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PM Perspectives

19 Posts authored by: gvolsky
4

Through its ownership of listing sites and reservation software companies, HomeAway straddles a line that marked a cultural gap between professional managers and self-managing homeowners.

 

That gap is on the verge of disappearing.   This is good for managers, homeowners, renters and HomeAway—as well as the entire vacation rental industry.

 

The gap began when the Internet spawned listing sites that allowed homeowners to advertise their own vacation rental homes under the rubric “rent-by-owner” (RBO), bypassing managers. 

 

These listing sites provided resources for homeowners interested in self-management and for financially stressed homeowners struggling to cover the expenses of second home ownership. Today, they offer:

 

  • Credit cards payment options
  • Taxes collection and remittance options
  • Online bookings
  • Reservation confirmations
  • Payments tracking
  • Housekeeping or maintenance service options

 

On the other side of the gap, some professional managers wondered whether the RBO movement threatened their livelihood.  Some managers viewed RBOs as a danger to be avoided or fought.

 

Mangers and RBOs on both sides rallied to promote or protect their interests:

 

  • Some early RBO listing sites refused listings by professional managers.
  • Some self-help resources portrayed professional rental managers as cheats and unnecessary.
  • Some managers lobbied to exclude RBOs from local chambers of commerce.
  • Web site discussion groups for both groups made polarizing statements about the other.

 

The reasons for friction are easy to understand.  Technology evolution shifts money from one group to another, creating opportunities for some and problems for others. 

 

In reality, the shift occurred because Internet technology changed the way consumers shop.  This was first reflected in the popularity of online travel agents such as Expedia, Travelocity and Priceline.  Today, consumers have transformed listing sites into the most popular market places for vacation rentals.

 

Today managers needn’t worry about being displaced.  And RBOs needn’t view managers as competitors— their real competitors are other homeowners. Managers exist to serve homeowners (all homeowners are potential customers).  Today’s RBO may be in a managed rental program tomorrow.

 

Managers perform services that save homeowners from tedious and stressful tasks of dealing with customers and servicing homes.  Homeowners typically use managers when they can afford to do so, except where they make rental management their “job.” (My next blog is about the impact of rent-by-owner on professional managers).

 

Managers need not worry that renters do or do not recognize the advantages of professional managers.  Not only does this worry treat RBOs as competitors (potentially alienating future customers), but it channels energy (a scarce resource) to an unproductive end and assumes that managers’ future success depends on a public-awareness-of-rental-managers campaign that would cost tens of millions yearly.

 

Managers, while this may initially sound heretical, your success doesn’t require renters to appreciate managers or even know that a home is managed.  It is gratifying and helpful when that occurs.  But it is not critical.  Thank goodness—it means homeowners and managers are in harmony—not conflict.

 

Why?  Rating systems –which matured after RBO appeared—have emerged as an indirect champion of your brand as a professional manager.  Your systems are designed to deliver high quality, consistent service.  When that works, your homes get good reviews.

 

  • Renters increasingly rely on peer recommendations to find a reliable vacation rental.
  • Rating systems allow renters to identify which homes are well maintained and appointed.
  • Managers will always thrive where their systems generate good renter reviews.
  • Plus mainstream listing services identify managed homes as such for renters who look for this.

 

If a RBO home next to yours gets good reviews, it is usually because that homeowner is working very hard to do what you do.  That homeowner deserves to get rentals.  That same homeowner may eventually tire of working so hard, or have no time to do so, and hire you to do some or all of his work.

 

Today, there are still some RBOs and managers who distrust each other. Some RBO groups worry that:

  • The presence of managed homes on RBO sites dilutes their bookings; or that
  • Management companies have marketing and resource advantages.

 

Some rental management companies worry that:

 

  • Listing sites divert homes from rental management programs;
  • RBOs steal renters by under pricing managed homes;
  • RBOs attract renters by failing to collect (charge for) lodging taxes.

 

Many of these worries once had some basis in fact.  But today the impact appears minimal. 

 

Booking Dilution. Today, leading listing sites market managed and self-managed homes side by side.  I see no evidence that this can/should be avoided or that it dilutes or diverts bookings from one group:

 

  • It is consumers who decide the popularity of listing sites-- consumers are patronizing the sites that offer the widest range of product and price. 
  • Renters love to use the Internet to shop—they have so many options that no single company could thwart consumer shopping preferences (aggregator services today search multiple sites).
  • Renters use the Internet to find and compare all available homes—Internet shopping technology is the driver of integrated market places, not listing site policies.

 

Resource Advantages.  It is obvious that professional managers have marketing and service resources advantages—this is a common sense result where managers spread the service costs among multiple homeowners.  That’s why so many homeowners hire managers.  But hardworking RBOs compete well.

 

  • Renters simply want a well serviced home that meets their needs and is competitively priced.
  • No RBOs can be at a disadvantage if they service their home well and price competitively.
  • In my experience, renters tend to find the good homes—even where lesser homes have superior marketing exposure.
  • A manager’s pooled resources (e.g., backup cleaners) confer advantage where this results in better or more consistent service (reflected in the reviews).
  • RBOs lose rentals to professional managers and vice-versa when they are not able to provide high quality service.  Many RBOs will eventually hire managers for some or all services.

 

Tax Collection.  Interestingly, I have seen no evidence that professional managers are losing bookings to RBOs who ignore tax collection requirements, at least not in measurable dimensions.  This is due in part to local tax authorities who are ramping up tax enforcement and to efforts to educate homeowners.   Also, renters appear most concerned about finding the right home at a competitive price—it takes a lot of extra work to identify a homeowner who won’t charge tax (homeowners can’t advertise that fact).

 

  • One of the most successful professional managers on HomeAway sites tells me that his bookings are not remotely affected by RBOs who do not charge tax.  He says he is not interested in renters who take bargain hunting to this extreme and that it is his attention to inventory quality and marketing that brings him bookings and growth.

 

Underpricing.  It is true in theory that some self-managing homeowners try to offer lower rents and feel empowered to do so because they do not pay a professional manager.  But I see no evidence that self-managed homes end up with lower rents or that they divert renters from managers based on price:

 

    • Professional managers initially set rents at levels that renters are willing to pay—given all the competing homes that are being offered in the area.  They then adjust rents as necessary.
    • RBOs commonly set rents based on comparable managed homes.  Even though they don’t pay managers, most RBOs can’t afford to charge too much less rent than renters are willing to pay.
    • A percentage of RBOs do try to under price managers in an effort to attract renters.
    • This stimulates discounting by managers.  Managers track bookings pace from one year to the next and are quick to discount prices when current year bookings are slow, equalizing rents.
    • For every discounting RBO, there is a hungry homeowner demanding that his rental manager discount his rent so he can snag a renter or a manager who discounts to fill vacancies.
    • The net effect is that rental home prices adjust the way that stock prices adjust. They simply rise and fall on a weekly or daily basis in response to shifting balance between supply and demand. 

 

Stay tuned for my next blog will summarize the impact of the rent-by-owner trend on professional managers.

 

Best,
George

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What do you do when a competitor threatens to steal your inventory or renters by offering lower commission or rental rates? This challenge presents itself when competitors:

 

  • Set their seasonal rent at a level below your rates
  • Put homes on website “specials” page at a discounted rent
  • Solicit your homeowners with offers of lower commission rates
  • Offer your homeowners free amenities or services to join their rental programs

 

I know what many of you want to do.  But what makes business sense?  The right approach is the one that leaves you with the most rental revenue. Unfortunately, the right approach is not always the most intuitive and can require you to speculate about customer behavior.

