Many have seen this coming, and the writing has been on the wall for quite a while now. With hotels firmly in place, it’s just a matter of time before one of these companies (Expedia or Priceline) dominates the vacation rental market.
I think this is likely to play out one of a few ways;
One of these companies buys AirBnb. My money is on Priceline given recent comments by their CEO. AirBnb is a cash cow and they are better suited to the hotel model. (Mostly RBO and willing to rent for a single night.)
Expedia doubles down on TripAdvisor (they essentially own it) and tries to crack the vacation rental nut. They definitely have the cash, though they have had plenty of time to do it without any significant results. TripAdvisor seems to be focusing more on hotels, and will likely decide that’s where the money is for now. Particularly given their less than stellar recent financial results, they will likely decide they can’t risk putting too many eggs in the vacation rental basket.
One of the companies make a strategic investment in HomeAway. I doubt an acquisition is on the horizon, though it could happen. My money is on Priceline given that Expedia already owns TripAdvisor and as mentioned above, Priceline is chomping at the bit to get into vacation rentals. (It’s also possible that HomeAway becomes a viable contender to Expedia and Priceline, but I think that’s unlikely at this point.)
Of the three, my money is on the first scenario, though I would not be surprised to see the third one happen.
What this means is that more and more bookings are going to be made through OTAs and the standard is going to be the “Book It Now” model. (I predict that by 2020 the majority of listings will be this way.)
What does this mean for vacation rental managers?
Diversify revenue streams – the majority of revenue for vr managers has historically come from rent. With OTAs and listing sites taking anywhere from 10%-30%, other revenue streams will become critical. This will include everything from additional charges to concierge services and damage waivers. (Companies like Discover Sunriver are doing some really innovative stuff with their loyalty programs. Check it out here.)
Yield Management – this is already an important part of revenue management, and it will become more and more critical as time goes on. The days of having two pricing structures (high season and low season) are almost gone. If you aren’t capitalizing on the nuances of supply and demand then you are falling farther and farther behind. (Read more on Yield Management strategies here.)
Direct marketing – Use the OTA’s and marketing sites to get new customers through the front door, then use direct marketing to past guests to keep them company back. This is going to become critical for survival. (Read here and here for more idea on this.)
Automate, automate, automate – Streamlined processes are going to be key to reducing costs. This doesn’t mean sacrificing that personal touch that differentiates vacation rentals from hotels. This means automating processes like check-in/out, keyless entry, auto-correspondence and credit card processing, etc. It won’t be cost effective to employ someone to manually send out guest correspondence and process credit cards for example.
The good news is that this is still just the beginning of the transition, so there is plenty of time to start making changes and gradually transition. You can start now upgrading units to keyless entry and remote climate control. Start now building a loyalty program and direct marketing campaigns. Explore new ways of driving revenue through additional services, referrals, and programs.
“If you don’t like change, you’re going to like irrelevance even less.” – Gen. Eric Shinseki
There is massive change underway concerning how vacation rentals are marketed, booked, and paid for online. We’re just in the beginning stages, but make no mistake, the industry is going through a massive shift again.
The fact is, like it or not, the genie isn’t going back into the bottle. Gone are the days when guests shopped out of a catalogue or brochure and booked their vacations several months, if not a year, in advance, and never tried to haggle over price.
Now guests compare prices, book at the last minute, and think they deserve a discount simply for shopping online. To complicate things even further, companies spend millions of dollars a month to convince guests to book their vacations through them, instead of picking up the phone and calling you. What’s more, the move is being made to allow guests to book your units without having to send an inquiry first.
The good news is, all is not lost. But it’s going to take some adaptation and that word no one likes, “change”.
Here are some things that you can do today to help ensure that your vacation rental business will be around for years to come.
Market to your past guests – I can’t encourage this enough. You are sitting on a goldmine in the form of your past guests and yet most vacation rental companies do not actively market to their past guests. This is the most important thing you can do that will offset people going to an OTA or listing site in order to book their next stay with you.
Contact them regularly (bi-monthly is fine) with compelling calls to action and offers. Just getting in front of them isn’t enough. Tell them why they should stay with you again instead of going somewhere else.
