How should a storage centre decide on prices to charge for storage units?

In setting prices for storage rooms, a facility manager will be influenced by various factors including: their costs, their level of occupancy, local competition in the storage market and the characteristics of particular customers.

Pricing self storage with a fixed cost base

The most obvious issue with costs is that the typical storage centre is a fixed-cost operation – almost all the costs are fixed, such as capital, property-related bills (business rates, insurance and utility bills) and staffing, and these costs stay about the same whether there are four customers or 400.  But that doesn’t mean that charges are completely unrelated to these costs.

Most owners know roughly what their occupancy has to be in order to break even and after that new customers are all contributing towards profit. These break-even occupancies vary, but if they are too high the business is unattractive.

At the current pricing levels, most self storage centres seem to achieve break-even at or below about 50% occupancy, and most stores have some vacancies, with mature stores often being 85% occupied. So once break-even occupancy is passed, any extra lettings are contributing directly to profit. Not only that, but almost all that extra letting income represents profit.

Lower prices for students and elderly using storage units

Storage managers therefore want new people using their storage space and should rationally be willing to reduce prices if this helps to bring in new customers.

The biggest issue is how to do this in a way that does not disrupt or antagonise existing customers.  The two common ways of doing this are introductory offers (first month free, only £1 for first 4 weeks etc) or special offers for selected groups such as students or elderly/retired.

This works well, especially because of the inertia in the self storage business with users usually storing their things much longer than they initially expect. But is there another reason for the policy of giving discounts to certain groups?

Cheaper storage pricing for certain customers

Reducing storage charges for certain groups is a way of “price discriminating”, as economists describe it. That means charging different customers different prices for essentially the same storage space.

We see price discrimination being used in all sorts of areas – the pricing of train tickets, or how much is charged for computers (educational discounts being offered by Microsoft and Apple) – but why would a storage manager want to give this sort of discount?

The reason is to enlarge the market. At full price it might not make sense for students or retired people to use self storage, but with a hefty discount it could do and, as we have seen, the storage facility will be making a useful extra profit too.

But not all customers in these categories are equally well off.  These and other discounts allow the centre manager to discount prices to individuals within these groups, in order to get the customer to store their stuff without upsetting all the other customers.

Entry prevention pricing in the market for self storage

Another interesting economists’ notion is that of “entry prevention pricing”. The idea is that some companies charge customers less than they would be willing to pay and the puzzle is to work out why they might do that. It could be that they are simply pricing on a cost plus basis and don’t feel that they want to maximise charges over the short term. By why not?

One answer is that they want to encourage customer loyalty, and certainly for many self storage businesses this is an important factor – the past customers are the best future ones. It could be that they do this to encourage customers to stay in storage for longer periods and to use more storage space than they might otherwise.

Another less obvious reason that they keep storage charges down is to discourage other businesses from coming into that market and competing with them. This appears to be what happens sometimes with a single storage supplier in an isolated town. By keeping prices down, the established storage company makes it unattractive for a competitor to set up and take some of his market.

Although this may have been a factor in lower storage prices in some towns, in general in the self storage market in the UK this appears not to have happened very widely, and indeed supply has been sucked into the industry by what are perceived to be healthy margins.