4 INDICATORS THAT SENIORS HOUSING IS IN A COMPETITIVE PRICING CRISIS
What Independent Living, Assisted Living, Memory Care and Active Adult Operators Need to Do to Avoid the Self-Destructive Behavior That Ultimately Kills Margins & Diminishes the Customer Experience
PRICING CRISIS & PRICE WARS
Many years ago, when I was a solo entrepreneur and working to establish my fee structure, I received wise advice from a consultant at the top of his field. He said, “You will know your value Traci when you are willing to walk away from a deal.”
He went on to explain that fee integrity meant having a set rate and honoring it. When prospective clients asked for discounts I would walk away, no matter how much I needed the business. This was an entirely new concept to me, but I took his advice. The first time I had to walk away I felt sick to my stomach; my company was in its infancy and I needed the business. Yet I stood firm.
Within days that same company called me back and hired me- even though it was twice as much as the competitor they were considering.
I share this story with you because at the time speakers, trainers and consultants were a dime a dozen (and in truth probably still are). The competition was fierce, and I had to take a stand on who I was going to be, how I would differentiate and the fees I would charge. Doing this literally removed me from the pricing wars my competitors faced and allowed me to grow a successful, profitable practice over the next two decades.
OVERCAPACITY SPARKED PRICING WARS, OPERATORS CREATED THE PRICING CRISIS
The biggest challenge facing pricing in the modern world and particularly in seniors housing is overcapacity. This is typical as an industry enters its mature phase and companies overestimate growth potential. It’s also typical for a market’s decline phase which companies often do not anticipate. While we expect to see an upswing in seniors housing due to the mass influx of Boomers, we still must sustain revenue until that time comes- which is a solid ten years or more into the future.
Overcapacity and the price pressure that arises doesn’t always prevent investment in more capacity and we are seeing that still today in seniors housing. While new development has slowed, there is still a strong new development pipeline meaning even further capacity coming onto the market.
For this book club study, a pricing crisis is a collapse in demand. It induces a buyer’s market where the balance of power has shifted in favor of buyers.
Indicators of such a situation include the following and seniors housing is experiencing ALL FOUR:
- Capacity Utilization: A company’s production capacity and its employees are underutilized
- Inventory: Unsold goods. There is a lot of unoccupied inventory across the country right now.
- Price Pressure: Arises when customers try to take advantage of the new balance of power and when competitors start undercutting each other.
- Selling Pressure: The sales force gets pushed harder and harder to sell more units at the same time when buying resistance from the customers grow. It becomes more difficult for salespeople to meet their targets.
These indicators of supply and demand typically lead to massive effects on prices and that is exactly what we are experiencing across our industry. A crisis causes one or more profit drivers; price, volume and cost to develop to the company or industry’s detriment. As a result, many organizations will reduce its prices as a reaction to reduced demand or to price cuts by its competitors. As I write I feel a sense of mass chaos as it relates to pricing as operators panic to gain volume when the reality is they should be focused on price.
DO OPERATORS ACCEPT FEWER RESIDENTS AT MARKET RATE OR CUT PRICE IN EXCHANGE FOR VOLUME?
Is it better to cut prices to grow volume or accept less volume in times of a pricing crisis? It seems logical as a business owner to say less volume at asking rate to ensure a protected margin and the ability to deliver on the expectations promised.
Sadly, the response of many operators in the seniors housing industry has been to cut prices in order to grow market share all while sacrificing earnings. A few operators have stood firm and held strong to their pricing structures without loss of any market share further proving that discounts are not the answer to strong volume during challenging times.
A SHIFT FROM OCCUPANCY GROWTH TO FEE INTEGRITY & REVENUE GROWTH
High occupancy can easily be masked in diminishing margins due to rampant discounting. This does nothing but inflate the numbers giving companies a false sense of security.
Bild & Co is known for its sales and marketing systems, designed to grow occupancy and revenue in six months or less. Despite our strong brand, we’ve had to change position due to the temptation to discount within our industry. The last few years we have been hyper focused on price and fee integrity. Once that’s locked in, we then push occupancy.
