VAT for VR
Value Adding Technologies for Vacation Rentals

Why you cannot do good yield management in Vacation Rentals today- REVPAR is not enough

Jul 25, 2019 3:14:35 PM / by Eric Bordier

Yield management is crucial for vacation rentals - it is one of the few remaining levers that have an impact on a vacation rental company's bottom line. And today, it is a lever that is damn hard to use- which is why it is also an opportunity to for each company to  differenciate, and for our whole industry to improve. 

Let's start with a quick reminder of the stakes. 
Pricing is an essential lever for any company - this McKinsey article https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-power-of-pricing  shows a price increase of 1% often typically increases profits by 8%.
That importance is even higher in vacation rentals, because our inventory is perishable - holes in grids are direct losses. 
And pricing is one of the few powerful levers left for short term rental companies. The growth of OTA's, who represent 70% of bookings in Europe and 50% in the U.S. has reduced the degrees of freedom in marketing. Increased competition and the spread of operational know-how mean most players get good reviews.  Inventory growth- adding- properties- is still a powerful lever, but regulations slow it or limit it in many destinations. So when you look at your vacation rental company's Profit and Loss account, yield management is one of the most powerful actionable levers.

In this article, we'll see why it is so hard to use properly for vacation rentals- and how we can improve that.

Let’s look at a few goals we could set:
1. Consistency across channels
2. Efficacy - Maximizing revenue
3. Efficiency- maximizing revenue and minimizing costs

 

1. Rate consistency across channels

Different objectives are possible: rate parity or optimized channel mix. Whichever objective you set, consistency will be difficult to even approach, because each channel has its own set of allowed rate rules and policies.

Rate parity is theoretically mandatory in the U.S., although it does not seem enforced in vacation rentals. It has been breached in the EU as Booking.com lost several lawsuits in the hotel industry.
So many vacation rental players will rather try to optimize their channel mix- for example favoring direct sales to reduce dependency on channels and try to reduce distribution costs.

One key difficulty there is that since direct pricing (in which the OTA would directly request the price for a stay from the VR company’s property management software) is still a dream, most channels import a table of daily rates and enable their own set of rules. This set of available rules are limited and different per OTA, so consistency here is impossible (or at the price of efficiency).

Rate rules table 27.6.2019

 


1.1. Inconsistent rate rule structures


At this high level, it looks like the OTAs propose many common rules.
But no! This does not stand in real life, because if you look one level deeper, comparing for example the LOS rule possibilities for Booking.com and Airbnb, you see that possible lengths of stay are limited and the possible LOS do not even match. How can you achieve rate parity, or price consistency, in such conditions? You simply cannot… And that’s taking the simplest possible rate rule, one that makes obvious sense to all stakeholders.

 

LOS (Length of Stay) discount example

Airbnb Booking.com
Percent off the promoted price. You can set up three day up to a monthly discount. Percent off the promoted price. You can also define a Min LOS as well as set the time restriction.
Airbnb LOS discount BC LOC discount cropped
  BC LOS discount 2

Download sample rules across channels

1.1. Missing rate rules that are crucial for vacation rentals

 

LOS:

Not only are there inconsistencies across channels,  but they miss spans needed for VR- for example  Booking.com's Extranet does not enable extra discounts for stays longer than 7 nights.

So basically you are trying to fit a square peg into a round hole...

dreamstime_xxl_32853569-Square peg into a round hole

 

Other examples include but are not limited to:

Rate per term:  ex NY. Loss for guests. They may be willing to pay more for a 2 nights stay than the VR is asking for a 3 nights stay, but a min stay 3 nights rule will not show your property…and at the same time the VR manager may be waiting for a 3 nights demand that will not come.

 

Fitwell rules:  occupancy based rules reward stays that fit well in your grid, because they either fill a gap or at least stick to an existing booking on one of two sides. This enables to sell in priority the similar property for which that demand fills the grid, and leave other properties more available for another -potentially longer-stay.

 

So consistency is not achievable - unless you downgrade to the lowest common denominator -the mom and pop 70’s vacation rental pricing and restrictions:
Price defined per season (table)

  Low Middle High
Property A 30 50 90
Property B 40 60 100
...      

Minimum stay 7 days
Etc.

dreamstime_xxl_6870225-peeling square to fit into round leaves a lot on the table

But when doing that, you leave a lot on the table...

