Research by the economists Marie Connolly of the University of Quebec and Alan Krueger of Princeton based on a sample of major concerts in 2006 estimated that artists and promoters left about 5% of potential income (or around $200 million) on the table by underpricing tickets relative to the market rate. The UK real estate rentals market collects about £42 billion in rent (average UK rent £700 * 5m PRS households * 12 months). A 5% loss of rent due to underpricing equates to £2.1b annually. This is of course in addition to the loss generated by voids.
Could you be underselling your service, like Bruce Springsteen?
Dynamic pricing or flexible pricing based on the demand for a certain product or service is widely used in a wide range of sectors such as telecommunications, sports and theatre ticketing, airlines, retail, local trains, electronic marketplaces, and more recently in taxi app companies such as Uber. The concept is also explained through this Bruce Sprinsteen concert at a broadway theatre pricing tickets between $75 and $850. He ended up leaving a lot of money on the table as a lot of $75 tickets went to people who were willing to pay $1000+. “Effective dynamic pricing essentially needs to correlate directly to real time market willingness to pay” Saurabh Saxena, founder of houzen data labs says. “There are also price bucketing techniques to ensure consumer response doesn’t negatively spiral.
How it works in London
An example would be the TFL tube tickets. A zone 1 and 2 ticket is more expensive than the other zones but is a fixed fare, and peak tickets are more expensive than non peak, albeit fixed. Due to the tap in/tap out data that TfL collects, it’s quite easy to have an even more elastic price discrimination strategy which prices tickets up and down based on daily traffic and which could potentially incentivise the re-routing of some of the passenger traffic to buses or encourage walking for short distances. However, there is the possibility of a consumer backlash and TfL being perceived as a capitalist entity. Also, by comparison most other city transit systems such as the ones in Singapore, New York, Madrid, Paris all have a fixed price strategy across the city and without any peak / non peak discrimination”.
2 issues with the residential pricing strategies nowadays
Now coming to the residential real estate market in the UK or other big and high demand cities such as Paris, Amsterdam, and Frankfurt, prices are typically set based on comparables in the market. Landlords, operators and developers would typically set prices at the point of having the business plan approved by investors and create a bit of a buffer of 10-20% on account of micro and macro trends over the next 5 to 10 years asset hold period. Then landlords or operators would stick to their rental demand and create a time tolerance for themselves and wait till they receive the right offer. There are two issues with this (i) if they wait, they lose 2% rental income each week, (ii) if they discounted the rent, what would the discount be based on?. Additionally, in a good market are operators charging the right rental, or based on market demand of their amenities, build quality, community et al could they charge an additional 2% to 5%. Here lies the answer to delivering the extra 200 basis points which investors are always looking for. Here also is the answer to WOW your investors, differentiate from your competitors, and command a higher asset management fee.
A response to lost opportunity – houzen data labs
In real estate, customers interestingly don’t repeat purchases within a year for e.g. if we compare with taxis, trains, tube, retail etc which we consume several times a month. What this allows for is a perfect opportunity for a little bit of flexible pricing based on the demand in the market at the time of placing a rental or sales offer.
houzen data labs was recently launched as a response to this lost revenue / IRR opportunity. It analyses all the current stock in a certain neighbourhood and its adjacent postcodes, and then compares it with other units with similar units to place it on a similarity index, and then compares this index with proprietary “closed rents” data and tenant demographic data to come up with an accurate “willingness to pay”. This data point is typically the proposed dynamic rent for that week. This data will again change the following week, as the stock in the market and the demand data will most likely change. Through labs, Asset Managers and Investment team can do at the click of a button, what they otherwise used to do through hours and sometimes days of research, data stitching, assumption building, and analysing (incomplete and inaccurate) data. Houzen strongly believes that the housing market not just in the UK but also across the world is ready for dynamic pricing as most other industries have educated the customers of also the benefits. With this kind of pricing, the industry would collectively become more predictive and will save a lot more money for all parties viz the operator as well as the customer. At that point, the operators could decide if they wanted to pass on the monetary benefits back to the consumer or keep it for themselves to service shareholder expectations.