Examining how VRM’s can get the most return for their investment in growth
Warning. Spoilers ahead.
In 2001, Billy Beane, the GM of the Oakland Athletics baseball team, was faced with a big problem. His team had just lost to the Yankees in the playoffs, and Beane was losing his three best players to teams that could pay them more money.
You see, The A’s had a payroll of $41 million. The Yankees, $125 million.
How could Beane rebuild his team while competing with organizations that had double or even triple the money to spend?
He knew he had to think differently to win, so he developed a new system of evaluating players to get the most bang for his buck.
Despite a rough start, upsetting his entire organization and nearly losing his job, Beane’s smart, data-driven decisions brought his team back to the playoffs the very next year. And, in the course of doing so, he forever changed the game of baseball.
Now that I’ve ruined the plot of the movie “Moneyball” for all of you who haven’t seen it, I’m going to tell you what it means for vacation rental managers.
Winning through smarter investments
As a business, the decision of where to invest your time, resources and money is one of the primary factors that separates winning companies from losing companies.
The goal behind any investment in your business is almost always to grow your profitability over the long term. This breaks down to either growing your revenue or reducing your costs.
Most vacation rental managers are like the Oakland Athletics. They have small budgets and are trying to compete with the New York Yankees and Boston Red Sox of the industry.
To win, they have to make smart decisions about where to spend their money.
The One Metric that Matters
In baseball, organizations traditionally looked at buying talent. Beane flipped that on its head and instead looked at buying runs, and boiled it down further to the single metric that mattered: getting people on base.
So, what’s the equivalent of “getting on base” in our industry? What’s the one thing that is at the root of how much revenue and profit your business can generate?
I argue it’s the quantity and quality of your homes.
In the vacation rental industry, we sell time in homes. But, each home only has so much time available each year. You can try to maximize your time sold (get more bookings) or increase the price of that time (revenue management). But, at the end of the day, both of those options have upper limits.
Disrupting the Old Belief Systems
For the traditional VRM, growing inventory has always somehow taken a back seat to getting more bookings, revenue management and even operations. You’ll see it reflected by the number of listings sites, revenue management companies and even property management softwares.
For me, this mindset is rooted in two primary beliefs:
- Growing your inventory is complicated
- The ROI is hard to calculate
However, forward-thinking VRMs are now challenging these beliefs. And reaping the benefits.
Running the Numbers
Let’s examine the return on investment of growing your inventory, using some industry averages.
- The average vacation home does about $35,000 in gross booking revenue (GBR) annually.
- The average profit a VRM sees for a home is about 10% of the GBR.
- And, the average lifetime of a vacation rental contract is about 10 years (based on the average churn rate of 10%).
That works out to a lifetime value of about $35,000 over 10 years, with $3,500 profit annually.
If it takes you one year to recover the cost of acquiring the property, then you start seeing profits in years 2-10.
Benchmarking that against a strong stock market performance of 15%, you can see just how outstanding the ROI of inventory growth really is over the long term (see graph).
Hiring a “Moneyball” General Manager
After Billy Beane pulled off his magic season for the Oakland A’s, the Boston Red Sox offered him the largest contract ever awarded to a general manager (in any sport).
But, Beane turned them down to stay in his small market.
At Vintory, we’ve worked out a system to help VRMs grow their inventory. But, we don’t want to be the GM for the Yankees or the Red Sox.
We want to help level the playing field for independent VRMs.
So, if you’re ready to start playing Moneyball, give us an at bat.
You can find us (and a bunch of free advice) at Vintory.com.