 

  • If you lower rents or commissions once, will you brand yourself “price flexible?”
  • Once you discount, will it be difficult to hold your regular prices with other or repeat customers?
  • If you refuse to discount, will you lose rentals or homeowners?
  • Will losing renters or homeowners snowball into migration of other homes and renters?

 

No one sets prices with complete certainty but you can perform the best if you have good technique and strategy.  A good approach is to view pricing like a sports event that has both an offensive and defensive strategy. 

 

For offense, begin by setting seasonal prices correctly and by knowing whether or not it is in your interest to use discounting to grow or protect your business, and how to discount most effectively.

 

For defense, create a foundation that will withstand competitive discounting by building knowledge of your product and markets and developing a business philosophy that is grounded in economics.

 

As to business philosophy, be wary of general principles that have brought you this far but which you promote and defend with emotional energy (we all have them):

 

  • “We deliver good value and we never discount.”
  • “If I discounted, I would undermine my ability to maintain my pricing structure.”
  • “If I don’t match every discount, I’ll lose rentals and homeowners.”

 

The best business philosophy recognizes:

 

  • Vacation rentals will always make financial sense no matter how low rents go as long as vacation homes continue to offer more value for the dollar than alternative lodging segments
  • The Internet allows renters to depress rent levels whenever supply exceeds demands
  • There is little you can do to protect a homeowner’s investment against discounting that arises from seasonal vacancies, predatory competitors or market downturns
  • Price flexibility (dynamic pricing) a necessary evil
  • There are opportunities to protect your pricing

 

Knowledge of your home(s) and market is your best defense against competitors discounting.

 

First, know your product and homeowners.  For each home, make the effort to identify the homes with which it competes, including other homes you manage, in terms of size, features, quality, proximity and consumer appeal.

 

  • One of your homes may be a commodity, like numerous others, that competes for renters during a low occupancy season; you have to discount to maintain your historic share of rentals
  • Another home may be unique and does not need to be discounted during low occupancy seasons because it has no peers, because its peers are not being discounted or because all competing homes are in your own rental program
  • Work to understand whether you lose money on seasonally discounted homes after add-on fees are taken into account.  If not, don’t hesitate to match competitive discounts during off-peak times where this will make your homeowner happy and keep his peak season rents in your program.
  • Offseason rents are often so low that they lose money for rental managers.  Where offseason rentals benefit homeowners only, match competitive discounts only where necessary to prevent your homeowner from leaving.
  • Also remember that homeowners, especially those with good homes, generally prefer rental programs that offer homes of equal or higher quality.  In this case, think about whether losing or retaining a homeowner over your discount policy will nudge other homeowners to join or leave your rental program.

 

Secondly, make sure you monitor and understand your market.

 

  • What’s Up with Your Competitors? 
    • If you have aggressive or up-and-coming competitors, you might have no choice but to match or beat their discounts to prevent them from “buying” market share by hijacking your customers (“We have more quality homes” or “We get more rentals per home.”)
    • If you know most of your competitors won’t discount aggressively during lower occupancy seasons, you can ignore an occasional competitive discount and hold your prices at levels renters are willing to pay for the week in question.
    • If you have multiple competitors who are discounting during a time when supply exceeds demand, your options are to match every discount or risk foregoing any rental for the period in question.
  • Mature or Growing Market: You must fight hard to retain your homeowners if your market has matured, exemplified by little or no growth of rental homes in your area.
  • Tracking the balance of supply and demand for each week of the year

 

When there is more supply than demand; renters have bargaining power thanks to the Internet—price competitively or forego the rental after asking yourself:  If I get fewer rentals than competing homes, will more homeowners leave me than if I match discounts?  Where will I likely lose the most money?

 

Price right initially by monitoring the duration and amount of seasonal discounting by competing homes. Then monitor your competitors’ discounting and booking pace.  Decide how discounting is likely to cause your inventory to decline, hold steady, or grow.   Think carefully about whether your company’s long and short-term interests conflict:

 

  • Do you need to match competitors’ discounts and lose money for a few rentals in order to protect several years of revenue? 
  • Is a competitor stealing your inventory and hurting your brand image by discounting steeply to get bragging rights that attract your homeowners (“I booked more rentals than my competitors.”)?
  • Do you dominate any market by managing most of the homes in a particular category so you can maximize revenue by refusing to discount at all?

 

What we thought of as “discounting” yesterday is today better thought of as “dynamic pricing” that requires quick adjustment in response to supply and demand.  The pressure to discount cannot be successfully addressed by inflexible policies.  It is easy to calculate how discounting will erode your historical rental income in the short-term.  It is more difficult, but more necessary in today’s Internet world, to acknowledge that the decision to discount or not has both short and long term consequences that often conflict.

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I’m excited to announce Community for Property Managers, a new online resource for professional vacation rental managers. 

 

The vacation rental management business is tough because there are many ways of going about it.  The Community for PMs will share snapshots of how successful property managers grow and streamline their respective businesses.

 

The site is launching November 10, 2011, and will be seeded with a rich sample of content.  The variety of resources will increase rapidly over the next year with your contributions to its articles and forums.

 

Sure!  All sites want great content, but few achieve this.  Why should this Community be different?  Because resources will be contributed by members of the industry itself, making up the “Community.”  Users will learn and share content via forums, share and seek advice with one another and form groups with fellow users to pool resources on a variety of topics and issues.

 

How will we foster this? Community for PMs is designed around a “give-to-get” information exchange.  Members will give opinions and advice regarding their business experience with an interest to see others’ answers.

 

Key Features of the PM Community

 

How-To-Articles.  Vacation rentals are a complex business.  The Community will offer a continuing steam of “how-to” insights on discounting, growth and other common industry challenges and trends.

 

Forums are available for managers to exchange comments.  These will grow in lock step with content and participation.  We expect to see forums for industry trends, vendor products and relevant industry news.

 

Statistics (available in 2012) will provide perspective to the booking trends experienced by individual rental managers.

 

Vendor Showroom -  I am especially proud of HomeAway here: we are planning to include a Community Vendor Showroom that will be free and open to all—including HomeAway competitors to provide PMs the ability to browse and rate products and service providers for their managed homes.   This is a bold move.  But we are hoping this will provide an incredible value to our PMs

 

I’ll host Webinars where guest speakers share insights.  One of our first webinars, “Hybrid Business Models,” will show how a rent-by-owner business morphed over five years into a PM with five hundred homes under management by incorporating best practices of both PMs and rent-by-owners.  Subsequent webinars will address difficult industry challenges in the realm of rate setting, finding growth in maturing markets and channeling employee conflict.

 

Polls will be utilized to gauge opinions on topics such as booking trends, financial effects of discounting and the impact of social media on the industry.

 

Community will also offer business support tools.  Our first example is a spreadsheet tool that will help calculate the dollar value of a single home—illustrating how much is at stake when a homeowner is added or driven away.  Soon, our “What-is-it-Worth” valuation tool will help calculate the value of a vacation rental management firm.

 

Community for PMs Will Belong to the Industry.  Community is designed to attract and benefit all segments.  No cost.  No strings.  Our goal is to build this industry and welcome any efforts towards that goal. 

 

So come on in.  See what’s there now.  Let your imagination show what you can help it become.  Then contribute what you can, take what you need and help make this a fabulous Community.

 

See you there!

 

George

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Who Should Go to RezFest?  It’s not just for HomeAway Software for Professionals (HASP) Customers.

 

I was a consultant to many property managers (PMs) during my first 12 years in the vacation rental industry.  I learned two things that are generally, but of course, not always-true:

 

  • Companies that attend industry events are the most hungry to learn and compete well;
  • The biggest benefit of industry events is the sharing of information among attendees.

 

Let me qualify this quickly, so as not to offend some very good companies that don’t do a lot of professional socializing:  there are many excellent companies that don’t attend industry events.

