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25 Aug 2020

Customer Acquisition vs Retention During the Coronavirus Era

Tom de Jong

Senior Vice President

With the COVID-19 pandemic shutting down parts of the U.S. economy, it is absolutely critical to understand the differential in costs between customer acquisition and customer retention in your business.

In economics, we use the 5-to-1 ratio as a typical average and I will use that in my analysis below. This ratio assumes that it costs your business 5x more to acquire a new customer (“tenant”) than it does to retain a current customer (“tenant”). It is my opinion that in the self-storage business that number gets higher, particularly when you look at loyal, long-term tenants.

Factors to include in your analysis (based on $1.50/SF rents):

ItemCostMath
Total costs to acquire new tenant$750.00($150 x 5 = $750)
Retained tenant rent after 3% bump$154.50($150 + 3% bump = $154.50)
Cost of New Tenant vs. Acquired-$595.50

The most basic analysis would show a cost to acquire a new 10×10 tenant in a market with $1.50 per square foot average market rents to be $595.50, and this number is likely too low given all other factors in today’s self storage market.

Consider that street rents have generally been dropping due to oversupply while in-place rents have seen continual rental rate bumps and the gap between the new and old tenants only gets wider. If you are concerned about your property value, each tenant that vacates would cost an average of approximately $35,000 in asset value based on today’s market cap rates.

Bringing this back to the current COVID-19 pandemic it is my belief that there will be a tsunami of current tenants unable to pay their unit rents for a few months. Even those that may be able to pay could decide not to pay out of fear that they need to hoard cash.

Based on the analysis provided above you would be better served financially by waiving rents for any customer that is in distress – up to 3.8 months – than you would be to lien-sale their unit. Besides the financial impact, a large number of lien sales will increase your vacancy and leave a long-lasting scar on your business reputation and potentially on the self storage industry at large. The opposite will also hold true – treat your customers well during this crisis and they will not only remember, they will thank you by providing more referrals in the future.

Let your business shine, offer your tenants the help they need today and they will be grateful for years to come!


Thumbnail: Photo by Kelly Sikkema on Unsplash, Ted Goff