Aligning unit prices to prospects’ perceived value would significantly increase your revenue in two critical ways
A few days ago I published an article titled Pricing Your Senior Living Units for Optimum Revenue. The article covered the topic of value-based pricing in the context of positioning and pricing your own units in your marketplace and focused on your customer perception of your units and/or brands relative to alternatives.
This article explores how these concepts could also streamline unit prices in a senior living community and effectively use it when selling.
Economic Value Analysis for Unit Amenities
For any given “unit type” (e.g., studio, one bedroom or two bedroom), a typical senior community includes units with many different features (we will refer to them as unit “amenities”) such as square footage, unit location, floor level, full kitchen and view. Each unit is valued or perceived differently by potential residents based on its amenities. An effective pricing strategy requires that the price of a given unit reflects its amenities since customers perform value tradeoffs (cost vs. amenities) when choosing among units.
Aligning unit prices to prospects’ perceived value would significantly increase your revenue in two critical ways. The most obvious is that you would gain “yield” (higher price) for units with higher valued amenities. Less obvious, but more impactful, would be situations where you avoid over-pricing a unit due to lower valued amenities resulting in increased vacancy loss since the unit is harder to sell.
How then should you quantify the economic value of each unit and capitalize on it when selling?
As an exercise, let’s use the following steps:
- List all the amenities or features available in your community. The unit amenities include, but are not limited to: size, location (e.g., close to core, close to elevator, close to laundry, floor level, noise), view (e.g., city view, canyon view, courtyard view, hillside view, junkyard view, ocean view), bathroom (e.g., walk-in tab, bath off bedroom) and kitchen (e.g., no kitchen, pantry, full kitchen).
- Establish the value of each amenity to the customer. Sources of amenity value may be based on expert judgments, data analyses and/or modeling (e.g., conjoint analyses, trade-off analyses, statistical modeling). Note that most amenities have positive values (e.g., close to the core), and some amenities might have negative values (e.g., junkyard view).
- Pick a reference unit. You can start with your best or largest unit, or you can choose your smallest unit or one with the most common size. Whichever you choose, it’s important that you select only one unit as a reference unit. List all amenities of that reference unit.
- Establish the price of the reference unit. This is difficult and requires value-based pricing in itself as many factors influence the price (e.g., current inventory availability, own historical prices, competitive prices, amenities, average days on market, customer price sensitivity). This was partially covered by the earlier article, Pricing Your Senior Living Units for Optimum Revenue. For the purpose of this exercise, suppose that we know the price of this reference unit.
- Pick a new unit and list its amenities.
- Calculate: price of new unit = price of reference unit – sum of amenity values of reference unit + sum of amenity values of the new unit
- Repeat Steps 5 and 6 for the next unit.
These steps should help you align prices of the units in a given unit type using the determined values of the amenities of each unit. Note that this procedure is value-based comparing value of a given unit to the value of the reference unit.
The selling process could start by asking prospects about their needs and the amenities he/she would value most (keep the price out of the initial discussion if possible). The sales person could then show the best unit that matches the customer’s preferences. If the price of that unit is less than or equal to what the customer is willing to pay, then you are most likely to have the sale. Otherwise, show a less expensive unit with lower amenity values and justify the price differentials based on the differences in amenity values.
This is value-based selling which is what you should always do. You can most confidently value-sell if your amenity prices are aligned and your price points are optimal. You always continue to refine and improve your value estimation based on results or customer feedback. For example, if you struggle to lease your highest (or lowest) valued units, it might mean that you over-value (or under-value) some of the amenities, and you can adjust accordingly.
Similar steps could be repeated to compare your own unit with a competitor unit using community attributes, unit amenities and prices. However, getting competitive prices and unit amenities and aligning them with your own units is more complicated.
Prorize provides a cloud-based software solution, Senior Living Rent Optimizer® (SLRO®), which enables value-based selling. First, the SLRO uses historical customer behavioral data and sets prices based on the customer’s willingness to pay. Second, the SLRO has powerful amenity administration and management capabilities, and enables maintaining, matching and updating amenities efficiently. The SLRO hosts amenity data and seamlessly integrates with the price optimization system. This assures that unit prices are always aligned and always reflect unit amenity values. Finally, the SLRO allows field personnel and sales staff to sell quality of lifestyle, benefits of senior living, and the value of one unit vs. another without getting bogged down in price negotiations. This can only be done when the prices are value-based and are always right based on relevant facts.