By Ben Edwards — The vacation rental landscape is changing as multi-billion dollar investments into the industry illuminate our profession. For years now, operating a vacation rental company has been a rewarding experience and profitable business investment. I continue to believe that the industry will always be rewarding, but this year, the way in which you manage your business should change in an effort to ensure your business remains a profitable venture for years to come. This is the year to transform your operation into a more profitable, effective and determined company.
Why is this year any different than years past?
Here are four reasons that underscore the need to transform your business:
1. Increasing competition
2. Increased expenses
3. Lack of financial oversight
4. Lack of process
1. Increased Competition
I often joke that as you cross the state line into Florida these days, there is someone standing there with a login to your new listing site and a “how to” guide for starting your own vacation rental business. While that is not the case, I know each of us feels the increased competition (old and new) in our respective markets. Frankly, I’m glad to see new entrants in the market, that’s not the issue. It is the establishment of a vacation rental company or a current operating company without a focus on standards, ethical operations and financial management that causes concern. I realize there are a number of start-ups and long-standing companies that are grounded in strong business practices, but the majority are not properly focused. By not being properly focused, the operations of that company adversely affect the vacation rental marketplace in a number of ways.
Primarily, profit margins decrease as a result of commission negotiation. Inevitably, companies immediately reduce commission. It’s easy to do, which is why it’s offered first when a prospective owner questions it. Imagine if each operation decided to more clearly articulate the services offered and explain the need to make a reasonable commission and ultimately a reasonable profit to have a sustainable business model. Collectively, the market or the industry could begin to focus on service as opposed to cutting commission and further highlight the attributes of a professional vacation rental manager.
Secondarily, there doesn’t seem to be a boundary anymore relative to solicitation. The competitive environment has changed and will probably never return to the days of old. In years past, general solicitations were sent to prospective owners articulating the value proposition of a company. Now days, reduced pricing and revenue guarantees flood an owner’s mailbox.
As it relates to guaranteed revenue, in certain cases, this is tantamount to gambling. I would submit that if a company does not have the financial reserve to effectively guarantee future revenue, then it is considered gambling on the outcome of the property. Of course, the vacation rental manager has the opportunity to make up the difference in what was produced and the guaranteed amount, but what does this say about the industry or the manager. This practice creates a more difficult marketplace in which to operate and may not be a sustainable business practice.
Becoming a member of the Vacation Rental Managers Association (VRMA) may be the best way to educate vacation rental management companies, new and old, on better and more sustainable business practices. The VRMA provides an environment of professional learning and a road map to creating a sustainable business through seminars, networking and access to ancillary vendors and skilled contractors.
Increased competition is good for the industry, provided its good competition. A focused and professional company will always outperform the market and operate sustainably for the benefit of employees, stakeholders, the community and the industry.
2. Increased Expenses
General operating expenses continue to increase, adversely impacting profit margins. From new “must-have” technology to increased booking fees from online travel agencies (OTAs) and distribution channels, vacation rental managers are forced to manage expenses more acutely.
It is important to understand the return on investment (ROI) of every initiative within the business, specifically marketing expenses. In year past, it may have been acceptable to float through the year managing macro cash-flows, but those days are over. Vacation rental managers are now being required to perform an ROI on every program in the business on a recurring basis. Vacation rental mangers not reviewing this information are simply going with the flow, and going with the flow will most certainly decrease profits.
Life was good. Utilize a few OTAs, produce some revenue and everyone was happy. Now that traveler fees have been implemented, margins are decreasing over night, forcing vacation rental managers to reassess their marketing plans. I have spoken with numerous vacation rental managers over the past month and all are concerned about the shift in traveler fees for a couple of reasons.
First, the obvious takeaway is that by adding an additional percentage to each reservation, general traffic and bookings will decrease. I think this is a genuine concern. Travelers, in the short-term, will attempt to book directly with the vacation rental manager utilizing certain listings sites as a billboard. This is what is known as the “billboard effect.” OTAs know that travelers will use their website to simply survey availability and pricing and will ultimately attempt to curtail that practice. As the billboard effect increases, OTAs will combat this traveler work around, historically, by raising fees, commissions and implementing more onerous restrictions and booking rules.