 

With that acknowledgment, let me further say that every management company would benefit by attending industry functions.  Why?  “THE INTERNET is changing this industry’s business models and forcing rapid industry evolution.”

 

More than at any time in the industry’s history, it is critical today that PMs keep track of changes.  No matter how strong or aggressively they monitor their own markets, they cannot afford to ignore the changes in other markets because:

 

  • Key trends start in a few markets and spread to others;
  • In my opinion, our industry’s occupancy rate (under 40%) and short peak season (often just 6 weeks) means that PMs often need more than one year lead time to adjust to trends.

 

Industry events are where PMs discover minor changes they are feeling can be the beginning of major trends that can alter the competitive pecking order.

 

The question is which industry event to attend.  Every company has limited travel budgets, and there are many industry events to choose from such as:

 

  • National associations
  • State associations
  • Local tourism bureaus
  • Reservation software user conferences
  • Regional conferences sponsored by industry vendors
  • Regional symposiums
  • Online webinars

 

So Which Events Should PM’s Attend? 

 

It comes down to:

  • Budget: what is the cost and how many events can you afford?
  • Size of the conference:  larger conferences offer more courses and more PMs to talk to;
  • Relevance of the event’s special focus (software training, housekeeping, ski tourism, etc.).

 

If you are looking to attend a larger conference, there are two worth noting…RezFest and the annual VRMA conference. Because HomeAway puts on Rezfest, we have some additional insight into the event. You can also learn more information about Rezfest here.

 

Who Will Benefit from RezFest?

 

HASP Customers.  Rezfest is organized around reservation software training and updates: it has different tracks for each of its reservation software products. So Rezfest is certainly good for HASP software customers.  Rezfest brings technicians and trainers, as well as the administrative staff who price software and decide which features to add to one location.  Rezfest is a good opportunity to get low-cost training, learn about new features, and interact with software staff who need to understand your problems and needs. 

 

Those Who Want to Explore Industry Products and Suppliers.  RezFest is one of the industry’s largest events, and accordingly, attracts the industry’s major vendors.  This is an opportunity for PMs to meet with key suppliers to compare features and prices, and talk to other managers who use these products.

 

Those Who Want Trend and Leadership Education.  By virtue of the size of HASP’s enormous customer base,  RezFest attracts one of the industry’s largest aggregations of managers and leaders.  As one of the industry’s largest supplier of reservation systems, Rezfest product and service reps deal daily with the effects of industry change across the country, and are well equipped to help PMs understand and adapt to national and regional changes.  This translates into sessions and seminar content that:

 

  • Highlight trends and issues;
  • Explain the evolving role of Internet marketing and technology;
  • Discuss the industry’s most vexing problems and solutions;
  • Offer thought leadership insights by key industry leaders.

 

Employee Rewards.  Where there is a business advantage to attending RezFest, there is also the opportunity to reward employees by sending them to Rezfest.  The event is historically held in fun locations and provides opportunities to interact with fellow PMs in a relaxed social setting.

 

Many PMs Who Are Not Already HASP Customers Can Benefit by Attending RezFest

 

  • Many will find RezFest less expensive than alternative gatherings while still offering substantial socialization, education and product information benefits:


    • Rezfest offers one of the largest gatherings of leading industry vendors;
    • The level of expertise in HomeAway’s family of products and partners is unparalleled;
    • It’s a preferred choice for those who can drive or otherwise incur less expensive travel.

 

  • RezFest is a great opportunity for PMs looking to buy or change reservation software.
    • While many managers can identify features they like in a software, most have difficulty charting the features that aren’t in a new software, until it’s too late.
    • The HASP family offers multiple reservation software products.  RezFest is the ideal location for learning which of them are best suited for a PM and, in fact, the best place to confirm that the HASP family of products will not suit your needs (if that is true).

 

For those of you interested in attending, I’ll be there.  I look forward to seeing you all.

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Though today, I shared my perspectives on the vacation rental management industry under the title “Volsky’s View.”  I’m excited to report this will be my last blog under that title.

 

Going forward, my blogs will be supplemented by contributors (HomeAway Software for Professionals (HASP) employees) who are in a position to interact with vacation rental managers and observe industry trends. These blogs, along with mine, will appear under the title, “Property Manager Perspectives.”

 

It is our goal to enrich the content of blogs on HomeAway Community by addressing evolving industry trends, newly emerging issues that concern property managers and events that help rental managers make better decisions. 

 

This change is part of a new role I will be assuming at HomeAway.  I have been given an opportunity to help HomeAway provide new and meaningful resources for property managers on HomeAway Community. The planning phase of this new project will keep me busy for a good while. 

 

We hope to unveil some new online resources and services for PMs in the future.  Until then, I’ll keep contributing blogs to PM Perspectives, as will other authors. 

 

Best,

George

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Hotels must achieve higher occupancy rates to attract investors.  It is natural that hotels sometimes fill vacancies through aggressive discounting.

 

The first part of this blog addressed community interests in vacation rentals.  This second part discusses actions managers can take to defend against hotels and cruise lines.

 

What Community Leaders Should Understand About the Unique and Critical Role Played by Vacation Rental Homes in Local Economies and Why They Should Promote a Level Playing Field

 

As noted in Part 1, vacation rentals are well equipped to survive aggressive promotional discounts by hotels and cruise lines which, by virtue of their more demanding investor expectations, must always rebound to higher prices than are charged by vacation rental homes.

 

But when municipalities place unfair regulations on vacation rentals, long-term damage can result to both the local economy and the vacation rental industry.

 

It is important to recognize (and educate community leaders on this point) that vacation rentals’ unique investment profile generates economic benefits that—on a per-visitor basis—cannot be matched or replaced by hotels.

 

Large hotels are often not financially viable (and thus not present) in vacation markets that are just beginning to attract tourists or have short seasons.  Hotels in such markets would need to charge prices that are too high to generate the high occupancy rates required by hotels.  Here:

 

  • Vacation rentals bring the capital investment (housing infrastructure) that is necessary to lure tourism dollars to destinations that lack sufficient traffic to support large hotels.
  • Vacation rentals offer lower-priced or higher-value lodging than could be offered by hotels and motels.  This brings more tourists and primes the pump for tourism growth.

 

It is also important to recognize (and educate community leaders on this point) that vacation rentals bring economic benefits to a community that goes far beyond those traditionally generated by hotels and captured within the scope of tourism metrics. Vacation rentals typically:

 

  • Involve longer stays;
  • Involve larger travel groups;
  • Employ more employees per bedroom for maintenance and housekeeping;
  • Support larger numbers of small business;
  • Accommodate peak season overflow that hotels cannot cover;
  • Generate economic benefits beyond those embedded in “tourism” metrics:
    • Prodigious numbers of housing construction;
    • Large volumes of real estate sales commissions (5-8 year home turnovers);
    • Related volumes of mortgage financing and fees;
    • Home furnishings and housewares sales;
    • Indirect employment and sales measured as economic multipliers;
    • Tax revenues related to underlying employment and sales

 

Local leaders seldom realize the full range of benefits their communities receive by nurturing and protecting vacation rentals.  As an industry, we can’t expect community leaders to understand our industry until we do.  It is our responsibility to educate ourselves, then others if we are to defend against regulations that restrain vacation rentals at the prompting of competitors.

 

What Defensive Actions Should Managers Take to Compete with Hotels and Cruise Lines?

 

My advice:  educate yourself on the forces that actually threaten vacation rentals or dictate what we can and cannot achieve.  Engage where you foresee clear benefits.  Otherwise relax.

 

Cruise lines advertise some incredible prices for all-inclusive vacations that can include air fare, a cabin, entertainment and food.  What can you do in defense?  You could pass along articles that show how much cruise lines generate from drinks and gambling, but consumers probably sense that anyway.

