The accelerated rise of the aging population is fueling the dramatic growth of a multi-billion-dollar industry focused on building, owning, operating, buying, and selling “senior living facilities.” These facilities fill a key chasm between living at home and being in a hospital, and range from independent living and assisted-living communities to nursing homes. The industry provides housing along with wellness programs that include dining, room services, basic healthcare services, community environments, social activities, and support networks. Holiday Retirement and Prorize LLC won the 2017 Franz Edelman Award.
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For senior living facilities to be a successful component in society’s solution to caring for seniors, these communities must be efficiently run and supported by a profitable business model. To accomplish this, there is no process more foundational than the way an operator makes pricing decisions.
However, the pricing process of most senior living firms is archaic at best – inconsistent, manual, and reactive. These practices create a situation where the local sales staff has frequent requests for exceptions, leading to time spent negotiating prices, first between local and corporate staff, and then between local sales people and residents.
Holiday Retirement (Holiday) is the largest private owner and operator of independent senior living communities in the U.S., with more than 300 facilities and approximately $1 billion in annual revenue. Management recognized its conventional approach to pricing was challenging for everyone and left revenue on the table. After extensive research, Holiday selected Prorize LLC, an Atlanta-based revenue management (RM) firm, as a partner to analyze, develop, and implement the first RM system in the industry.
The resulting system, the Senior Living Rent OptimizerTM (SLROTM), is truly a state-of-the-art system based on innovative pricing science modules and processes. The system is a complete, interconnected software package with complex sets of interactions and flows, including: how data is processed; the kind of variables derived and calculated at appropriate levels; how they coalesce to produce an accurate forecast in a low volume business; the use of a forecast range versus a single point value; the use of a stochastic optimizer to consider most probable demand scenarios; and how workflow is designed to process pricing recommendations with ease; among others.
The SLRO system enables a consistent and proactive pricing process across Holiday, while simultaneously providing optimal pricing recommendations for each apartment unit in every one of their communities. It gives Holiday control over their corporate pricing process, eliminates inventory devaluation and maximizes long-term revenue. In addition, the system is a cultural difference maker. It has raised Holiday’s organizational “pricing IQ” and given the salespeople the confidence that the listed price is the “right” price.
Prorize and Holiday developed a reliable and credible method of measuring system performance by live pricing experiments, comparing the results from a set of “pilot” communities that used recommendations from the RM system with results from “control” communities that did not use the system. The results showed that the RM system would provide a revenue benefit to Holiday on an average of 9.3 percent (ranging from 4.1 to 16.2 percent based on different baselines).
As a result, Holiday rolled the system out to the rest of its properties in August 2014. Since then the company experienced significant same-store revenue and occupancy gains. In dollars, Holiday experienced a total revenue increase of $85 million for the first two years of deployment (compared to the year leading up to August 2014, which was used as the baseline).
During this same period, public companies in the senior housing space reported levels of revenue and occupancy that were generally flat by comparison. Over the next three years, Holiday estimates an additional revenue benefit of $219 million (leading to a total $304 million for the initial five-year period). After that period, SLRO is estimated to deliver a sustained annual revenue contribution of $88 million.
For the first time, operations research brought revenue management techniques commonly practiced in other industries to the senior living industry and did so with great success. Holiday views this project as their most important initiative to date.