A Pricing Revolution
Reflections on Winning the 2017 Franz Edelman Award
"There are two fools in every market; one who asks too much and one who asks too little!" - Old Russian proverb
In 2011, we received a call from Holiday Retirement (Holiday) to create a revolution in pricing for senior living industry. Holiday is the second-largest senior-housing operator in the US with over 300 facilities and an annual revenue of approximately $1 billion. Holiday’s then CEO, Kai Hsiao, had a vision to implement a data-driven pricing approach to benefit Holiday, its residents and the growing senior living industry. Hsiao and several members of the Holiday executive team were familiar with the impacts of implementing revenue management (RM) techniques from their past experiences in the hospitality industry and were questioning whether they could be applied to the senior living industry.
After significant exploration, Holiday selected Prorize, then a two-man pricing-consultancy shop, to create software that would analyze available data and make pricing recommendations for their senior housing apartments. Even though we were a small company, both my partner and I had extensive experience pioneering RM solutions for multiple businesses, including the apartment rental industry.
The key challenge to achieving a cogent solution for senior living, as opposed to the apartment rental industry, is that senior living is a care business. The decision to move into a senior-living facility is a very emotional process and many believed that scientific pricing would simply not work for this situation.
However, Hsiao believed the opposite and considered pricing optimization a strategic imperative for Holiday. Understanding the often-poignant sales situation, the requirement was to use data and facts to generate right prices so that Holiday could shift the sales conversation away from bargaining to finding well-suited homes for real people to spend the rest of their lives. Our goal was to develop a practical RM solution to consistently recommend the optimal price for each apartment, allow Holiday to remain profitable, and enable them to continue to provide services that residents enjoyed and valued most.
We were thrilled with the challenge and readily agreed to the initial proof of concept study. During an intense eight months, Prorize developed an initial prototype of the RM system called Senior Living Rent Optimizer™ (SLRO™). The SLRO performance was tested with scientifically selected pilot-control pairs (much like clinical trials) and revenue lift differentials were observed from actual rent deployments. The average revenue lift exceeded nine percent.
As a result, Holiday decided to rollout the SLRO across all its communities in August 2014. The revenue lift estimates were later confirmed by the company’s same-community revenue growth. Revenue lifts were primarily due to lower rents and higher occupancy rates; a win-win for both Holiday and their residents!
Prior to implementation, Holiday’s market rents were artificially high, and it was virtually wishful thinking that units would sell. Unable to move units, the sales force historically gave many on-the-spot discounts. Instead, we recommended to start with the calculated, right rent and allow only a two-week promotional allowance. This reduced the gap between asking and actual rent from 11 percent to less than 2 percent. In the process, we significantly raised occupancy levels and kept them high for extended periods.
The RM system was championed by the entire executive team. The initiative streamlined pricing practices and fostered back-and-forth communication between operations, sales and pricing teams, and resulted in considerable improvements in Holiday’s operations and sales processes. Culturally, it was a “mind shift” away from discounts and incentives to a value-based approach, which ultimately created a more focused and informed sales force, and improved the industry’s talent level.
Armed with our success in senior living, we adapted our model for the self-storage industry as both businesses share many of the same challenges. Prorize partnered with CubeSmart, the third-largest owner and operator of self-storage facilities in the US with approximately $500 million annual revenue and tested our solution with a pilot program using approximately a quarter of its portfolio. Again, results were impressive, with our RM system showing a four-percent revenue increase as compared to their legacy RM system.
Knowing we achieved something big with these results, on a hunch, I scrolled the INFORMS website to see if we should apply for the Edelman competition to share our story with the analytics community. Competing for the Edelman award was a lifelong dream, and this seemed like an optimum time to apply. We satisfied all criteria for the competition: implementation in an important industry (senior living), significant revenue and cultural impact, advanced technical solution, difficulty, and even achieved transportability (self-storage industry).
When I contacted Edelman Committee Chair Anne Robinson, she said that I had three hours left before the application deadline (yikes!). My partner, Utku Yildirim, and I quickly wrote the key messages, and our editor-in-chief, Ray Wheeler, added the final touches. We finished on time and submitted the abstract.
Being named a finalist was a great honor and winning the award from among an outstanding group of finalists was both humbling and gratifying. Our Edelman coaches, Jeff Alden of General Motors and Arnie Greenland of the University of Maryland, offered amazing guidance and helped us prepare for the competition by putting together a “laser-focused” story. Winning the award served as the highest form of recognition for the long hours and hard work put in by the Prorize and Holiday teams.
Winning the 2017 Edelman Competition has enhanced our company’s image in the business community. It has yielded inquiries from many firms in multiple industries. Each prospective partner presents a new set of challenges and an opportunity to transform the way they do business. In the self-storage industry alone, we partnered with seven additional clients with repeated success. An additional unintended benefit of winning the Edelman Award is that we can more easily attract top talent for our growing company.
At Prorize, we are fascinated by the complexity and the many dimensions of pricing. We know there is one right price and many wrong prices. Reflecting on the Russian proverb, it is easier to be a fool if your price is based on guesswork. We understand the price a customer is willing to pay; therefore, the price a company can achieve depends on the customer’s perceived value of a product or service. We are driven to find the right price so that both buyers and sellers are content. After all, better pricing creates a better economy, which in turn, creates a better society and ultimately a better world.
Despite our amazing results, the revolution is far from complete. We continue to encounter pushback from the “business-as-usual” crowd, which I imagine every Operations Research (OR) professional faces from time to time. Pricing optimization techniques are new for many industries including senior-living. When staff turnover occurs, new team members tend to bring with them traditional practices.
The pricing process involves the most sensitive profit decisions as it directly influences sales-purchase transactions. It is transformational and very difficult to implement half-heartedly. One lesson we learned is that changing the way companies price is an ongoing process. Many people feel that they give up their pricing authority when a computer program produces price recommendations. Overcoming this perception has been a challenge, and we know the only way to succeed in the long-term is through persistence and synergistic collaboration with our customers.
The OR field is at the intersection of data and technology, providing value and meaning to data, and is positioned to revolutionize the world in ways we’ve never imagined. At Prorize, we feel fortunate to be a part of this movement and hope that our example of a two-man shop, which ultimately won the Edelman Award, can serve as an inspiration to others in the field.
While we have come a long way, we still have a long way to go. The revolution continues.