With the growth of our research division we’ve seen firsthand the massive toll that discounting has had on operators. Even worse is the overall buyer experience and integrity of our industry. As pricing wars became more prevalent, we doubled down on training that empowered operators to focus on price first, protecting profit margins and then volume second; accelerating occupancy, revenue, cash flow and NOI. Yet we don’t sacrifice one for the other. As an industry we need to get operators and investors on board so that we can put an end to the insanity of pricing wars we are in.
SMART DISCOUNTING VERSUS DESTRUCTIVE
Should you decide to still offer discounts despite everything we are learning from this study on pricing, do not offer any type of discount off the monthly rental rate or care fees.
It’s much more advantageous to offer a new resident one month of free rent instead of a discounted price per square foot or monthly discount that has long-term consequences. The valuation of the community depends on a multiple of the rent and banks also use this when making decisions on financing. A solid, consistent rent cycle is critical to the success of an assisted living, independent living, memory care or active adult community. Additionally, buyers place a high value on free rent even if just one month. An alternative is to offer complementary moving services, cabinet upgrades or a $1,000 shopping spree at a local store like Target or Home Goods to make the move exciting and fun (also what a great way to get the word out with retail partnerships).
WHAT ABOUT A PRICE INCREASE, IS THAT STILL POSSIBLE, OUTSIDE OF THE ANNUAL 3-5%?
During the Great Recession, Panera Bread which operated 1300 outlets in the US, reacted differently than its competitors. Rather than cutting prices like its competitors or offering promotions, Panera upgraded its menu and raised its prices. They even added a lobster sandwich which sold for $16.99.
The CEO, Ron Shaich, decided to focus on the 90% of Americans who were employed while the rest of the world focused on the 10% that were unemployed. What an amazing mindset and strategy. The result was a 4% rise in revenue and a profit growth of 28% in 2009; an incredible feat during this very difficult time.
SENIORS HOUSING IS FOR SURE IN A PRICE WAR
In the Global Pricing Study of Simon-Kucher & Partners, some 59% of all managers surveyed said that their company was involved in a price war. I remember a time in seniors housing when there were no discounts. when a new resident moved in, they saw the value of paying the asking rental rate and communities fees; no questions asked.
The influx of new product on the market and decisions by operators to compete on price rather than value has taken a toll on our margins. Price wars are known to be one of the most effective ways to destroy profit margins in an industry for a long period of time. Even worse, once a price war has begun, it’s hard to stop, creates mistrust and wreaks havoc on an operator’s inability to deliver on its brand promise. Overcapacity is the most frequent trigger for a price war and is very true for those products or services with little differentiation and for which price is often the decisive purchase criterion.
READ HOW LCS, A 100+ OPERATOR PUT FOCUS ON VALUE OVER PRICING AND EQUIPPED THEIR ENTIRE ORGANIZATION TO SELL IN TODAY’S COMPETITIVE MARKETPLACE RESULTING IN A 23% SAME STORE OCCUPANCY BUMP FOR ITS RENTAL COMMUNITIES COMPARED TO THIS TIME LAST YEAR
IT’S TIME TO PIVOT AWAY FROM PRICING DISCOUNTS AND TOWARD FEE INTEGRITY
Seniors housing is not only devaluing and commoditizing its offerings by discounting but it’s creating incredible confusion among prospective buyers. Smart operators will avoid price wars while self-destructive operators will continue to be embattled in them. The smart ones will maintain profitability while the self-destructive ones will incur losses and diminish profit margins. Ultimately, we want our competitors to be smart about pricing as its better for the industry as a whole and the consumer’s buying and resident experience.
Traci Bild is available for speaking events, to inquire, email TBild@BildandCo.com with the dates and location of your event.
To Your Success
Traci Bild, CEO of Bild & Co. Traci is the go-to thought leader within seniors housing with operators and investors relying on her Company’s expertise to identify those barriers impeding financial performance. She has pioneered sales and marketing systems as well as the infrastructure needed to support growth and sustainability in a fast-growing competitive market space. Her insights and strategies have led over 80 of the top 100 operators across the nation to increase occupancy and efficiencies. She is a world-renowned thought leader and author of Zero Lost Revenue Days. An in-demand keynote speaker, she is boldly addressing the future of the industry and the complex nature of the Operator/ Investor relationship and what needs to happen to achieve financial results. You don’t want to miss out on her proven 4-step formula; used in countless turnarounds to help under-performing assets turn into strong cash assets that deliver a stellar product.