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2 Posts tagged with the commission tag
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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.