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.