Readers of this blog will not be surprised to have learned that, just before the weekend, the DOJ dropped its criminal investigation into RealPage revenue management (RM). The 5 p.m. Friday media slot traditionally reserved for announcements of government policy failure saw one of the more bizarre twists in this tale go out with a richly deserved whimper.
Of course, that still leaves the DoJ's civil suit, filed in August. It is hard to say where that will go as a new regime takes over the DoJ, and the pre-election publicity benefit of announcing the suit has now passed. For insight into that suit, I recommend listening to my conversation with Ethan Glass (S2 Ep 5 of the 20for20 pod), an ex-DOJ antitrust expert, who provided a detailed and valuable analysis.
Time to take stock.
I am currently interviewing multifamily leaders for the annual 20for20 White Paper, which is due out as usual in February of next year. The contents of those interviews are, of course, confidential, but I can point to one general trend. There is more activity among operators in the domain of RM than I have seen in any of the seven years I've been preparing this annual survey.
If companies had been avoiding RM over the last couple of years, they no longer appear to be. Many are actively making progress in this important area. Now feels like a good time to take stock of the last couple of years and what it portends for the future. Technology is part of that picture, and our understanding of technology represents an opportunity.
During my many conversations with various actors involved in RM over the last couple of years, I have noticed that companies pay relatively little attention to what RM systems actually do. We understand that they crunch data and spit out prices, but how they determine prices remains a black box, even for experienced users. That matters, particularly now, as many companies appear to be re-evaluating future RM strategies.
The real opportunity for multifamily
Perhaps the biggest disservice vendors have done over the years of RM adoption is to educate the industry to think that competitor data is more important than it is. Multifamily is a deals-driven industry. Comps are vital to deal appraisals, and when most of the leaders signing checks for RM software come from the deal side of the business, a focus on comps appeals to the buyer's cultural priors. As PMS vendors purchased comp data providers, comp data became increasingly central to the pitch.
The problem is that in an industry that routinely achieves 95% occupancy, RM should not be about competitor data. A system designed to determine the optimum price for your property should focus primarily on your exposure, expirations, and the demand for your property. Comp data, public or otherwise, does not help with that calculation.
The prediction business
RM is fundamentally about predictions. It's about estimating your future supply and demand based on available data. I recently interviewed Donald Davidoff, the CEO of REBA and the most knowledgeable RM expert in our industry, bar none (Podcast S2 Ep 4). During the interview, which was about algorithm design, Donald put it succinctly: imagine a prospect standing in front of you, attempting to lease an apartment. RM's job is to estimate who is in line behind that prospect and what capacity you will have available to accommodate them.
That is the basis for understanding pricing power and the trade-offs involved in revenue optimization. That is what pricing algorithms do. Comp data does not help with that estimation.
We have come to under-rate the role of prediction in RM software. Most pricing apps offered by property management system vendors do not predict the future at all, limiting their functional scope to data aggregation, analysis and some rules-based automation. Pricing optimization depends on predictive math, which is ultimately where the financial benefits of RM solutions lie across all industries that have adopted it.
Comp data is a useful guardrail against the relatively rare instances where your pricing is systematically out of step with the local market. But that's all it should be—a guardrail or a data point in our property reporting. It should certainly not be driving pricing, which is why it does not belong in RM algorithms.
The central issue of RM lawsuits is the use of competitor data. That should be irrelevant. As a RM purist, I encourage all leaders exploring RM technology to throw it out entirely. The original lawsuits—which are cynical and commercially driven—could have been avoided if we had never set out down this path. Keep that in mind if you are considering your future RM strategy, as we now know many companies currently are.