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.