This has worked when all players played the same game with the same tools, but now that more modern players and tools rise, those who remain there will die in the competitive game. A bit as if someone tried to compete in tennis today with a racket and techniques from the 70s…

dreamstime_xxl_26677051-wooden-tennis-racket

 

1.3. Your tech stack can fill some of these gaps…but it most likely doesn’t.

Configuration:

Individual without a PMS

PMS

What you send to the channels

1. 

2. Daily rates from PMS+ rate rules in the channel

3. LOS table

4. Future

 

Impossible to be consistent using the Extranets of each channel, but at that level it does not matter so much.

Either the PMS lacks rate rules, or it exports to channels  a feed with just the daily rates that does not leverage the rules above.

Most rate rules (gap pricing, min per term, etc.) are used to define an LOS table combining arrival, departure, number of guests.

Direct pricing

 

Many leading PMSes are still stuck in 2: they generate a daily rates feed, and if the property manager wants to apply LOS discounts for example they have to add them in the Extranet- back to square 1. above.

legacy rate feed example 2019-07-08_11-53-25

This does not get better when you have to go through a channel manager instead of having a direct connection from your PMS into the channel:
feed through channel manager 2019-07-08_11-55-03

 

More modern vacation rental  softwares like BookingSync are able to apply rate rules from your PMS so that for each possible stay (defined by combining arrival, departure, number of guests),  the LOS table sent to the channel will already take into account rate rules like LOS, gap pricing, minimum rate per term, etc.).

So it is possible to do quite a good yield management for vacation rentals, but for many vacation rental companies a revision of your whole tech stack will be necessary - including potentially a change of PMS- Property Management System.

 

2. Efficacy: maximizing revenue and making it work- the tech stack issue

 

2.1. The missing rules limit revenue optimization

As detailed in point 1 and 4, missing rules prevent you from optimizing revenue and profit for your vacation rentals.

2.2. Implementing rate rules for each channel=x times rework and work costs

If your PMS does not support rate rules and you must implement them in the Extranet of each channel, then managing that extra complexity has a cost too...someone in your team has to update them. And the channels change rules structures and add new rules. it is a good thing...but the cost to monitor, leverage these rules and try to get at least partial consistency is extra work for your team. Last, but not least, this increases the risk of errors by your team and not having a clear vision of what the "right" price should be means your team will take longer to notice errors. So to do better, you must set up team trainings and monitorings. Again, this best practice has a cost.

2.3. The tech stack issue

 

2.3.1. Missing features in PMSes:

Many PMSes do not support Daily rates, only seasons - and the workaround defining each day as a season  can result in unexpected lags and bugs. 

We have seen in 1 examples of missing rate rules, but depending on softwares many others can be missing.

 

2.3.2. Incompatibilities across PMSes, channels managers and channels

Add to this how complex stacks (PMS+channel manager+channels+potentially pricing tools) imply complex configurations with their set of bugs, updates, lags and losses in refreshes and uploads. Whenever a weird price comes out of that on a channel, the list of suspects -points to check gets longer...

 

2.3.3. Pricing tools are filling some of these gaps, but they still have a significant way to go

Pricing tools like Beyond Pricing and Pricelabs can be of great help because they bring in more price monitoring of channels, event monitoring and can fill in PMS gaps like daily pricing and easy rates edits. 

That being said, they still have a distance to go. For example, a lot of weight in their algorithm is the monitoring of occupancy in Airbnb and Homeaway. While that can be very relevant in a U.S. coastal destination where those prevail, it might be less relevant in a European city where the weight of Booking.com is more important. See the Transparent European figures presented by Simon Lehmann (AJL)  in VRMA Prague. Also, hotel capacity might be huge compared to Airbnb in cities like Barcelona and Prague, so vacation rental companies would better monitor these prices closely.

20190318_174557 Europe-channels-sample-Transparent-AJL-VRMA-Prague

 Other spikes not always accounted for in time can be seasonal spikes due to moving holidays like Easter or Labor day.

So these tools have a great future and it makes a lot of sense for the whole system that instead of having each vacation rental manager go through the calendar of next year holidays and events and update rates, a few competing teams of each pricing tool will centralize the analysis in a shared effort. 

But today, just like self driving cars, these tools can't be blindly relied upon to automate.

