What do you do when a competitor threatens to steal your inventory or renters by offering lower commission or rental rates? This challenge presents itself when competitors:
- Set their seasonal rent at a level below your rates
- Put homes on website “specials” page at a discounted rent
- Solicit your homeowners with offers of lower commission rates
- Offer your homeowners free amenities or services to join their rental programs
I know what many of you want to do. But what makes business sense? The right approach is the one that leaves you with the most rental revenue. Unfortunately, the right approach is not always the most intuitive and can require you to speculate about customer behavior.
- If you lower rents or commissions once, will you brand yourself “price flexible?”
- Once you discount, will it be difficult to hold your regular prices with other or repeat customers?
- If you refuse to discount, will you lose rentals or homeowners?
- Will losing renters or homeowners snowball into migration of other homes and renters?
No one sets prices with complete certainty but you can perform the best if you have good technique and strategy. A good approach is to view pricing like a sports event that has both an offensive and defensive strategy.
For offense, begin by setting seasonal prices correctly and by knowing whether or not it is in your interest to use discounting to grow or protect your business, and how to discount most effectively.
For defense, create a foundation that will withstand competitive discounting by building knowledge of your product and markets and developing a business philosophy that is grounded in economics.
As to business philosophy, be wary of general principles that have brought you this far but which you promote and defend with emotional energy (we all have them):
- “We deliver good value and we never discount.”
- “If I discounted, I would undermine my ability to maintain my pricing structure.”
- “If I don’t match every discount, I’ll lose rentals and homeowners.”
The best business philosophy recognizes:
- Vacation rentals will always make financial sense no matter how low rents go as long as vacation homes continue to offer more value for the dollar than alternative lodging segments
- The Internet allows renters to depress rent levels whenever supply exceeds demands
- There is little you can do to protect a homeowner’s investment against discounting that arises from seasonal vacancies, predatory competitors or market downturns
- Price flexibility (dynamic pricing) a necessary evil
- There are opportunities to protect your pricing
Knowledge of your home(s) and market is your best defense against competitors discounting.
First, know your product and homeowners. For each home, make the effort to identify the homes with which it competes, including other homes you manage, in terms of size, features, quality, proximity and consumer appeal.
- One of your homes may be a commodity, like numerous others, that competes for renters during a low occupancy season; you have to discount to maintain your historic share of rentals
- Another home may be unique and does not need to be discounted during low occupancy seasons because it has no peers, because its peers are not being discounted or because all competing homes are in your own rental program
- Work to understand whether you lose money on seasonally discounted homes after add-on fees are taken into account. If not, don’t hesitate to match competitive discounts during off-peak times where this will make your homeowner happy and keep his peak season rents in your program.
- Offseason rents are often so low that they lose money for rental managers. Where offseason rentals benefit homeowners only, match competitive discounts only where necessary to prevent your homeowner from leaving.
- Also remember that homeowners, especially those with good homes, generally prefer rental programs that offer homes of equal or higher quality. In this case, think about whether losing or retaining a homeowner over your discount policy will nudge other homeowners to join or leave your rental program.
Secondly, make sure you monitor and understand your market.
- What’s Up with Your Competitors?
- If you have aggressive or up-and-coming competitors, you might have no choice but to match or beat their discounts to prevent them from “buying” market share by hijacking your customers (“We have more quality homes” or “We get more rentals per home.”)
- If you know most of your competitors won’t discount aggressively during lower occupancy seasons, you can ignore an occasional competitive discount and hold your prices at levels renters are willing to pay for the week in question.
- If you have multiple competitors who are discounting during a time when supply exceeds demand, your options are to match every discount or risk foregoing any rental for the period in question.
- Mature or Growing Market: You must fight hard to retain your homeowners if your market has matured, exemplified by little or no growth of rental homes in your area.
- Tracking the balance of supply and demand for each week of the year
When there is more supply than demand; renters have bargaining power thanks to the Internet—price competitively or forego the rental after asking yourself: If I get fewer rentals than competing homes, will more homeowners leave me than if I match discounts? Where will I likely lose the most money?
Price right initially by monitoring the duration and amount of seasonal discounting by competing homes. Then monitor your competitors’ discounting and booking pace. Decide how discounting is likely to cause your inventory to decline, hold steady, or grow. Think carefully about whether your company’s long and short-term interests conflict:
- Do you need to match competitors’ discounts and lose money for a few rentals in order to protect several years of revenue?
- Is a competitor stealing your inventory and hurting your brand image by discounting steeply to get bragging rights that attract your homeowners (“I booked more rentals than my competitors.”)?
- Do you dominate any market by managing most of the homes in a particular category so you can maximize revenue by refusing to discount at all?
What we thought of as “discounting” yesterday is today better thought of as “dynamic pricing” that requires quick adjustment in response to supply and demand. The pressure to discount cannot be successfully addressed by inflexible policies. It is easy to calculate how discounting will erode your historical rental income in the short-term. It is more difficult, but more necessary in today’s Internet world, to acknowledge that the decision to discount or not has both short and long term consequences that often conflict.