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Mar 31
2010
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For my previous blog regarding negotiating apartment lease renewal rates, Johnny shared his strategy for the renewal letter, which included listing out the previous rental rate, the current market rate, and the new renewal rate, which was in between the first two. His letter listed them out clearly to the reader (rather than mixed into a paragraph), and is a great example of anchoring the new rate relative to the higher market rate.
So what is price anchoring? You see price anchoring every day through sales - the price of a product or service is initially listed at, let's say, $30 and then discounted to $20. That $30 serves as the "anchor" to show the customer exactly how much they are saving. If they just showed $20 as the price immediately, it may or may not be perceived as a good price to the customer. A good example is how the iPhone was price anchored to an extremely high price tag initially, so that when discounts were applied it had much more of an impact on sales.
The problem with renewal rates, as Johnny pointed out, is that the "anchor" is what the resident is currently paying for their apartment. If they are paying $900 for their apartment and you raise them $20 per month, it is a worse deal relative to their anchor price. In other words, all they see is that they are having to pay more for the same apartment.
But when you include the market rate in the renewal letter, you have the opportunity to "re-anchor" the price point. Of course, that price has to be a real, attainable number - if you set a market price but also give three months away free, the gesture becomes meaningless. But if you truly identify your current residents as more valuable/profitable and want to give them a better price than someone walking in off the street, this will show the current resident the value he or she is receiving.
(As a personal note, I previously shared the renewal letter from my apartment community. As you could see, they did not list the rate they could realistically achieve by re-renting it. This was actually a big concern of mine, and I even took the time to find out what my apartment would rent at to a new prospect. After finding out it was higher than my renewal rate, the rental price had effectively been "re-anchored" and I was satisfied that I was getting a good deal.)