Target communications to specific segments of your customer base. Do you have homes that are perfect for families? Send an e-mail highlighting those units to past guests with kids and talk about all of the family friendly things that your area offers.
Have units that don’t seem to rent as well as the rest? Put together a “bargain” offering. Lower the minimum night stay for those units. Offer up to two tickets for a local event or show if they book one of the units by a certain date. There is a ton that you can do to keep your company top of mind with your past guests. Be creative and leverage your uniqueness.
Yield Management – If you don’t know what this is, you need to. In a nutshell, Yield Management is taking advantage of supply and demand. You can raise or lower your rates and minimum night stay in order to capture more revenue. More revenue = longevity and greater freedom.
Here’s one example of how you can leverage this. The majority of guests book holiday vacations (Christmas, New Year’s Eve, etc.) several months or more in advance. Determine how far in advance you get the majority of those bookings and charge a premium for booking during that period. Say you get the majority of your holiday bookings 8 months prior to arrival. Increase your rates 10%-15% for bookings that are made 8 months or more in advance.
On the flipside, determine the time period in which you get virtually no bookings for the holidays (usually a week or two before the date) and offer a reduced rate and/or reduced min night stay to capture additional revenue. The goal is to leave as little money on the table as possible.
Distribution – This has become the “necessary evil” for many vacation rental companies. Distribution channels like HomeAway, Airbnb, and TripAdvisor are here to stay. Like it or not, most travelers are going to start at these websites to book their next vacation. So having your units on these sites gets them in front of eyeballs that otherwise wouldn’t see them. The thing is, you don’t have to love this fact in order to benefit from it. Get the guest through distribution, and keep them coming back through direct marketing.
Here are a couple of guidelines for distribution:
Use what works. You don’t have to be on every site out there. Focus your inventory on the sites that drive the most bookings and ignore the rest. Even if what works is a little more expensive than what you’d prefer.
Make sure your units stand out. Take the time to get great photos. Write descriptions that help the guests see themselves in the unit and enjoying all that the location has to offer. Don’t assume that guests are going to connect the dots on why they should stay with you. Write photo captions. Highlight positive guest reviews and respond to negative ones. Don’t try to hide the fact that you got less than a 5 star review. The negative reviews give legitimacy to the positive.
Split the marketing costs with your owners. More and more sites are moving towards a commission based pricing structure and many vacation rental companies can’t afford to swallow the entire commission. It’s worth suggesting to your owners that in order to continue to participate on a particular website (which delivers $X a year for them) you can’t continue to eat the entire commission. All of the companies that I know that have done this haven’t regretted it. Some of their owners said “no”, but they’ve been surprised at the number that have said “yes”. Most people tend to be pretty reasonable and fair if you frame your request in a thoughtful, “win-win” sort of way.
Putting it all Together
Each one of these things is good to do but the key is to combine all of them into a cohesive strategy. What works best for you will depend on your location, type of guests, booking trends, and individual economics. It takes a little bit of time to find what works for you, but it is absolutely worth it in the long run.
If you need help getting started or aren’t sure how to figure out what will work best, I can help. Contact me and we’ll get started.
There are numerous ways that customers can be segmented (geographic region, demographics, psychographics, etc.) but for the purposes of yield management and maximizing revenue, we want to segment them by purchasing behavior. What this really translates into is profitability. It can feel like a sin to say that not all customers are equal (I.e. some are more profitable than others) but it’s true none the less.
Ideally, you want to have offerings for all of our customer segments in order to capture the most amount of revenue possible. This can be difficult to do, but yield management and price elasticity make it easier.
If we segment customers into purchasing behavior we get 4 groups; (Note that these groups can overlap a bit, and there are many nuanced subcategories. For the purpose of simplicity we’ll stick with these four general groups.)
The Bargain Hunter; these folks are mainly interested in the best deal that they can find. That doesn’t mean that they don’t have standards, but they are willing to give up certain things in order to get a great bargain. For this group it’s all about the best value and how much they saved in the process.
The Planner; this group’s main focus is getting everything set for the family vacation/event that they are putting together. They can be very budget conscious (I.e. overlap into the Bargain Hunter category) but their goal is to have all of their ducks in a row well in advance of the trip, with as few surprises and hiccups as possible.