 

  • Cruise ships require massive capital investment, and a small decline in bookings can be disastrous.  Unlike rental managers, cruise lines have to pay for empty rooms. 
  • It’s important for cruise lines to be full even if they have to give rooms away because cruise lines get revenue from liquor sales, gambling casinos, and shopping. Plus, ports often pay a fee for each disembarking passenger.
  • Cruise passengers don’t necessarily spend less, but they love the idea that they can spend less, eat endlessly, or put vacation money into shopping, drinking and gambling.
  • Cruise lines won’t supplant vacation rentals.  There’s room for both.  I believe vacation rentals offer more of a recurring lifestyle vacation embedded in family traditions. Cruises fit in the category of infrequent travel adventures, ala Las Vegas or Disney World.
  • For 2011, economic stabilization is allowing cruise operators to demand higher prices, and this should result in less competitive pricing pressure on vacation rentals

 

Periodically, ski resorts and high-end hotels steeply discount room rates to fill vacancies. 

 

  • Resorts and high-end hotels have higher fixed costs than vacation rentals and fight to cover those costs by getting “heads in beds” that generate additional spend from spas, lift tickets, restaurants and shops. When these entities discount lodging by 50%, their revenues drop just a fraction of that and could actually increase.
  • Managers and homeowners do not generate similar supplemental spend, and are hurt more by lodging discounts.  Managers should inform homeowners about steep hotel or resort discounts and give homeowners the option to defensively discount rents to retain renters—many homeowners will  discount rather than get nothing.
  • When resorts ask homeowners and managers to discount lodging to lure renters from competing destinations, do the math and raise the issue if it appears that private homeowners contribute 90% of the discounts but resorts reap 90% of the benefit.
  • Managers need only calculate how low rents can go for them to break even.  Profit is desirable, but it is better to help homeowners get some revenue through discounted rents (even if the manager makes no profit) than to lose the homeowner (and future profits from his home) because the homeowner thinks you didn’t try hard enough

 

Remember, the ability of hotels and resorts to meet fixed expenses depends on high occupancy rates.  This dictates that hotels deliberately keep capacity below levels required for peak demand days, leaving room for vacation rentals. 

 

Also keep in mind that hotels must charge enough to generate a return on investment, whereas vacation rentals need not even cover investors’ costs of home ownership. 

 

These facts, combined, make hotels and resorts vulnerable to vacation rentals, which deliver excellent value and lower prices. 

 

In other words, vacation rentals offer a better lodging value for the renter’s buck during normal times.  Hotels and resorts inflict the biggest pain on rental managers during periods when declines in demand make it hard for hotels to cover their larger fixed expenses.  But vacation rentals will always remain healthy competitors in the lodging market.

 

For 2011, U.S. hotels appear to be on pace to grow room revenue (RevPar) 7%, and this should alleviate the steep discounting of prior years. 

 

In all events, the threat from hotels and resorts is not great over the long-term. But I'd love to hear different perspectives if you have them.

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This blog addresses questions that confront every vacation rental manager at some point: 

 

1.    “How can I compete with hotels, cruise lines and other lodging segments?”

 

2.    “How can I convince community leaders to keep the competitive playing field level?”

 

Part 1 answers the first question.  Part 2 discusses how managers should react to other lodging segments and lists reasons why community leaders should promote a level playing field.

 

Why Would a Rental Manager Want to Compete with Other Lodging Segments?

 

The obvious answer: renters of vacation homes also patronize hotels, motels, cruise ships, camp grounds, recreational vehicle rentals, houseboat rentals and B&Bs. 

 

Each lodging segment has unique advantages and core customer groups.  But many travelers patronize two or more lodging types.  Customer pools for each segment can overlap.

 

When travel declines, cruise lines and hotels unleash expensive campaigns that could divert travelers from vacation rentals. The vacation rental industry is historically fragmented and has only recently been postured to defend itself with effective national advertising campaigns.

 

Renters Have Been Inundated With Offers for Alternative Vacation Opportunities


•    Cruise packages that include lodging, transportation, meals and entertainment;

 

•    Heavily discounted rates by resorts and four-star hotels offering shops, spas and food;

 

•    Central reservation systems that discount lodging to lure travelers to resorts;

 

•    The dominance of hotels on online travel agency sites:

 

Hotels have aggressively discounted in response to several years of declining roper room revenues.

 

Should Managers Defend Against Competitive Assaults By Other Lodging Segments?

 

This question should be addressed on four levels:

 

1.    Are vacation rentals’ role in the lodging ecosystem threatened over the long-term?

 

2.    Do managers have any ability to counter low-price promotions by other segments?

 

3.    Should managers respond to promotional initiatives by other lodging segments?

 

4.    Do communities have reasons to keep the competitive playing field level?

 

Vacation Rental Homes Compete Well With Other Lodging Segments in Good Times

 

Hotels are expensive capital assets that require a return on investment from operations and thus high occupancy rates in the 60 percent range.  So developers never intentionally develop enough hotel rooms to accommodate peak season surges (just as airlines wouldn’t intentionally buy enough planes to handle the busiest traffic days if those planes would have to fly half-empty other times).

 

•    By contrast, vacation rental homes can be financially viable with low occupancy rates in the 35 percent range and can serve as the safety nets for local economies that capture dollars spent by visitors whose numbers exceed the bedroom capacity of hotels.

 

•    Investors who own the capital assets in vacation rentals (the homeowners who own your rental inventory) don’t expect to make money from lodging operations.  They expect profit when they sell appreciated real estate and negative cash flow in the interim.

 

•    This unique and advantageous investor profile for vacation rentals means that:

 

     o    Managers and homeowners may price rental homes below cost!

     o    Vacation rentals should thrive with lower occupancy rates!

     o    Vacation rentals should exist and thrive as long as property values at vacation destinations are expected to appreciate over the long term.

 

Vacation Rental Managers Make it a Point to be Structurally Equipped to Ride Out Market Downturns

Generally, when the demand for hotel rooms pulls occupancy below 60 percent for the industry as a whole, many hotels become nervous and discount room rates to any level that contributes to offset hotels’ large fixed expenses.  This is the time when they discount most and/or encourage community restrictions on vacation rentals.

 

But vacation rentals are well positioned to survive price competition, even if hotels eat first:

 

•    Homeowners, not managers, shoulder the burden when demand dips (subsidizing mortgage and expenses), whereas managers have few fixed expenses.  Managers’ largest cost is labor, a variable expense that falls almost in lockstep with bookings and arrivals.

 

     o    When rentals dry up, vacation rental managers can lay off staff and hibernate.

     o    Homeowners survive dips in demand by (a) discounting rents to maximize contribution to expenses; (b) covering declining revenue out-of-pocket; or (c) selling the home to a buyer who can afford it at prevailing annual rents.

 

•    Apart from value, vacation rental homes offer:

 

     o    Greater space for families or friends who vacation together;

     o    Kitchens that extend vacations by lowering food costs;

     o    Options for every pocketbook, from small or older homes in great locations to luxury homes with home theaters and indoor pools that are destinations in their own right.

 

•    This unique resilience of vacation rentals to market downturns means that, barring another depression, vacation rentals should exist and thrive over the long-term regardless of the level of discounting by competing lodging segments.

 

Next Blog:  Part 2: 

 

•    What Community Leaders Should Understand about the Unique and Critical Role Played by Vacation Rentals in Local Economies; and why they Should Promote a Level Playing Field

 

What defensive actions managers should take to defend against hotels and cruise lines

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If there is one debate that rages continually inside vacation rental companies, it is this:

 

In our advertised prices, should we roll any mandatory add-on fees into the rent or not?

