There’s no way they’re making money with rates that low, right?
With demand slumping from the 2021/2022 highs, storage facilities are having to make difficult decisions with their rate management. Many of the biggest players in the industry are slashing their street rates to jaw-dropping lows.
Should small operators do the same? Can you survive charging that little? Can you get any renters if you don’t?
In this blog, we’ll go over the methods that the big players are using to capture the market, as well as the ways smaller operators can counter (or imitate) them!
Should you pour more money into your self storage marketing? Do you need to run a self storage Google ad campaign? Change your rates to match these eye-popping low numbers? Or simply tighten the belt and wait for demand to improve?
If you’re keeping track of the competition’s pricing - which you probably should be - you’ve seen rates dropping significantly. This slump is a reaction to a reduction in demand, and overall, storage operators were making 4-5% less revenue in 2023 compared to 2022.
There are lots of reasons for this slowdown. People aren’t moving as often, people are spending their money more on services than goods after the pandemic, and higher interest rates have people worried. All of this leads to less demand for our product.
Some areas aren’t seeing rates drop by much - but others are seeing rates drop to half of what they were a year ago! The REITs and other big players in self storage are leading this race to the bottom.
How is this possible? Are they actually making money at those rates?
Not really. But they’re not planning on charging those rates for long.
What we’re seeing today is a variation of the “First three months half off!” discount, except the operators aren’t always telling customers that’s what they’re getting.
The operator lures a customer in with discounted rates, and then two months in, the customer gets a letter saying their rates are going to go up in a month. Usually, the rates will be doubled; then, if that price hike doesn’t deter the renter, aggressive rate management can continue.
In a lot of other industries, this wouldn’t work because subscriptions are easier to cancel. I can cancel one streaming service and subscribe to another if the first one triples my rate. In storage, though, changing facilities is a pain, and operators use this fact to squeeze their customers.
The customer can’t simply say, “I’m not paying that much! Plus, you lied to me about what my rate would be!” and walk off because the customer has a couch and their grandmother’s old writing desk stashed in the unit.
To get out of the storage unit, they need to rent a moving truck and get some strong friends to help them carry their stuff. They’ll need to find a new storage unit at a new facility to move into. They’ll have to find a time that works for everyone involved.
And then they have to hope that this new storage facility doesn’t do the same thing to them!
This is why some operators can get away with these misleading tactics. The barrier to finding a new facility is just too high! But this won’t work forever. Customers are wising up to the practice, and in some places, we’ve even seen a push for rent control in the storage industry.
Rent control would be a big hit to the self storage business model, and to operators. We’d have to see longer-term contracts, predictive pricing, and more regulation. Rent control isn’t likely to happen soon - but the possibility should give pause to those using deceptive rates.
The second strategy that the largest players are using to fill up their facilities is buying occupancy. This phrase refers to the practice of spending huge sums on marketing, combined with offering very low rates, in the hopes of making that money back once the customer is in a storage unit.
Google ads and aggregators like SpareFoot are the most common avenues for buying occupancy. And, with the big companies pushing the prices for these services, the cost of acquiring a tenant is getting higher and higher.
Of course, the REITs can afford to pay a 3-4-5x rate on SpareFoot or pour thousands into an ad campaign. They have the data to prove that, over time, they’ll make that money back. They’ve also got the bankroll necessary to wait until they do.
Smaller operators don’t always have that luxury – but you do need tenants. So what should you do?
During our Gabfocus on the 2024 State of the Industry with John Chang, he mentioned one of the ways smaller operators could compete with the big ones - playing small ball. [The discussion starts at 23:00 or so].
“Small ball” refers to aiming for incremental gains, rather than going for a home run. For self storage, that means focusing on the little things that set you and your facility apart.
The REITs have huge amounts of data and capital because they’re big. But because they’re so big, they can’t be quite as nimble. They can’t tailor their marketing to your specific neighborhood the way you can. The CEO of [insert door color here] doesn’t go to the same supermarket as your customers - you do!
Here are a few ways a small operation can outperform the big ones:
Local marketing tactics are great - but there’s a large portion of the customer base that is going to look at a list of facilities and choose whichever one is cheapest.
Why? Because most of your leads don’t know anything about self storage. All the units look the same, the amenities don’t have any context, and, to top it all off, they’re stressed from needing storage at all.
Storage isn’t a hobby for your leads; it’s a chore. They don’t want to spend time learning about storage and weighing their options. They want a cheap solution to a problem.
So, for a lot of smaller operators, the best way to compete is to offer a similarly low rate, and then play small ball in the other areas. Have better reviews, have a more personable message, and advertise that you’re a local business.
Then, like the others do, you can make up your money later once you’ve got the tenant in your storage unit.
We strongly recommend that you make this arrangement crystal clear to your customers. Tell them you’re giving them 50% off the first three months - or whatever discount plan you’ve decided on.
Small local businesses rely on word of mouth and a good reputation. You can’t afford to drive all your customers away with predatory pricing. Eventually, the bigger players will pay a price for it – and you’ll be there ready to take up the slack.
Looking to learn more? Check these out!
At StoragePug, we build self storage websites that make it easy for new customers to find you and easy for them to rent from you.