The Jet-setter; this group isn’t looking for a bargain, for them it’s all about the experience. Money is not nearly as big a concern as it is for the other two groups. They are willing to pay top dollar for convenience, privacy, and whatever else they feel they need.
The Procrastinator; these folks have left their planning, or their decision to travel, to the last minute and now they are scrambling to get it all together.
Now let’s look at these groups in order of profitability and how yield management (the right service to the right customer at the right time for the right price) can help us meet each of their needs and capitalize on the revenue potential in the process.
The Jet-setter: These folks have the most to spend and are willing to spend it in order to have the kind of stay they want. Progressive pricing (increasing the daily rate as occupancy goes up) is the best way to capture additional revenue from this group.
The Procrastinator: This group can be willing to pay a premium for their stay due to their lack of planning. They know they left everything to the last minute and therefor aren’t going to have many options. Progressive pricing works well here too. If occupancy is on the lower side, then a reduced rate or last minute deal can capture their revenue and likely turn them into a repeat guest. (Assuming they have a great stay with no headaches.)
The Planner: These folks are a bit harder because they tend to plan quite a ways out where occupancy may not be all that high. Incentives to stay longer or upgrade to a better unit can come in handy here. For example, we could offer this guest a slightly reduced rate if they are willing to stay at least a week. Let’s say our daily rate is $350 and the average length of stay is 3 nights. That comes out to $1,050 in rent. If we make the offer that the daily rate is $300 if they stay a minimum of 5 nights, that brings in $1,500 in rent and also helps drive up the occupancy percentage so that our progressive pricing (daily rate increases when we hit 70% occupancy, again at 80%, etc.) kicks in. The guest also received a deal on their stay which tends to make them feel good.
The Bargain Hunter: While this group is our least profitable in the short term, if we can turn them into repeat guests, their lifetime value goes up. While this group is always looking for a deal, they want to get the best value possible, not necessarily the lowest price. If they can stay in a penthouse for $350 a night (normally $500 a night), instead of a bungalow for $200, that’s a great bargain for them. Offering last minute deals helps capture this market, and even though we’re dropping our price to accommodate them, their stay increases occupancy which helps our progressive pricing plan and drive up rent overall.
The most effective pricing plans will have options for each of these buyer segments. I know that “discount” is a dirty word for some, but keeping the long game (or losing the battle to win the war, if you prefer) is the key here. Offering a discount can still bring in more revenue than it otherwise would have if the stay is longer, it increases occupancy allowing other yield management strategies to kick in, and we can turn the guest in a repeat customer.
Let’s look at another yield management scenario, this one around increasing rates as occupancy increases.
As a general principle we want to charge more per booking as our calendar fills up. This is just basic supply and demand. The more scarce or unique something is, the more valuable it is. Obviously we want to stay within what the market will bear, while capturing as much of the revenue as we can.
Let’s say our base rate is $100 a day for a given unit. (That’s just rent, no charges.) The most revenue we can bring in during the month for that unit would be $3,000 (30 days @ $100 dollars a day), which would require having every day booked. Not impossible, but not easy either depending on time of year, the specific attributes of that unit, etc.
What happens to the revenue if we implement a yield management strategy based on occupancy? We’ll keep it simple and raise the daily base rent by 15% once we hit 60% occupancy for the month, and then raise the daily rate by another 15% for each 10% occupancy gain thereafter.
When we hit 60% occupancy the rent becomes $115 a day. (A 15% increase over the $100 rate.)
When we hit 70% occupancy the rent becomes $130 a day. (A 30% increase over the $100 rate.)
When we hit 80% occupancy the rent becomes $145 a day. (A 45% increase over the $100 rate.)
And so on up to 100% occupancy.
So what does this do for our revenue potential? If we manage to book 100% of our availability we take in $3,450 in rent, a 15% increase over what we would have otherwise received. Further, we only have to hit ~90% occupancy in order to make the same amount of rent revenue that we would have needed 100% occupancy for with the original model. This also suggests that booking up all of our inventory too soon prevents us from maximizing the revenue potential on that inventory. (Ex. If we are at 100% occupancy 4 months out, we have no inventory available for the traveler that decides to plan their trip 30 days before the arrival date and is willing to pay a higher rate to make their stay happen.)
