Tag Archives: Revenue

Interview: Tom Leddy

Tom

I recently interviewed Tom Leddy, industry guru and one of the founders of First Resort Software about a number of topics and developments in our industry. Tom has some interesting thoughts on listing sites charging guest fees, Expedia, vacation rental technology, and where the industry is likely headed.

Tom, to say that you have been around awhile would be an understatement. You were one of the founders of First Resort and helped run that company for quite a few years. You then lead Instant Software for a while and you’ve worked with many of the other software companies like Escapia and then HomeAway. Now you have your own consulting company that helps vacation rental managers run their businesses more effectively. What do you love about this industry that has made it worth devoting so much of your time and energy to?

In the first place, the vacation rental industry stems from life-style decisions made by smart, interesting people. They love resort areas, which are clearly the nicest geography you can find. From there, they love helping people have great vacations. In the second place, I’ve had the opportunity to help these companies do what they do better. They feel good about that and that makes me feel good too. It’s a clear win-win opportunity.

Of all the things that you have contributed to the industry so far, what are you most proud of?

First Resort Software as a company set the bar pretty high for quality of product, service and relationships with clients and employees. The fact that there are still many rental companies using FRS is a clear indicator of that.

This past fall, Expedia purchased HomeAway. Some were expecting it, others were completely shocked. Were you surprised? What are the positives that you see and what, if anything, concerns you with the acquisition?

I was not shocked. Expedia has struggled with access to the vacation rental business, as have all of the GDS-type operations. There are really two aspects of this acquisition that deserve some attention. The distribution side is pretty obvious, and the acquisition should provide great additional exposure for a significantly larger audience to the opportunity that vacation rentals provide. This should make big strides in making the vacation rental market not a ‘zero sum’ game. This follows the ‘rising tide raises all ships’ premise.

The software side is another story, and I see two potential scenarios:

1. Someone in the upper offices of Expedia really gets the value of access to the ‘last mile’ of the automated calendars and rates that professional managers provide, recognizes the market share that HomeAway currently holds, and decides to invest heavily in magnifying the advantage.

2. No one in the upper offices of Expedia sees the value of the software and either: a. Spins it off to someone else (I don’t see any great buyers at this time) b. Lets it eke out its own business with little or no involvement

Scenario #2 is sad, but not unlikely. Many companies have undermined great opportunities, so this wouldn’t be the first time. Scenario #1 would potentially put all other software competitors in a very difficult position.

Priceline has been talking about vacation rentals for quite a while, Airbnb is becoming a juggernaut to the point that even HomeAway is taking shots at them with their commercials now. How do you see them (Priceline and Airbnb) fitting into this new world of mainstream vacation rentals?

The fact that these companies are entering the market is more indicative of there not being a ‘mainstream’ in the industry. ‘Mainstream’ would imply standards and we don’t have much in the way of standards. Large companies will tend to ‘bully’ their way into a market, and then become sensitive to inventory and customers as necessary to increase or maintain their position. To the extent that customers (including owners who provide the inventory) demand standards, standards may begin to solidify, but they are not likely to be demanding in that way.

Is there anyone else that you think will become a major player in the next several years?

This is a tough one. We didn’t see AirBnB coming, for example. The industry has become more newsworthy in recent years, and that may bring any number of potential players into the mix.

On the technology side, there will be several new start-ups, one of which may have something really exciting. There will also be some consolidation and dropouts. The big unknown is Homeaway’s plans for their technology.

Another hot topic lately has been the listing sites charging guests commissions. Many owners and managers are upset as they see it as double-dipping, and are also worried that the increase will negatively impact their bookings. The listings sites are saying that it helps lower the barrier of entry for managers that can’t afford to pay a high commission (by charging the guest a fee, they can lower the commission that the owner/manager pays). Airbnb and TripAdvisor have been doing this for some time, and now HomeAway is doing it. Are owners and managers right to be concerned, or is this ultimately a win for everyone?

Chances are, it’s just an add to the cost and won’t probably reduce the managers’ commissions. It’s not really much different from managers charging fees as well as rent. In some respects, managers should be happy about it, as it makes the distribution partner bookings cost the guest more than the direct booking (that should help with follow-on repeat guest programs). In general, commerce will expand profit generating avenues until it finds resistance. We’ll see if there is any resistance.

Is there an area or practice that you consistently see managers missing or ignoring that would help them drive more direct bookings?

I would like to see all managers paying more attention to their accounting and general business health. I see some pretty bad balance sheets that prevent businesses from taking steps to really improve their businesses.

I think ‘revenue management’ is a big deal. I am intending to do a session at VRMA on the myths surrounding it. Companies either do nothing or take steps without clear direction. I believe a consistent, local-based analysis, combined with a couple of specific actions could significantly increase both bookings and revenue from those bookings.

I also believe that there is an acceptance of technology without financial analysis that is costing managers lots of money that they are not receiving appropriate benefits for. Managers tend to begin by resisting new technology, but then accept pieces of it based on promises or other beliefs. Once they accept it, they rarely focus on maximizing the benefits or defining the ROI of the investment.

Where do you see the industry in the next 5-10 years? What is just now on the horizon that will likely be mainstream in that time?

There is no question that the main theme is growth. What form it will take is not clear. I would guess that there will be a segment at the upper end of professionalism (not the upper end of price necessarily) that will involve continued consolidation, acquisitions, technology and centralized processes that will improve the general guests’ experience. The center of the market, the small to mid-sized management companies that are not very aggressive, will struggle. The least professional portion of the market, the rent-by-owner segment, will get some benefit from technology provided by Homeaway and others, but continue to weaken the general guests’ experience and expectations. While the VRMA and increased national exposure to vacation rentals will encourage and improve the notion of standards and best practices, the industry as a whole will continue to be very scattered and disorganized.

Any parting words of wisdom or anything that you want to share with people about yourself or your company?

Mostly, I find that everywhere I look in the industry there are problems that arise that no one else seems to address effectively. So, there continues to be work. I guess that the combination of skills that I bring to the table continue to be fairly unique.

Thanks Tom!

The Truth About Yield Management Pt. 5 – Customer Segments

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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.

Sound familiar?

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.

Next – Demands & Solutions