 

Why is this a recurring concern?  Because:

•    Fees (vs. commissions) often contribute all the profit and many expenses;

•    No lodging segment has a more varied or complex pricing structure;

•    Not all managers or homeowners roll fees into the advertised prices;

•    Renters hate it when hit with unexpected fees;

•    But renters will often ignore a home that “appears” more expensive.

 

I know a company that changed its advertised rents to roll in fees but later concluded that it would have to revert to its original pricing by backing add-on fees.

 

This company’s reservations staff had been repeatedly beat up by renters who became angry when informed that the advertised price had to be significantly increased by fees (fees and taxes can increase advertised 50%, especially for short 2-3 day stays).

 

So the company changed its policy by rolling fees into the advertised rent.  The result:

•    Renters who did book were much happier;

•    The lives of this company’s reservation staff improved significantly, and

•    Bookings fell 20%.

 

The unfortunate lesson for this company was that many renters ignore a home or company that “appears” more expensive than comparable homes.  They often dismiss a home without drilling down enough to learn that it would have been less expensive than the home they ultimately booked.

 

The dilemma: renters get angry when hit with unadvertised add-on fees. But property managers lose bookings when fees are made clear due to the perception of being priced higher than properties with hidden fees.

 

If you can take the high road without losing rentals, by all means roll your fees into your advertised rents.  But remember why add-on fees are used.  Pricing today is a game of psychology.  Add-on fees are indirect ways of increasing prices. 

 

Consumers don’t always take the time to get accurate price comparisons.  This fact is obvious and relied upon in the creative strategies that focus on appearances. For example:

 

•    Car dealers add a variety of fees, including delivery;

•    Banks invent more fees than I can keep up with;

•    Airlines adapted to low cost competition by lowering base prices but charging fees for every sort of convenience.

 

Some renters—too many to be ignored—punish good managers for being honest and reward companies that do a good job of hiding actual prices until the last minute.

 

The vacation rental industry is fragmented in its pricing, so there is no common standard.

 

While commodity price can be compared on aggregation sites, I know of no site today that can accurately compare prices for vacation rental homes without a direct link to reservation systems.

 

Hotels rely heavily on fees today, as do airlines.  And the Internet does a good job of comparing prices for hotels and airlines.  But both industries typically use reservation systems that provide real-time access to availability and pricing data to travel agents.

 

In vacation rentals, the “advertised” price often does not include add-on fees.

 

Here’s my advice.  Let your market be your guide. 

•    Check the advertised prices for homes similar to yours;

•    Determine the extent to which they roll in fees;

•    Decide whether your prices “look” higher;

•    Determine whether your prices are higher and, if so adjust them.

•    Always price your homes so they “appear” to be price competitive.

 

It goes without saying that you should post all add-on fees on your website if you don’t roll them into your advertised fees.  

 

If you are dominant in your market, or have the greatest number of homes with great rental appeal, you may be able to book them even when your advertised rent is higher.

 

One question commonly arises.  “What if I go to great lengths to let consumers know that my all-inclusive prices are often less expensive than competitors’ homes that have unadvertised add-on fees?”

 

This is a fine idea if it works.  I know companies that do a very good job of this by adding language to every web page and by comparing competitors’ prices.  But if there is even one renter who doesn’t bother looking at their web sites because the advertised price appears too high, then this strategy may still result in lost rentals.

 

Sometimes, renters zero in on homes that interest them based on two lines of text and a picture.  There is a lot of basic information that competes for space in these two lines.  It is hard to make the point, “our all-inclusive price is actually a great value.”

 

In the end, your pricing strategy must take into account:

•    Your competitors' practices;

•    Your ability to distinguish your prices from competitors;

•    Your homeowner's fickleness;

•    Your staff's ability to deal with unhappy renters;

•    Your inventory and share of desirable homes.

 

 

Good luck.  There is never an easy answer.

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Title notwithstanding, this is not a blog where I will:

•    List and rank markets according to competitive opportunities; or

•    Assume that managers have much choice about where they operate.

 

I will list some characteristics that make a market good or difficult to compete in.  Understanding these can help you set realistic priorities, identify strategies that have a chance of success and avoid competitive efforts that are a waste of resources.

 

First, let’s acknowledge the Internet has put pressure on second home owners and managers alike, pushing rents down and expenses up in all markets.  A manager’s ability to adapt to these changes will vary by market.

 

Markets offer more or less opportunity depending upon:

•    Season length (longer seasons mean more revenue per home);

•    Real estate prices (rising prices counterbalance rising expenses or discounting);

•    Average stay length (how many times do you have to rent and clean each home?);

•    Number of vacation rental homes (profit opportunities increase with volume);

•    Number of competitors (discussed below); and

•    Market maturity (also discussed below).

 

The best market to compete in is one in which you have a monopoly—you are the only rental manager in your area, and you have the vast majority of available homes.  Consumers can’t bargain shop by threatening to use a competitor.  (Few monopolies exist).

 

The second best market is one where there are 3-4 equally sized large competitors and a number of smaller companies. The large companies often compete on everything but price (“pricing parallelism”) and are able to discipline smaller companies who undercut them(discouraging predatory discounts by responding with even steeper discounts).  Everyone makes money.

 

The worst market to compete in is one where you have tons of equally sized competitors and vacancies (this generates desperate discounting).  Few managers can make much money here until the market consolidates, weeding out the weak and creating leaders.

 

A very difficult market environment is one where the growth of rental inventory has stopped.  This occurs, for example, where all desirable land has been developed, local regulation has strangled growth, or falling home prices have forced homeowners to subsidize mortgage and carrying costs. As a result:

•    Managers can no longer achieve double digit growth in inventory;

•    It is no longer possible to offset “expense creep” by taking on more inventory;

•    Each new home must be acquired through hand-to-hand combat with competitors.

 

By categorizing the characteristics of your market, you can better identify what won’t work and zero in on the tactics that can grow (or at least protect) your company’s profits.

 

Here are suggestions for a mature market or a fragmented market with many competitors:

•    When the growth of new rental homes slows or stops in your market, focus on becoming more efficient than your competitors.  A lean company can do more with less and spend more money to retain and attract homeowners, leapfrogging over competitors who are saddled with less productive operations.

•    If it is getting harder to find new revenue streams or you are digging into profits to cover growing expenses, consider growth by acquisition (or merger).  This will insulate you from requests for discounts and allow you to offset shrinking margins with volume.  Consider the impact on you if your competitor beats you to this.

•    Don’t be afraid to “buy” new inventory one home at a time by offering promotional or introductory rates.  You can give away up to three years' profit to get a new home, just as you would if you bought a competitor’s inventory. (Just take care not to undermine your general commission structure).

•    If your market is maturing (no growth), focus on becoming dominant in a specific area, building or type of home (50 percent market share is a good goal).  This is another way to protect yourself from renters who demand discounts and from competitors who will undercut your pricing (more on this in a future blog).

 

In a healthier competitive market, you can focus on marketing.  Keep in mind that inventory quality and size trumps almost everything. The better your inventory, the less you must spend to find renters. Companies with very large marketing budgets sometimes achieve a relatively small occupancy rate advantage (or barely manage to stay even with other large-budget competitors).  Cutting marketing expenditures may not translate to many lost rentals:

•    If you don’t already do so, monitor your competitor’s occupancy via the Internet.  Weekly monitoring of availability calendars can allow you to track this with only a few hours of effort each week.  You need to know how you match up.

