Five Star Taps Starwood Expertise for New Pricing Approach

Five Star Senior Living (NYSE: FVE) has turned to the hospitality industry for help in rolling out a new pricing program in about 80 of its communities, which the company believes will give it an edge over the competition—and maximize revenue.

Specifically, Five Star has initiated a community center dynamic pricing program that will allow the company to flex rates up or down to capture demand, CEO Bruce Mackey said during the company’s first-quarter 2016 earnings call on Wednesday. Based in Newton, Massachusetts, Five Star ranked as the fifth largest senior living provider nationwide in 2015, with a resident capacity of about 25,000.

The pricing model, which considers how market demand and inventory impact pricing, enables the company to look at its competitive landscape in real-time, Mackey explained. Five Star, like some of its senior living peers, was inspired to adopt the model by the hospitality industry.

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“We took a page from the hotel industry,” Five Star Chief Operating Officer Scott Herzig said during the earnings call.

In fact, Five Star hired a consultant from Starwood—the hotelier that owns brands like Sheraton, Westin, and St. Regis—for assistance in building out its flexible pricing program, Herzog said.

Senior living lags far behind hospitality and other industries, such as airlines, in implementing dynamic pricing, then-CEO of Holiday Retirement Kai Hsaio said at last year’s Senior Housing News Summit. Dynamic pricing makes sense for senior housing because it eliminates negotiations in the sales process, takes discounting out of the equation, and is embraced by customers who are used to it from other industries, Holiday executives told SHN. Yet, Holiday and now Five Star are among the only providers to embrace dynamic pricing—a point Mackey drove home during Wednesday’s call.

“We believe that we are ahead of most of our competitors in this regard and will continue to add more communities to this program over the ensuing month,” he said.

Since rolling out the program, Five Star has approached its pricing differently in many ways, including by starting to look at prices on a monthly basis, according to Herzig. Although it’s still early on, the initial results are “pretty positive, as far as being able to move people in a little bit faster than we have in the past,” he said. 

That extra speed in move-ins, plus the overall nimbleness afforded by dynamic pricing and its sensitivity to market conditions, may be especially critical given that Five Star is facing supply pressures in certain markets, Herzig noted. After slower than usual move-in activity in January and February, record move-ins were posted across all property types in March.

Another factor contributing to the move-in rate is Five Star’s focus on resident referrals, which increased 11% year-over-year to now account for 26% of the total. These referrals result in longer lengths-of-stay and are less expensive to cultivate than those from third-party companies, Herzig said. The proportion of move-ins stemming from these third parties is down to 8% from 16% a year ago.

Overall, Five Star missed analyst estimates on earnings per share by $0.03, and its revenue of $344.21 million missed estimates by $2.4 million. Revenue was up $1.8% on a year-over-year basis, and Mackey struck an optimistic tone with analysts.

“In the quarter, once again, we were able to increase rates, hold the line on occupancy, and we kept good control on our operating expenses,” he said. “We continue to push forward the programming and innovation that has led to higher resident satisfaction and will lead to higher levels of resident and professional referrals, which, in turn, should lead to higher occupancy.” 

Written by Mary Kate Nelson and Tim Mullaney

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