSing recommendations have informed the marketing and stock management strategy. As we gather more data based on Smart PRiSing performance in real time, we expect efficacy rates to improve even further as our analytics become more sophisticated. The below graph is indicative of the results achieved during the initial product trial with one of our large BtR clients (across three locations).
The challenge posed by managing a dynamic pricing strategy effectively is twofold: external and internal. An external challenge is posed by the necessity to source and constantly update the relevant market data required to make sound pricing adjustments, particularly as factors such as seasonality will vary between units with different property specifications in the same scheme (i.e. demand for a two-bedroom property will peak in a different month to demand for a one-bed property).
Internally, it is essential to remain alert to the ways in which dynamic pricing during marketing can impact the customer journey. For example, a prospective resident is unlikely to enquire, view, and offer on a property all on the same working day. The price of the unit thus may have changed in the intervening period between the initial enquiry and the offer. There is a risk that the prospective resident’s customer journey is negatively impacted as they no longer feel as though they are getting value for money and their trust in the scheme is undermined. It is crucial to manage the process sensitively in order to maintain high levels of customer satisfaction (and ultimately customer advocacy).
Of course, the above outline merely scratches the surface when it comes to the operational challenge presented when implementing dynamic pricing strategies during lease up. Maximising revenue growth in perpetuity also requires longer term thinking beyond the initial market price of each unit. Developers also need to control the terms of the lease to ensure that there is maximum pricing leverage as units are subject to a renewal lease or reintroduced into the market based on seasonal demand. We intend to cover the topic of revenue management throughout the life cycle of a BtR scheme in greater detail in a subsequent piece.
Our model considers all requisite external and internal factors analysing multiple and complex data points to provide a bespoke detailed model which can underpin lease up at all stages. If you are interested in discussing our suite of BtR-dedicated solutions and how we can work together to maximise your revenue, we would love to hear from you. Please click to contact us today, and we’ll put you in touch with our expert in-house team to explore how we can support the delivery of your development.