CH. 10 – Operators Fail To Understand The Power That Price Has On Profits And Value

SENIORS HOUSING OPERATORS FAIL TO UNDERSTAND THE POWER THAT PRICE HAS ON PROFITS AND VALUE

Price is the most effective profit driver to a seniors housing business, yet Independent Living, Assisted Living, Memory Care and Active Adult Communities Continue to Focus on Volume Over Price; Ultimately Sacrificing Margins

Seniors housing is an interesting niche indeed.

 

While we are in the business of care, we are also in the business of real estate. This makes for a complex dynamic, oftentimes causing conflict among operators and investors due to very different priorities (see my new column on this topic in Seniors Housing Business).

 

It’s a business best practice to lead a company with a strong profit orientation because without profit, there will be no investors. Without investors there is no business; particularly in seniors housing. This is sometimes difficult for operators whose priority is to care for its residents. With high acuity, increased regulation, a lean staff and an ongoing workforce crisis, there is little to no time for operators to focus on driving profit on behalf of its investors. Thus, the tension…

 

As an industry, we have to find a way to unify both mission and margin.

 

The reality is that the stronger revenue, cash flow and net operating income, the more investment that can be made into the operation; positively affecting the overall resident experience.

 

PRICE IS THE SINGLE MOST EFFECTIVE PROFIT DRIVER IN YOUR SENIOR LIVING BUSINESS

 

The last five years we have seen a staggering increase in pricing concessions. Looking back, I would attribute this trend to Brookdale acquiring Emeritus in July 2014. While a portfolio of 50 communities was large at the time, with over 1,000 communities and at least 100,000 apartments in inventory, no one predicted the complications that would arise and the sheer need to put numbers on the board to appease stockholders.

 

To drive volume, incredible discounts were (and still are) offered that disrupted entire markets. Rather than maintaining fee integrity, competitors followed suit, reducing their own prices ultimately leading our industry into the price war we are in today.

 

It’s no longer about the best value but the best deal and that’s sad for such an amazing industry that does so much good for seniors and their families.

 

Imagine the financial and operational impact had operators stood their ground and sold apartments at market rate rent with full community fees collected. Instead, operators are trying to recoup lost margins, cost cutting to the point there is nothing left to cut. Ultimately that trickles down to residents.

 

 

OPERATORS TAKE THE EASY ROAD; BECAUSE IT’S EASIER

 

Given the choice, most independent and assisted living as well as memory care and active adult leaders will take the easy route to drive sales volume. This means announcing discount campaigns to drive market share rather than rolling up their sleeves and >u>investing in the training and education needed to sell at market rate rents.

 

Warren Buffet once said, “The single most important decision in evaluating a business is pricing power.”

 

For an operator to exit the pricing chaos that has engulfed seniors housing, the leadership team must be willing to invest time and money into improving existing sales and marketing programs, bring operations into the sales leadership puzzle and reinforce that training with recurrent weekly training. Anywhere outside seniors housing, from pharma to technology, this is the norm; not running specials to the detriment of margins.

 

SALES LEADERSHIP MUST BE DRIVEN BY OPERATIONAL LEADERS

 

Seniors housing operational leadership teams need a complete overhaul of their education around sales, marketing, and the operational aspects of balancing both roles within the business.

 

Silos no longer work; it is everyone’s job to drive revenue and net operating income and that means sales and ops working together to achieve both mission and margin goals for all its stakeholders.

 

CLICK HERE TO READ ABOUT THE SALESFIRST TRANSFORMATION AT LCS

 

 

PRICE STRATEGY MUST BE DRIVEN BY THE CEO

 

In this final Chapter, Hermann Simon makes it clear that companies earn higher profits when their CEOs and senior managers get personally involved in price management. In seniors housing, price is most often determined at the regional and site level, not by the CEO or senior leaders. As you will see there is tremendous benefit to doing so.

 

For companies with strong CEO involvement:

  • The pricing power was 35% higher
  • The success rate for implementing price increases was 18% higher
  • 26% more achieve higher margin after the price increases which means that they were not just passing on higher cost to their customers
  • 30% had a special pricing department which in turn had an additional positive effect on profit

 

The global pricing study showed that companies with strong pricing power had 25% higher returns than those who didn’t.

 

Compare the difference: Click here for a complementary competitive analysis on a community of your choice and see how it compares to the site level assessment, a $500 value

 

HOW PRICE CAN INCREASE MARKET CAP

 

The average price earnings ratio for all 30 companies that constitute the Dow Jones industrial average is 16, meaning that the market value of the average company is at 16 times its profit.

An incremental price increase of just 2% can yield dramatic gains that might surprise you:

 

 

WHAT’S NEXT?

 

If your operation has exhausted all cost cutting measures and added as many communities to your portfolio possible, the next step is to explore the potential for price increases within each individual market. Because of the unique nature of assisted and independent living as well as memory care and active adult communities, you don’t want to implement an identical, across the board price increase. Instead look at each market, the property itself, and the competitive advantage. There must be strategy behind the increases that make sense and that you can effectively communicate to the consumer.

 

Build newly identified prices into future sales contracts, thereby locking in an additional stream of annual revenue on those apartments that are vacant and those that turnover. Be sure to implement a training program to support the implementation of new pricing so it is done properly.

 

This effort will drive the value of your senior living operation and investment as well as its market capitalization.

 

TRUTH: It does no good to increase rent if you just give it away in concessions

 

Consider putting together a committee within your leadership team that is focused on professional pricing strategies and utilize a third-party to conduct thorough competitive analysis with each of your markets to not only understand rate structure but to help you differentiate and strengthen your brand presence in each market.

 

IT’S A WRAP OF CONFESSIONS OF THE PRICING MAN- WHAT HAVE WE LEARNED?

 

My big takeaway from this book is that the most important drivers of a company’s value are profit and growth. While the term growth typically means revenue, growth occurs in different ways. It can stem from volume increases or price increases. What is most important to point out is that these scenarios have very different effects on profit and therefore on value. Price increases compared to volume increases result in almost double the margins.

 

Short on resources? Bild & Co can serve as your internal pricing department. Email revenue@bildandco.com to learn more. All information is housed in a portal for trend analysis and information is turned around in a timely manner.

 

Thought leader, Traci Bild is available as a speaker for your next industry event. Request details can be emailed to tbild@bildandco.com or you may call 1.800.640.0688 for more information.

 

To Your Success,

Traci Bild

 

P.S. Now that we have completed Confessions of the Pricing Man, click the book below to purchase your copy of the next book in our Bild and Co Book Club. We start reviewing Chapter One next week!

 

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