•    Re-examine each market expenditure with an eye toward identifying expenditures that aren’t clearly necessary and with the goal of leveraging any advantages that you do achieve from them.

          o   If you spend more on marketing, let homeowners know if you are getting more rentals than competitors—homeowners respond to this.

          o    If your competitor has a bigger marketing war chest, use Internet monitoring to let homeowners know there is little difference in occupancy for comparable homes (say you put your money into service where it goes much further in benefiting the homeowner).

 

I’ll cover some of these strategies in more detail in future blogs.

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The best times to add fees are during good rental years when the market will allow an increase in rates.  In lieu of increasing rent that is subject to a commission split, a manager will create a fee to be paid directly by the renter.  When this approach can be taken, the homeowner does not get less revenue, lessening his opposition to the fee.

 

Obviously, these are not the best of times.  The Instant Software Research Center Monthly Report: December 2010 State and Regional Vacation Rental Trends, which I administer, reveals that the industry raised rents 1% in 2010 and arrivals declined 2%

 

There is a backup strategy.  If a manager lowers commission rates when he increases fees, revenue doesn’t decrease for homeowners or increase for managers—the first year.  This makes it easer to sell fees to homeowners.  But if discounting gets worse in the future, homeowners will shoulder more of that burden.

 

Does your company need to do this?  Not if you are making a healthy profit (10-15 percent of commission and fees for a small to medium company).  Yes, if expenses have crept up over the past few years, eroding profits below healthy levels.

 

Can you pull this off?  This depends on how well you communicate with your homeowners and on your competitive environment.  If you don’t communicate very well, key competitors who are either very smart or very desperate will steal your homeowners if you haven’t made a very compelling case to your homeowners.

 

What fees do you add?  It almost doesn’t matter.  Run through your key expenses to find expenses that are killing you (hot tub, bill-pay services, housekeeping; inspectors; maintenance, etc.).  And look closely at any fees already being charged by your competitors.  Its not so much what fee you add but how you sell it to customers.

 

Can you sell change to your homeowners?  I have worked with many managers over the years to help restructure their fees and commissions.  Homeowners always resist.  Managers always panic.  But you can implement change.  It’s just stressful (very).

 

How do you structure the fees?  Add language to your listing agreement that allows you to charge fees to renters and raise them periodically without further approval from the homeowner.  This way you can raise fees every year, but need only fight homeowners the first year.  Tell homeowners you are placing the burden of the services on the renter.

 

Look for expenses you currently pay with a view toward passing them on to the homeowner.  Or introduce new (high margin) services.  Or terminate old services “because of runaway costs,” but announce your willingness to do them on a fee basis for those homeowners that really want them.

 

Can you pull it off?  The question is, “Can you afford not to?”   If you do not earn a healthy profit or your profits are declining, and if you can’t compensate by growing your inventory, you are on a destructive path that will force layoffs and degrade service.

 

Look in the mirror every morning and repeat this:  “Profits are not selfish.  They are a necessity.  Companies must have a reserve to hedge against cycles in the marketplace and economy.  Growth costs money.  It takes money to find and implement efficiencies.”

 

If you still need motivation, let me offer this. Managers have an obligation to themselves, their families, their employees and their vendors to maintain their financial health.  You cannot share your cup if it is empty. 

 

If you forego the hard decisions required to protect your profits, you will eventually let down the people dependent upon you.  Your sacrifice will not even benefit your homeowners, who will ultimately end up with a manager who charges enough to buy the services required to attract and retain renters and homeowners.

 

Keep in mind that you can’t raise or add fees that are paid by the renter if that new fee will cause renters to look elsewhere.  The market sets a cap on rents.  You must match market rents or risk losing rentals.

 

There is of course more to be discussed.  This blog just offers an overview.  If you would like further information, let us know.

1

Discounting poses one of a rental manager’s biggest challenges.

 

The Internet has shifted bargaining power from vacation rental homeowners and managers to renters, providing the tools that allow renters to capitalize on vacancies.

 

Renters peruse online availability calendars to confirm a company has empty homes. They use this knowledge to bargain.  Each year brings an increasing number of renters who demand discounts.

 

It would be wonderful if managers and homeowners could set a fair price and hold it.  But that is no longer possible during periods when there are more vacancies than renters.

 

  • A slow economy has prompted renters to look for value and ask for discounts.  When homes are vacant, usually one vacation rental homeowner will agree to discount.
  • Discounted rates reduce annual rental revenue and dig into homeowners’ lifestyle:
  • We operate in a fragmented industry, meaning there are so many managers and homeowners that they have no chance of acting together.  When a few homeowners start discounting, others must follow or lose rentals.
  • Discounting was further fueled by a housing crisis that destroyed the investment value of rental homes for buyers who bought at the peak of the housing market; homeowners who are digging further into their pockets to pay mortgages are not able to sell their homes without losing their equity.
  • The accompanying financial crisis made it difficult for second home owners to unload homes even at a loss, because buyers couldn’t get financing.
  • Consequently, there are homeowners who are desperate to generate any rent, and they are the first to discount during the non-peak seasons.
  • Again, other homeowners must match these discounts or forego renting

 

A decade ago, managers set rates based on the prior year’s rental history, and largely held to those prices.  Today’s Internet world, the market is dynamic.  Prices fluctuate much like stock prices—they change daily in response to the balance between supply and demand. There are few rental managers today who are immune from discounting. 

 

This poses several dilemmas for rental managers. 

 

  • If they don’t ask vacation rental owners to discount, they get fewer rentals; some homeowners will change rental programs.  If they do ask owners to discount, then owners blame managers for giving away rental income.
  • When managed homes are discounted, there is less revenue for the commission split.  A 20 percent discount reduces managers’ commissions proportionately but managers’ housekeepers and maintenance staff expenses remain fixed.

 

When rental rates are discounted, managers do the same amount of work (or more) and can’t afford to shoulder the burden.  Managers must either cut expenses (staff) or take a bigger share of the dropped rates.

 

In a resort market with many competitors, managers can’t raise commissions without losing homeowners to competitors.  So they do what banks and car dealers have done:  tack on fees that, in a strong company, can contribute two-thirds of all company revenue.

 

Fees have many advantages over commissions:

 

  • They are payable in full whether the home is discounted or not, insulating the manager from discounting (placing the burden of discounting on the homeowner);
  • They increase the “effective” commission rate in a way that is more palatable to homeowners who might leave if the commission rate were increased directly;
  • Fees help most during the off-peak seasons, where seasonal discounting of up to 50 percent traditionally caused managers to lose money on rentals.
  • Fees are the best way for managers to insulate themselves from discounting.
    0

    The New Year brings to each rental manager the challenge of growing profits and responding to emerging competitive pressures.  Ideas are seldom scarce.  Resources usually are.  How can a manager best decide which promotion ideas will best grow your business?

     

    As managers sift through their options, they need an understanding of the profit drivers for vacation rental management business.  The fundamental concept can be conceptualized with this question:

     

    “What is more important to your business— inventory (homeowners) or reservations (renters)?”

     

    “Why,” you may ask, “is it even important to ponder this question?  Shouldn’t we treat both groups as equally important? “

     

    I’d illustrate the importance of prioritizing inventory vs. reservations in the context of budget planning.

     

    For example, as your company puts together its 2011 budget, it might see opportunities such as the 12 that follow, but have resources to invest in just one.  How does your company decide which to pursue?

     

    1.    Website enhancement;

    2.    More money for paid search;

    3.    Marketing consultant or staff;

    4.    Database mining and email blast capability;

    5.    Staff to respond more quickly to email inquiries;

    6.    Phone systems that help monitor and improve call-to-booking ratio;

    7.    Data mining that identifies homeowners;

    8.    Lists of target homes;

    9.    Email and postcard campaigns that solicit new homeowners;

    10.  Staff time that can be dedicated to soliciting new homeowners;

    11.  Studies of competitors’ commissions, fees and services;

    12.  Decision support tools that monitor each home’s bookings year-to-date

     

    It can be loosely said that the first six options target renters and the last six target homeowners. 

