By George Volsky -Revenue management is what we do to maximize profits.
It is more complex for our industry than for hotels. Most managers manage revenue within varying but sustainable parameters. But few understand how/when to modify revenue management components for competitive advantage.
Revenue management can include pricing, product selection, expense reduction, marketing, and fees. But some elements are more important than others.
This article focuses on how and why the core concepts integrate so that managers can adapt to the changing market and better set priorities.
The Sale: Inventory and Pricing
To manage revenue, it is necessary to have revenue. Revenue requires a sale.
Sales involve a supplier (a homeowner), a buyer (renter) and a market place (the manager’s website or brochure, reservation staff and software).
Sales occur through a market place when a homeowner provides a rental home to an interested renter at a price the renter is both willing and able to pay.
Revenue management challenges arise from truths such as these:
- If a renter wants a 4 bedroom home and the manager doesn’t have one, there will be no sale.
- If a renter can’t afford a manager’s 4-bedroom home, there will be no sale.
- If competitors offer comparable 4-bedroom homes cheaper … no sale.
Thus we illustrate, in revenue management, that inventory is king. A home that is in demand books well and is more immune to price competition from lower-tier inventory.
The way to grow revenue is to grow inventory.
The best way to grow inventory is to get more bookings for your best homes.
We can also illustrate, in revenue management, why pricing is queen. Occupancy rates in vacation rentals average just 37%. There are more rental homes than renters. Price is the primary influence as to which comparable homes book or stay vacant. Competitors who get more bookings get more homes.
Rate setting is an interactive sport. Set rents too high and you will lose rentals. Set them too low and you will generate less revenue for homeowner. Either way, homeowners will defect to competitors.
Every home is a good value to someone one at some price, but not at all times. Pricing has two components. First, it requires us to determine the highest rent that can be charged each season without losing an interested renter. Secondly, rents must be adjusted for changes in supply and demand.
If you were your market’s first vacation rental manager, you started by setting rates by feel. You priced your best home during the best season by any method you could think of. Then you priced less appealing homes at lower rent levels and watched to see what happened.
Eventually, you fine tuned rents after many conversations with renters who were offered different homes. You looked at booking results over several years to observe how similar homes booked based on different prices set by different homeowners.
If you were your market’s second vacation rental manager, you started by using the first manager’s homes as comps. You might have adjusted rents up or down depending on a home amenities or your pricing strategy (you might price 10% lower in an effort to divert the competitor’s renters).
As years went by, you and possibly your competitors would fine tune pricing by developing information systems to help you set and adjust pricing based on trends. Information systems must tell you:
- How is your company’s booking pace this date this year versus the same date last year?
- How does this compare to year-to-date booking pace for specific homes or groups of homes?
- How is the booking pace for our market as a whole (or for key competitors)?
- How would price adjustments affect bookings and impact revenues?
At their most sophisticated levels, information systems can help you determine why booking pace is behind. They identify problems before homeowners or competitors see them, and help you take proactive steps to generate more bookings than competitors, answering such questions as:
- Are renters being diverted to better or discounted homes?
- Has a competitor under-priced us through Internet specials or modified pricing seasons?
- Are rent-by-owner homes under pricing us and diverting renters?
- Can we catch up with last year’s numbers without discounting in response to this slow pace?
These information systems are seldom present in the reservation software systems. They usually require managers to extract data from the reservation system and from a competitor’s website. But some kind of system can be developed for every manager, no matter what his size, time, or budget.
Just beware of statistics pulled from other markets—each market is different. And don’t base rents on averages for bedroom sizes without the ability to differentiate locations and amenities. Broad-brush metrics are most often misleading because each home, neighborhood and market is unique.
Rate setting is just the first step. The real key to revenue management is in dividing money between the company and homeowner through a combination of commissions and fees. Good commission structure involves elements of pricing psychology and revenue forecasting, and generates more money from fees.
Psychology plays a role because homeowners are influenced by a manager’s nominal commission rate. There are definite advantages to having a lower commission rate and higher fees.
Psychology is also important because managers have to sell stakeholders on every new fee. Stakeholders respond differently depending on whether the fee is a visible line item or buried in the advertised rent, imposed on the renter or on the homeowner, and optional or mandatory.
It takes experience and a good understanding of industry profit drivers to strike a balance between commission and fee revenue. For every fee, a manager must decide whether to impose it on a per-reservation or per-night basis, and whether to charge a different fee for different home categories.
Fees are an ever growing staple of revenue management because the Internet has made it possible for renters to compare rents and know when managers have many vacancies. This gives renters bargaining power and forces managers to adjust rates constantly. Fees insulate managers from discounting.
It is important for a manager to set a proper foundation while there is opportunity to do so. Where one competitor has a superior fee structure, this can affect survival when market growth slows and otherwise make enormous differences in profitability.
While this article cannot address the complexities of each component, it hopefully identifies the important components of revenue management. It is important to know that each of them is critical.
For a helpful self-check, underline each of the key concepts and mentally review whether/ how your own systems deal with each one. If you are missing one, you are missing an important revenue opportunity.
For more information, read articles, talk to other managers, or feel free to ask us.