The way guests book vacation rentals (VRs) has changed dramatically in the past five years.
One of our Gulf Coast clients with 200 properties experienced this firsthand. Just three years ago, they were booking 60 percent of their guests by phone. This year, they’re booking 75 percent online, thanks to listings on Expedia, Booking. com, Airbnb, and Vrbo.
Why the shift? “Because more people book online now!” exclaimed their operating partner. And he’s right. According to Phocuswright, 70 percent of all VR bookings were expected to be made through online partners rather than directly with property managers last year.
As we all know, Vrbo was the original listing site for short-term rentals, but hotel-style online travel agencies have gotten in on the action. New entrants and changing listing terms at Vrbo (and HomeAway) over the past few years have created five VR marketplaces, each operating in similar ways but each with their own pros and cons.
Vrbo and Airbnb are native VR sites—visitors expect to book at a VR and are the same guests who look for short-term rentals year after year. This is a good market, but much smaller than the audience looking for lodging options on Expedia and Booking.com.
You can certainly fight it out for a bigger slice of the pie, but why not add a newer and much larger pie? There are millions of new potential VR guests loyal to Expedia and Booking.com you need to get in front of.
From my conversations around the United States, I hear property managers acknowledge this trend, but they hesitate because of the higher price the hotel-style channels charge and the resistant homeowners’ voice.
In this article, I’d like to share a few data points to help you convince your homeowners they are missing out big-time by not promoting their homes on Expedia and Booking.com. These crucial points will help you explain to them why paying higher commissions makes sense.
Largest Audience
My mom always said there’s safety in numbers, and this definitely applies to occupancy. The key to maximizing rental income is promoting your property to the largest pool of potential guests.
According to SimilarWeb, Booking.com and Expedia have more than four times the number of monthly US-based site visits of Vrbo and HomeAway combined.
New Guests are Worth More
Repeat guests are important, but attracting new guests is essential for rental income growth. Without a purposeful strategy to attract and book new guests, your business will unfortunately decline over time through attrition.
Fortunately, now is a fantastic time to be seeking new vacation rental guests. According to Skift, demand for nonhotel accommodations is rising 30 percent to 40 percent faster than for hotels. And for good reason: The value of short-term rentals is undeniable.
Earlier this year, Booking.com released news that only 20 percent of its revenue is from alternative accommodations. However, 35 percent of its bookers say they want to stay in a home. That means millions of potential new guests are looking for a home but have yet to stay in one.
Free Exposure
Your home’s exposure is the key to attracting new guests. Listing your property for millions to view costs nothing, because you only pay when it’s booked. And making an impression is the surest way to be remembered when guests begin planning their travel. This is an excellent way to build your brand and awareness of your home with millions of potential guests.
Booking Safety Net
Each of these online channels is used by slightly different guests. Some channels cater to those who book long weekends more frequently than week-long stays. Some cater to millennials more than to baby boomers. Some are used more frequently by last-minute shoppers than by those who book six months in advance.
My point is that the surest way to maximize occupancy is to list your home for all these potential guest types to see. Last-minute cancellation? No problem. You’re already visible to other last-minute shoppers. Slower shoulder season? When the weather’s good, and people want to plan a getaway, you’re already there.
An Advantage for First Movers Who Get It Right
Expedia and Booking.com built huge businesses as hotel-specific listing sites. As you know, they’ve been adding vacation rentals to their platforms for the past several years. Expedia’s $3.9 billion acquisition of HomeAway is Exhibit A in this market shift.
Although some VRs have been listed on these sites for several years now, many struggle to create listings that perform. Translating the added complexity of a VR home’s additional amenities into these platforms is difficult.
There’s a big opportunity to list your homes on these platforms as traditional hotel guests continue to shift to looking for higher-value homes for the first time. You want these guests to find your homes the first time they look; this gives you the best chance of building lifelong, loyal guests.
Acquiring New Guests Costs More
A senior executive at a large VR company recently told me that its PPC costs have increased 190 percent in the past 18 months. Acquiring new guests has never been so expensive, while property manager commissions get smaller and smaller.
The biggest complaint I hear about Expedia and Booking.com is that their commission rates are too high. However, when you evaluate these commission rates in light of today’s true costs of acquiring new guests, many property managers are finding OTAs are in fact cost effective in this new reality.
So, in summary—a quick review of the incremental value of listing on Expedia, Booking.com, and all of their affiliates:
1) Four Times the Audience
There’s no substitute for promoting your homes to the largest pool of qualified consumers in the United States. Fish where the fishing is good!
2) New Guests
They’re more costly to acquire, but they’re your source of growth. Shoot for at least 40 percent new guests each year, and you’ll have a very healthy, growing business.
3) Booking Safety Net
You’ll fill more of your availability by promoting your home to more kinds of potential guests, particularly in shoulder and off-seasons. Neutralize some of your risk by listing on all the major platforms.
4) Free Exposure
Millions will see your listing, but you only pay when bookings are made. Imagine paying for traditional media ads this way? The “Billboard Effect” is alive and well.
Four Options for Handling Higher Commission Rates
If these higher costs still give you pause, property managers have a few options for offsetting the higher commission rates. Here are four I’ve encountered across the United States. I think your risk tolerance is key to selecting the right option for you and your business.
1) Increase the management fee by x percent.
Adding x percent to your overall management fee effectively amortizes incremental acquisition costs across all bookings. This smaller incremental fee per booking pays for costs associated with actively managing the optimal revenue mix and ensures consistency across your book of business. Competitive pressures in your market may render this option a nonstarter, so please consider the value you deliver vis-à-vis your competitors’ management fees. (And some of you need to stop rolling your eyes.)
2) Deduct the commission rate before the revenue split.
This is the most common approach I’ve encountered and is what I used as a property manager. A more precise cost attribution model, this method applies the incremental costs to each booking. This ensures you pay the appropriate fee for each booking. In this model, the property manager and homeowner effectively share the acquisition cost.
3) Add the rental fee (or boost rent) to cover incremental costs.
Increase each property’s rent for any given period by the amount of the incremental commission paid. This is the surest way to recover these incremental costs, but be careful: Conversion rate may suffer if the resulting price outpaces the market rate. At some point, rate parity may become a problem, but as of now, you need to make sure you have rate parity across your channels.
4) Use a pay-to-play opt-in for homeowners.
A few property managers have offered homeowners the option to list, but with an upcharge for these new external marketing costs.
There’s never been a better time to build your business, as an increasing number of traditional hotel guests look for higher-value short-term rentals.
Our industry continues to flourish, in large part due to this guest migration. Now is the time to get your homes in front of these first-time guests, and the best way to get them there is to list your homes on Expedia and Booking.com.
Scott Dobos
February 22, 2020 at 9:51 am
Great article, Michelle. Thank you for putting this together. Knowing what the consumer acquisition cost is can be a vital data point for us working in the vacation rental world!