     

    Certainly, you have to “treat” both renters and homeowners as though they are your highest priority.  But you can’t always invest in promoting both.   If you have a sense of whether it is more important to grow reservations or inventory, you are half way through a difficult decision.

     

    So, which is more important?  (Let’s assume that you don’t already have enough of one group.)

    Initially, the question appears to pose one of those “which came first, the chicken or the egg?” questions that has no definitive answer:

     

    • Without renters, there is no business.  Their rents and fees supply all the revenue.
      • If you bring in enough renters, you can attract new homeowners.
    • Without homes, you have no product to attract renters; your company profits depend on the number of homes you have.

     

    But we need to look deeper.  Embedded in the very structure of the vacation rental industry are other facts that help prioritize these two customer groups.  A grasp of these structural facts will help managers better understand their business models, identify profit drivers, and decide how to allocate scarce resource to grow the business.

     

    “What,” we need to ask, “is the product we sell?” Vacation rental managers sell lodging of course, like hotels, motels, cruise ships, and RV rentals. 

     

    “Duh!” you might respond.  “What’s not obvious about that?”

     

    The answer:  Lodging is by far the most expensive component of the vacation rental business. Many managers don’t focus on this because they don’t own the lodging they rent.  For managers, the greatest expense is usually labor.  But for vacation rentals to exist, someone has to invest capital in lodging.

     

    “Okay, inventory is the most expensive aspect of this business.  Why is that important to know?”

     

    Here’s the key.  Unlike investors in hotels, motels, cruise lines, and RV rentals, most homeowners do not expect to earn a profit on rentals!  Rental homes don’t have to generate a return on investment.

    • Homeowners are largely investors in real estate who profit when they sell their home at an appreciated price; they usually expect to have negative cash flow from the rental activity.
    • They are investors who use rental income to help them buy a more expensive home than they could otherwise afford (leveraging the potential appreciation on their investment);
    • They include investors who gain lifestyle benefits while rental income helps them pay for real estate that—during the history of the US—has always appreciated over the long term and is likely to continue to do so as the US population grows.
    • Investors supply the bedrooms we rent, allow us to sell the rooms below cost, subsidize the renters through negative cash flow (often losing $2000 monthly), and take all the risk.
    • Rental managers get to price these rental properties below cost (which hotels cannot do for long), take a percentage or every dollar spent by a renter, and expand or cut our expenses when the market expands or contracts.

     

    When the economy was booming, a study I did for the North Carolina Vacation Rental Managers Association concluded that homeowners in NC subsidized renters by $251-500 million annually.

     

    This subsidy makes vacation rentals a superb value to renters.  For each dollar spent, renters get more space and privacy than can be offered by hotels.

     

    • This single fact frames the business model depended upon by most rental managers:
    • Managers don’t have to pay for the lodging they rent;
    • They don’t have to charge enough rent to pay the mortgage as do hotels;
    • They don’t have to generate a return on the homeowner’s investment;
    • They can sell their product below cost, making it a great value;
    • They take a commission and fees on every rental;
    • Managers do not need a large capital investment to enter the business.

     

    This gives rental managers some fairly unique advantages over other lodging providers:

     

    • Vacation rental homes offer such good value relative to hotels and motels that managers don’t need large marketing war chests to sell their product.  “Build it and they will come.”  (At least during peak season).
    • Managers can survive by spending just enough money to enable renters to find them. 
    • Promotion of the resort area can be left to State tourism agencies, County tourism development bureaus and Chambers of Commerce who represent hotels as well as rental homes. 
    • Managers need only compete for a fair share of those tourists who have already decided to visit.

     

    And here is the wonderful part:

    • Good inventory will be found by renters.  

     

    With these thoughts in mind, let’s revisit the question, “What is more important, inventory or renters?
It has been my contention for the past 10 years that inventory is more important, hands down:

     

    • If a manager can offer great inventory at a competitive price, renters will find it (good inventory = inventory in demand);
    • Competition in each market may dictate rent levels and limit the fees that a manager can charge.  But it is the quality and number of homes in a manager’s inventory that will determine how much profit a manger can generate.

     

    Am I suggesting that managers need not dedicate resources to getting reservations?  Of course not.

    • A rental manager’s first priority is to attract and keep the best homes possible;
    • A rental manager often has more bedrooms than area hotels; he needs to build his hotel a few bedrooms at a time, and it is the number and quality of inventory that attracts renters.
    • Renters will find good homes (homes in demand) whether the manager has a large or small marketing budget.  Illustration:  in most markets, a great new home that is not yet constructed can book up fully for the peak season shortly after it is advertised on any manager’s web site.

     

    Managers must also focus on getting reservations because homeowners want to be in rental programs that maximize rental income.   Even one extra rental per home per year can help managers retain and attract the most desirable rental homes.  But the key to profits lies in attracting and retaining inventory.

     

    There are of course other things that must be considered in deciding whether to pursue renters or homes at a given point in time:

    • How fast can you grow without degrading service levels or diluting rentals for veteran homeowners? 
    • Can you finance this growth (growth costs money) or survive it (most small business failures arise from growth, not from lack of customers)?
    • Is one of you key competitors growing (can I afford not to grow);
    • Is your market maturing or can we count on growth?

     

    We’ll cover some of these issues in future blogs.  Hopefully this discussion will illustrate the structural elements of the vacation rental industry that set it apart from other lodging segments, and bring into focus the core importance of inventory in driving profits for vacation rental managers.

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    Volsky's View: All About Me!

    Posted by gvolsky Dec 7, 2010

    Hi!  I’m George Volsky – the person responsible for posting blogs on the Community about vacation rentals in relation to property managers. This first blog is devoted to ME--who I am, what I’ve done, what I’m good at, and what I plan to do with this blog.

     

    To start with, I’m a bit dysfunctional and really bad with names, but on the upside, I’m good with concepts and systems and I’ll remember your business issues even when I can’t remember your name.  I can say (modestly) that I have as comprehensive an understanding of this industry as anyone, because of the time spent talking to rental managers about the business.

     

    I pour over industry statistics.   I’ve written white papers and delivered hundreds of educational seminars over the years on virtually all industry topics.  I love this industry.

     

    What I enjoy most is figuring out how everything about this industry interacts with everything else. I like questions like:

     

    • “What is more important to rental managers--inventory or renters?” 
    • “How can you change your fee structures to insulate you from discounting?”
    • “When is it better to omit add-on fees from your advertised price?”
    • “Which markets are best and worst to compete in?”
    • “How should you compete with hotels and cruise lines?”
    • “How do you deal with competitors who cut commissions and rents?”
    • “How fast can a rental manager grow?”
    • “How do you compete with a competitor that has more money, homes, etc.?”
    • “What does the growth of rent-by--owner mean for the future of rental managers?

     

    In my blog, I’ll be talking about issues like these--as well as about issues you raise in the forums.

     

    Many vacation rental managers have already attended my seminars at national or state association meetings, software user conferences, regional seminars hosted by vendors and webinars.  For you, I hope to continue sharing my perspectives about our changing industry and your options for adapting.

     

    But there are literally thousands of rental managers who are not active in industry events.  For you, I hope to share insights that have evolved from the collective wisdom of your colleagues.  It is my hope that these insights will help you grow, increase your revenue, and navigate the Internet and competitive challenges that are shaking up the vacation rental industry.

     

    Anyway, back to the main topic for this blog--ME.

     

    My first job out of college was as a transportation industry analyst, where I worked with government analysts and economists, learning about travel economics, and this led to too many years as an attorney, setting up and working with airlines (I still apologize for those years and am grateful that bankers have taken up their share of the burden as public targets). 

