Revenue vs. Occupancy: Revenue Wins Every Time

With the holiday season approaching, we’re in full bargain-hunting mode. But as we dig through racks and racks – or pages and pages – of discounted goods, we realize there’s a certain price companies won’t go below, regardless of inventory levels.

That’s because you can sell out of anything if you price it low enough. But at some point, you’ll reach a price so low that you no longer make a profit.

The same concept can be applied to the multifamily industry. In fighting for 100% occupancy, you might lower your rents or offer crazy concessions, but at some point, these tactics will keep you from hitting your revenue goals.

Yes, high occupancy can result in revenue, but it doesn’t necessarily maximize it. In fact, if you’re optimizing your revenue, you’ll probably earn more at 95 percent occupied than 100 percent, because you’re charging more for each apartment home. If you’re constantly sitting at 98 or 99 percent, you’re probably charging too little for each apartment home and leaving revenue on the table.

Imagine if Apple developed a new phone and sold it for $3. The tech giant might set a record for the fastest sellout of a new product, but it wouldn’t generate the amount of income the company currently generates. A much wiser approach is to sell the phone at market value – or slightly above – and not worry about the portion that remain on the shelves for a few weeks.

It’s about optimizing your price with demand and earning the most revenue possible. After all, revenue pays the bills, occupancy doesn’t.

Here are few more reasons why you should focus on revenue rather than occupancy:

  • Revenue provides more visibility into performance. Occupancy is easily manipulated. You can provide heavy discounts or concessions to meet occupancy goals. If you’re basing success on occupancy, a community manager could offer three months free in rent to every resident and look good at 98 percent occupancy. If you’re judging their performance on revenue, they can’t hide the discounts.
  • Revenue puts your team’s focus on the financial aspect of the business. With a focus on revenue, your team is less likely to recommend a price decrease on units simply because it’s been a challenge to lease one or two. If the sole focus is occupancy, price takes a backseat to getting someone into the empty space. A strong revenue management strategy ensures you maximize revenue returns on a unit.
  • A revenue focus makes renewals less difficult. This might seem counterintuitive in a time when you’re dishing out huge rent increases due to a hot market. But if you heavily discount a unit in order to fill it quickly, renewal time comes as quite a shock — not only are you increasing their rent, but they no longer have the initial concessions in place. Effective revenue management strategies avoid using concessions and set the price at fair market value. Upon renewal, the rent increase is only impacted by market conditions eliminating the need to end a concession and further increase the rent.

Remember, your price point is part of the first impression you make on prospective renters. Jacqueline Drew, marketing research and strategy consultant for Tenato Strategies Inc., notes that consumers are skeptical if you’re priced 10 percent below comps. They’ll often wonder why you’re cheaper and what corners you’re cutting to meet the price point. In many instances, cheaper symbolizes low quality.

Lower prices also equate to lower margins. The concessions you’re offering to meet occupancy are cutting into the remainder of your budget. That money could be better spent on improving the amenities or promoting brand awareness.

Lastly, if you price too low to start in order to meet an occupancy target, it’s difficult to raise your rents later. The resident has already valued your community at its original low price, and you’ll be forced to inch your prices upward rather than alienating residents with a sudden drastic change. If you’re offering a low introductory price, make certain you’re transparent that the rate is temporary.

Many will debate whether revenue or occupancy is more important. But your income statement will make it abundantly clear that revenue wins every time.