The bottom line is that if you rent a unit at $100 a day and a customer would have paid you $115 a day, you lost $15 a day. Yield Management strategies can help prevent this from happening by taking advantage of supply and demand to help ensure you get the maximum amount of revenue for your inventory. There are all kinds of adjustments that could be made to the above scenario to maximize revenue. (Ex. We could have increased the rate by 20% when we hit 60% occupancy, and then 50% when we hit 80% occupancy, and done this across multiple units.) For this example I wanted to keep things simple and straightforward to avoid confusion.
Now let’s play devil’s advocate and say “But people always shop around online, we don’t want to lose business to someone else because our prices are too high.” True, the internet has taught people to shop around and expect discounts, but scarcity can also be a powerful motivator. In tandem to a strategy like the one above, you would also want to make sure to keep an eye on your competitions inventory and possibly adjust the strategy based on total market demand. But, just because your competition has quite a bit of availability doesn’t mean you can’t charge a higher rate for yours. They may have lower quality units, their prices may be too high already, they may not be doing a great job at marketing or showcasing their inventory, or a number of other things that would contribute to a lack of occupancy. If you slowly raise the rates as demand increases, you have a better chance of not pricing yourself out of the market.
So far we have just talked about strategy and theory around yield management. What happens when we put this into actual practice?
Let’s look at a simple example. Below is a theoretical, though realistic, calendar for a unit. To keep the example simple we’ll say that this agency only takes 5 night stays, and the rent calculates out to $100 a night. They are not booked at 100% occupancy, but they’re doing pretty well. So far they have booked $1,500 in rent for this unit, of which they will get a percentage.
Now let’s look at the same unit where they have decided to implement some yield management strategies.
The agency has decided that they will take stays that are less than 5 nights, but they’re going to charge a premium for them. So they increase the rent to $700 for a 3 night stay and $650 for a 4 night stay. They also decide to offer a reduced rate on last minute bookings instead of letting the unit sit empty, so they grab $425 for a 5 night stay that was booked a day or two before arrival.
In this scenario they’ve increased their occupancy to 90%, and they bring in $3,275 in rent, of which they will get a percentage. (That’s just rent, that doesn’t include any money that they will make off of charges.) They have also managed to raise their average nightly rate to $121 and increase their average booking amount to $546. This is powerful information they can share with the owner of the unit as proof he/she is making the right decision in keeping their unit with this agency.
How about one more? Let’s see what could happen if they only offer a reduced rate for last minute bookings and those bookings are only for a few nights.
Even in this scenario the agency still brings in more money than they otherwise would have. Even though they reduced the rate by 15% and accepted a shorter stay than they would have preferred, they still manage to net $3,200 in rent which is $1,700 more than they would have gotten had they left things as is. They increased their occupancy to 90% so they can now charge a premium on that last 10% if they choose to, and they increased their average nightly rate to $118. Even though their average booking amount dropped slightly to $457, they still take in an additional $1,700 of which they will get a percentage.
Just to put a cherry on top, let’s see what happens if this agency has really low margins. Let’s say they only get 5% of the rent, whereas most agencies get between 10%-20%. Even at 5%, they still come out with more using yield management strategies.
In the first scenario ($500 for a 5 night stay, no yield management) they would net $75. (5% of $1,500)
In the second scenario (where they’ll take shorter stays at a premium, or offer a reduction at the last minute) they would net $163.75 (5% of $3,275), more than double what they would have received under the first scenario.
And in the third scenario (only offering last minute deals) they would net $160 (5% of $3,200), again, more than double what they would have received under the first scenario. It also bears repeating that this doesn’t include any money they will take in from charges (reservation fees, etc.), of which they will now have more because they took in more bookings.
These are just examples so bear in mind the specific offerings need to match your particular business dynamics. Maybe you only do this for certain units to avoid wear and tear on units where the owners are prone to complain. You may only choose to offer a last minute deal if you are less than 90% booked. The point is that you can grab additional revenue by presenting the right service to the right customer at the right time for the right price.
Finally, in order for these strategies to be effective you will need to leverage all of the avenues at your disposal to drive traffic and get your customers attention. (Distribution channels, marketing to past guests, etc.) The right service at the right time at the right price isn’t effective if the customer never sees it.