     

    My first job after leaving the law was as a vacation rental manager on the Outer Banks, where I dove into the company’s reservation data in an effort to learn in a few years what took eight years for vacation rental managers.  Anyway, I started talking about my discoveries, and this led to a 12-year term as a consultant.  I have worked closely with many of the nation’s leading vacation rental companies, large and small, in all areas of the country.

     

    I’ve studied the competitive and pricing strategies of competitors in entire markets, valued companies for purchase or sale, designed decision support software, projected the economic impact of vacation rentals on state and local economies, and served as industry consultant for the 2008 PhoCusWright study that sized and valued the vacation rental industry. 

     

    I currently monitor industry statistics and do monthly trend reports.  I have served as Director of Research for the nation’s leading reservation software companies, Instant Software and Escapia, which, as of October 2010 were acquired by HomeAway.

     

    I’ve now said “I” enough times that I can only bear to say it thrice more in this blog:

     

    • I’m looking forward to sharing my views and
    • I hope, over time, to get the benefit of yours;
    • I’ll share my next blog in time to wish you a happy holiday.

     

    Geo

    0

    As 2009 came to a close, the lead story in Wall Street Journal’s November 16 Money & Investing section was captioned “Earnings are Strong, Sales are Another Story.”  Eighty percent of companies in the Standard & Poor’s 500 stock index beat analysts’ expectations during a period when revenue was on pace to fall 10 percent.

     

     

    “Cost-cutting” drove profits for these major companies.  Cost cutting is similarly a priority for many vacation rental managers, which leads to the point of this blog:


     

    The most direct paths to cost-cutting in vacation rentals can lead to a reduction in a company’s long-term profits and competitive stature.  The paths that best protect profits are often counter-intuitive.  So pick your path cautiously.

     

     

    • “Knee-****” cost cutting often jeopardizes future profit and growth;
    • It generally costs money to properly find and implement cost cuts;
    • The best cost-cutting opportunities arise from industry changes.

     

     

    What to Expect from Cost-Cutting.

     

     

    • As noted in the Wall Street Journal article, cost cutting can only boost profits so long, but companies that learn to run lean in bad times can expect to see profits surge when sales improve.
    • In my view, cost-cutting is “reckless” when it is the goal; it is “safe” when it is the byproduct (intended) of a goal to make your company more efficient.
    • Your goal should be to become more efficient pursuant to a plan all players understand and buy into.

     

     

    When Does It Cost Money to Cut Costs Properly? 

     

     

    • Time.  Generating plans and buy-in is expensive because staff must stop doing something they may not want to stop doing--making their jobs harder--and devote time, money and energy to developing a new plan, acquiring any required resources, testing the plan, and implementing it.
      E.g., the woodsman who responds to the well-meaning passerby’s suggestion that he might cut a lot more wood if he sharpened his ax:  “I can’t—I’m too busy.”
    • Systems Development.  Often, the best efficiencies require your company to change the way it does business, requiring an investment in new systems design, technology, training, promotion and customer hand-holding.

     

     

    Why Do You Need Staff “Buy-In?”  

     

     

    • If a player doesn’t understand how your plan will work, he can’t execute well. 
    • If he doesn’t buy in, he won’t execute well.  He’ll be happy to let your plan fail so he can return to the system he is used to. 

     

     

    Trimming Fat.  Successful companies can get “fat” during good years because they can afford to hire people and buy services.  I know a company that trimmed several top managers without losing a beat.  But the common pitfalls arise when you ask people to do more with less, without a plan they buy into. 

     

     

    • This causes tension among employees, increases turnover (reducing your staff’s skills), reduces service quality, saps energy required to get new customers, and—ultimately—makes it difficult to keep and attract homeowners and renters. 

     

     

    Look at Competitors Before Identifying Cost Cuts.   Difficult times pose problems for some but create opportunities for others who find ways to use them to leapfrog ahead of their nearest competitors.  You can’t decide which expenses to cut without knowing whether your competitors are redistributing their resources.  Are they:

     

     

    • Going hard after your homeowners?
    • Soliciting your renters?
    • Trying to get extra bookings from their existing renters?
    • Offering new services to existing renters and homeowners?
    • Replacing expensive staff services with computer services?

     

     

    Categories of Promising Cost Cuts. Look carefully at the following: 

     

     

    1. Changing your business model.
    2. Use of technology to free staff for other jobs;
    3. Elimination of services to renters or homeowners  who don’t need them;
    4. Downsizing of promotional activities that may no longer be cost effective;
    5. Trimming of fat to become more lean and fit.

    

     

     

     


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    In a recent blog, I suggested that you look for ways to become more efficient in five categories. In this blog, I include my thoughts on“Changing your business model.”

     

    For years, I’ve joined the rest of you in following the role of rent-by-owner. RBOs are simply one facet of changes arising from the Internet that are responsible for many new expense categories and more pervasive discounting.  Among my conclusions is this:

     

    The legacy of the Internet (and Rent-By-Owner) evolution will not cause the eradication of mainstream rental managers but will result in the fundamental changes in what managers do and how they do it.

     

    Taking a Lesson from the Real Estate Industry

    We have seen a trend similar to rent-by-owner in real estate sales, when FSBO’s (“For Sale By Owner”) came into prominence on the back of new consumer-friendly Internet technology.

     

    In the early years, real estate agents worried that FSBO would put them out of business.  They saw FSBO as the enemy, and worked actively to oppose it.  In extreme examples, the government took action to prevent the industry from relegating FSBOs in the context of multiple listing services. 

     

    Before long, the National Association of Realtors was advising sales agents to find ways to work with FSBOs.  Their polls concluded that the vast majority of homeowners were reluctant to price their home on their own, market it properly, and do the related paperwork.  The FSBO trend peaked, and trailed off to occupy a fraction of the industry’s annual sales.

     

    The FSBO trend changed the industry.  Many real estate agents began to offer services a la carte. They let FSBOs pay them to do almost any aspect of the sale:  provision of signs, marketing, MLS listings, and the like.  The industry also departed from its commission structures to become much more competitive.

     

    Changes in Our Industry

     

    Today, there are many new rental managers who began by renting their own homes.  They started out as rent-by-owners and evolved into a new breed of rental managers.  Such companies have leveraged the Internet to redefine the way they do business.  Many do not have central offices and don’t require renters to check in and check out.  Many are able to service far larger geographical areas.  Some rely primarily on the Internet for bookings and/or allow their reservations staff to work from home.

     

    The net effect is a category of vacation rental companies that have lower costs than mainstream competitors (and provide less service).  They are able to charge lower commissions, or spend more money on Internet marketing.  This new breed is growing, proving that mainstream rental managers have many homeowners and renters who would accept less service in order to get lower prices.  This new breed is steadily stealing inventory and market share from mainstream managers.

     

    There will be many markets in which there is no discernable change from the Internet.  But you cannot afford to take this for granted.  Change can occur if one of your mainstream competitors is sold to a new-breed rental manager. Rental managers must always have a contingency plan.

     

    1. Think about ways your company can profit by providing services to RBOs;
    2. While you are at it, consider services to vacation home owners who do not rent;

     

    Also consider whether it can be in your company’s interest:

     

    • To specialize in a type of vacation rentals that is efficient (high-end luxury homes; or more basic “Motel-6” type properties, etc.);
    • If you are large and secure in your market, split your operations into two or more distinct businesses;
    • To offer a la carte services so the renter and homeowner need only pay for services they really want.

     

    As farfetched as some of these ideas sound, we are seeing similar trends in industries where the business models were so perfected that such changes would have been considered unthinkable ten years ago.

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