The Second Annual Data and Revenue Management (DARM) Master Class may be the quintessential illustration of the vacation rental industry in 2020.
After DARM’s incredibly successful debut in 2019, the vacation rental industry—if not the entire hospitality industry—eagerly awaited the second installment of what was certain to become an industry staple for the foreseeable future.
And then, you know, 2020.
The conference, planned for Denver in August, moved to a digital platform in September. No big deal. Then the team that put so much work into planning and organizing the conference got hammered by Hurricane Sally, which knocked out their power and even their ability to participate in the second day of the conference.
But just like 2020 itself—with its roller coaster from “things are great” in February to “worst-ever” in March to “more-than-rebounded” in May—our industry responded. Conference planners and attendees did not sit idly by and wring their hands. Volunteers across the country stepped in to facilitate things for Amy Hinote and the team, and from where I sat, the results were extraordinary. Kudos across the board.
The Big Picture of Revenue Management
Just as the conference team adapted to changing conditions in 2020, we have had to reexamine how we’ve used historic data to forecast booking patterns, predict ADR, and drive Revenue Management with a heavy reliance on pricing. Fortunately, many experts, including Dr. Kelly McGuire, went out of their way to point out that setting prices is just one of many tools at your disposal—and at times not even the most useful or powerful one.
As the conference’s name implies, it is Revenue Management (with a capital “RM”) that is actually the critical discipline. Having the right data—and correctly using it—is essential to performing this function successfully.
This naturally raises the questions: What data should you be looking at? And what should you do as a result of what you see?
The first place to start is your own business. Before you can understand the market, or the competing players, or other factors, you need to understand yourself. Specifically, you need to understand your costs and your cost structure.
Start with your fixed costs. These are the costs you will incur whether you bring in revenue or not. Fixed costs typically are mostly employee costs and rent for your office(s) but will also include items like insurance premiums, property taxes, and more. Understand not only what these costs totaled in the past, but what they are right now and how they might change for the upcoming month and year.
Knowing fixed costs is crucial because it sets your baseline for how much revenue you must bring in to keep the lights on. For example, if your fixed costs total $500,000 for the year, then you must bring in at least $500,000 in operating profit to stay in business. This is your break-even number.
Once you understand your business’s fixed costs, you can start digging into your variable costs. These are the costs you only incur when you are generating revenue. The biggest buckets are usually owner payments and cleaning costs, but your variable costs probably also include third-party booking fees, marketing expenses, laundry, and more.
Calculating these numbers helps you determine how much each new rental costs—and thus how much you actually make. Your revenue, minus these costs, will give you your operating profit.
Let’s say that, on average, each of your properties brings in $40,000 in revenue over the course of the year—and, on average, you have $35,000 in variable costs to service those rentals. This leaves $5,000 in operating profit for each property (again, on average). Referring to the example above, if your fixed costs total $500,000, you would need to manage 100 such homes ($5,000 x 100 = $500,000) just to break even and doing so would earn you $0 in profit.
If you only have 50 homes, or even 80, you are running a charity— not a business. Having a business serving only 50 homes, but with fixed costs scaled for 100 homes, will end in a financial disaster, no matter how happy you are making your owners and guests.
Understanding these numbers tells you whether or how much you need to cut costs—or how aggressively you need to grow.
Once you have done the work above and you understand what your business needs to succeed overall, it’s time to dig a level deeper— because averages can hide wide variations.
For example, if you have 100 homes that average $5,000 in operating profit, it could mean that every home brings in just around $5,000. Or, it could mean that 50 homes each bring in $15,000 in operating profit, while the other half of your portfolio is losing $5,000 for you every single year. Or it could mean something else entirely.
The average alone doesn’t tell you what you need to know to manage your revenue effectively. You have to do the more difficult work of property-by-property analysis. This means treating each home as if it were its own business, with its own profit and loss (P&L).
You want to understand what your operating profit looks like:
1) Which homes are your most profitable?
2) Which are your least profitable?
3) Are any of the homes actually losing money?
Now you can begin the real detective work of figuring out why your operating profit looks that way and how to improve it:
Why are your most profitable properties so profitable?
How can you find more homes like them?
How can you make your other homes more like them?
How can you turn around homes that lose money?
Is it worth the time and effort, or is it wiser to say goodbye?
Again, remember that you are running a business, not a nonprofit. (You hope.)
Then Go More Macro
Once you better understand your business and your P&L at a per-property level, zoom back out for a macro-level view of how your business fits in the context of your market, your competitors, and the industry as a whole. In doing this, however, be careful to not “boil the ocean,” as consultants often say when a project’s scope starts to balloon.
Here’s the thing about using data to drive your business: You don’t need scraped data on 10 million homes to understand your market. What you need is real and accurate data on the homes that are actually relevant to your business and your properties.
You may only need to analyze data for two to seven comparable properties for each of the homes you manage, and many of these properties probably overlap across your portfolio. As you dig in to understand your market, you should focus on quality over quantity. Filter the meaningful signal out of all the noise.
Revenue management is not about having more data. It’s about having the right data.
Pulling It Together
Compiling all this data—your business revenue, your operating profit, your per-property P&L, and your comparable market data— is just the start. You still have to decide what to do with the information you’ve gathered, based on your business goals, your industry experience, and your best judgment.
There will be times when it makes sense to quickly change course and adjust based on what the data is telling you (e.g., a big event moved its date by two weeks—so you drop prices dramatically for the original dates and raise them immediately on the new dates, before anyone books an unintentionally great deal). There will also be times when the data is informative, but you choose not to change your course (e.g., when others in your market are competing in a race to the bottom on nightly rent).
This is why Revenue Management is ultimately a blend of art and science. The data—how you collect it, how you cut it, and how you analyze it—is the science. The choices you make as a result of that data? Those are subjective, based on your own experience and judgement. They are, in a manner of speaking, art.
This principle rings truer than ever as we adapt our goals, contextualize our data, and deploy our best judgement to navigate the shifting landscape of this year.
Balancing the science and art of revenue management will help us not only survive but thrive as our industry moves forward, through 2020 and beyond.