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4 Posts tagged with the add-on_fees tag
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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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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.

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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

    In a recent blog, I suggested that you look for ways to become more efficient in 5 categories. In this blog, I include my thoughts about the third of these.

     

    Elimination of Unwanted Services. Would even one of your renters or homeowners volunteer to accept fewer services in return for a price discount? 

     

    If so, you are “over-serving” that customer.

     

    This generally happens when rental managers build up their services over the years to attract and keep their best (most profitable) customers. 

     

    If you only serve luxury homes or economy homes, you may be okay. 

     

    But we can take a lesson from hotel executives, who have learned that you can’t be all things to all people.  Hotels create multiple “brands” that allow customers to pay for the services and level of luxury they want.   If your competitive position is secure, consider splitting your program into two branded operations, one focusing on your high-end properties.  This will allow both groups to be more profitable.

     

    Or we can take a lesson from the airlines, which are lowering the base price of air travel by asking customers to pay extra for each accommodation they want.  I’ll cover this in a future blog titled, “This is a Good Time to Take a New Approach to Add-On Fees in Vacation Rentals.”

    If your rental program includes homes that run the full range of price and quality, you probably “over-serve” a good number of guests and homeowners who feel they are forced to pay for services they don’t need. 

     

    Your risk is that over-served renters and homeowners will leave your program to try a competitor who offers lower prices for less service.  So your best chance of protecting your existing customer base is to look for ways to appease renters or homeowners who will take less service in return for lower prices. 

     

    Don’t overlook opportunities just because they weren’t viable in the past.  For example, revisit questions like the following after doing some research on the Internet to see how new or innovative competitors are reshaping their business models.

     

    • Do you provide linens for all renters?  Or can they pay less money to rent a home that doesn’t have linens (or made beds)? 
    • What about designating homes that offer lower rents because they are “cleaned but not inspected” (“call for immediate response if you are dissatisfied”).  I know very good companies who have found ways to eliminate the cost of inspections.
    • Do you provide a welcome basket or special products (coffee, cookies, wine) to renters who might be willing to go without?
    • If you print a brochure, are all the homes paying their fair share of the costs?  What about revising your processes to include only those that do?
    • Do you require all guests to check in at your office?  “Express” check-in can free up staff time.

     

    You get the idea.  During a time of change, you have to be flexible and innovative to protect your customer base.  Get the staff together and revisit old assumptions