This brings to me to my second concern, associated with increasing expenses. There is a myriad of concerns aggregated into “what’s next” and how that will affect the industry. The next major issue I see is that vacation rental managers will not be able to control travelers booking directly with the OTA or distribution channel. That said, can you blame a traveler for not wanting to save ten percent? This loss of revenue will ultimately force OTAs and distribution channels to demand rate parity. Rate parity is generally a contractual request made by the OTAs or distribution channels to ensure that the rates presented are the same on both sites, providing an equal playing field of sorts for selling vacation rental inventory.
Until this happens, travelers will continue to work around the fee and book with the management company directly. The issue is that rate parity will come as an additional expense to the vacation rental manager. Obviously, managers are upset about the addition of new traveler fees, but this was a matter of time as corporations survive on profits. Until vacation rental managers create a multi-faceted marketing program and decrease their dependence on any one particular marketing channel, they will be susceptible to increases in marketing expenses.
3. Lack of Financial Oversight
Too many managers are going out of business, leaving guests displaced and owners owed money. These issues do not happen overnight and are a result of poor business practices, unsustainable business models and lack of financial oversight. The majority of the vacation rental industry does not have sound financial practices, much less oversight.
Many vacation rental managers focus on macro cash flow or gross revenue as an indicator of performance. In today’s marketplace, that’s not enough. I’m not saying that every vacation rental manager that has little to no financial oversight will go out of business, although there are plenty of examples. More importantly, fundamental financial oversight is needed to ensure sound business decisions are made and a material profit is generated within the business. Sound business decisions and reasonable profits create sustainable operations.
Assuming that financial reports are created on a monthly basis, a review is needed to ensure the company is on the right track. Reviewing revenues and expenses as compared to the prior year is a great start. This will provide a baseline of results in which to determine performance, provided the operations and property count are similar year over year.
Creating a budget will ultimately provide the best mechanism to manage profitability. Once created, managing budgeted versus actual results is the best way to ascertain the financial condition of the business and further fine-tune the profitability. Having a sound financial process that produces timely, consistent and accurate results will ensure that the business is run at an optimum level, and the lack of these processes remains a growing concern.
4. Lack of Process
Since starting out in the vacation rental business, I’ve always felt that if you cannot measure the business, you can’t effectively manage it. There is a tremendous opportunity in the industry to instill more effective business practices through proven processes. From reservations call conversion to housekeeping management, opportunities exist to further measure the business in a manner to glean more information about a particular practice and refine a process.
As an example, most vacation rental management companies review the revenue produced by reservation agents to determine individualized performance. A better approach would be to determine the number of qualified reservation calls taken and compare that to the number of reservations booked, providing a call conversion percentage. Comparing a call conversion percentage across reservationists will ensure an “apples to apples” comparison of production and staff. In the event conversion for a particular agent declines, certain coaching mechanisms can be implemented to increase performance.
Housekeeping inspection management is another process wrought with inefficiency. Each property on the rental program should have a specific inspection form to ensure that all pertinent areas of the property inspected. This can be done manually or electronically. Either way, these forms should be electronically filed within the property folder. Having this information for future reference is extremely helpful. Furthermore, taking pictures and having those filed electronically will remove all doubt in the event an issue arises.
Developing a review process as it relates to property rates is paramount in revenue management. There are number of tools available to vacation rental managers these days, such as Smart Host, which provides pricing recommendations designed to maximize a property’s revenue and reservation performance. Even without automated tools, vacation rental managers can perform a revenue and rate analysis manually. Monitoring occupancy for future months is crucial in determining whether to increase or decrease the rate. At any point in time, a vacation rental manager should be driving occupancy or rate. Because the two are tied to each other, slight decreases in rate should generally drive occupancy. Knowing this relationship, added to monitoring reservations and booking pace reports will certainly increase revenue.
Hoping that certain processes are operating effectively is no longer workable. Further measurement of certain processes across the business will create a more effective operation. Operating a more effective operation breeds efficiency and higher profits.
As you can see, the industry is changing. Margins are being attacked requiring vacation rental managers to operate with more purpose. This is the year vacation rental managers are being forced to step up and take hold of the business to safeguard their operations. Many vacation rental managers will take notice of these changes in the industry and chart a new course for their business. Those vacation rental managers will be the new pioneers of the industry, operating profitable and sustainable business operations. Flexibility for the future is vital, and being able to pivot using financial and operational data is imperative.
As always, please feel free to contact us directly, should you wish to discuss any of theses changes and how to chart a new path for your business. One constant in the vacation rental industry is change, and change always brings opportunity. Good luck charting a more effective pathway for your business in 2016.
By Ben Edwards, Weatherby Consulting
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