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.