2.3.5. Benchmarking tools can help

To know where you are doing well and what you can improve, benchmarking tools share anonymized data amongst vacation rentals companies. The most famous is Keydata dashboards. If the sample is not large enough in your destination, you may have to agree with other short term rental companies to share using that tool or spreadsheets to know how good your results really are. Often short term rentals associations are a good place to start this.

2.3.5. Changes and bugs will derail even the best set tech stack.

A major  channel that owns a PMS changed rate rules, feeding into their associated OTA only half of the rate rules- they trimmed a lot of what made our pricing efficient. Luckily, I had a process in place in which experienced reservationists gave the alarm when they noticed an inquiry through this channel for 50% of market price, but a lot of rework and tech debugging was needed before we could work with that channel again.

Years ago, another major channel started scraping our rates in euros and advertising these values as USD rates in the U.S...

Other changes like channels starting to  include fees in commission calculation,   switching to charging 14% commission from the owner, etc. will also affect any well set balance and require vigilance and adjustments. 

Changes in rate rules on channels: as they improve, - which is great- it is hard for VR managers to keep up with the changing set of rules.

 

 

3. Efficiency: achieving this with reasonable resources 

In consulting we used to distinguish efficacy and efficiency. 

Efficacy here means reaching the goal, making it work, which is hard enough as described above.

Efficiency means reaching the goal with minimum resources - which actually should be your main goal, because that's profit!

So let's look at the potential cost of a VR tech stack: for example Guesty 3% of booking value + Beyond pricing 1%+ Channel manager up to 4.5% +staffing+processes in the context of high channel costs around 15%. Add to this  growing competition including Russian roulette/amateur competitors and you get a challenge on profitability, for agencies that charge between 15 and 30% commissions to owners. Many of the Airbnb growth players will have to report to their shareholders when focus will switch from growth to profitability and ROI...

 

4. Actually, for short term rentals, yield management is not good enough as a goal

 

Actually, let’s take this one step up- in our case one step deeper in our profit and loss account. We cannot do good yield management, because yield management is good enough for hotels, but not for vacation rentals.

Let me explain. What is the ultimate measurement of success for a business? It is not revenue, not even profit, but return on investment- ROI.

OK, let’s simplify- often when we get to the pricing of a vacation rental, the investment side is already defined, so maximizing profit maximizes ROI. In a hotel, yield=ADR*occupancy is a good enough proxy.

What huge difference makes this proxy lousy for vacation rentals?

I remember how once in Florence Alex Nigg presented us turnover cost (cost to clean up a room in a hotel): 8 euros. It makes sense: a standardized room, small, without a kitchen, all rooms in the same location, etc… Compare that to the turnover costs in a vacation rental: just for the cleaning, you get the room+the living room+ the kitchen, and sometimes the pool, jacuzzi and barbecue. What makes our value proposition to guests also drives huge variable costs that are stellar compared to hotels.

And cleaning is just one of the costs- the reservationist’s job is more complicated and costly, and so is maintenance, software, etc.  and the cost of complexity is huge.

To put numbers on this, let’s take the cleaning and linen example: 8 euros for a hotel room, 30 euros for a studio in Prague, 70 dollars for a studio in LA, and hundreds of dollars for a villa in Florida…

And when we include variable costs per reservation, we get to 60 euros per reservation in Prague, etc.

Because the hotel invested and put in place many fixed costs that reduced variable costs…while variable costs can be neglected in a hotel to build the yield and profit equation, we cannot neglect them in vacation rentals.

Let me illustrate that case in a simple example:

 

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

Sunday

Next period empty

Scenario 1

o

o

o

a

o

o

o

a

Scenario 2

o

o

o

o

o

o

a

a

o=occupied

a=available

Hotel

Yield- revenue

Margin after cleaning and variable costs

1 six days booking

 

360

352

2 x 3 days booking

 

360

344

 

VR

Yield- revenue

Margin after cleaning and variable costs

1 six days booking

 

360

300

2 x 3days booking

 

360

240

REVPAR is good enough for hotels,
but Vacation Rentals must price for profit

VR partnership - REVPAR is good enough for hotels but not for vacation rentals

 

Let's zoom on the margin:

VRs must price for profit-not just for yield

 

 

Bonus: in scenario 2 for VR, not only do you have a higher margin, but you still have a chance to rent profitably the last night (Sunday in this case) for a longer stay since the following days are empty. In scenario 1, Thursday night is wasted, because you won’t rent it since market rate is above your variable costs -why go through the risks and complexity and work for a reservation that loses money?

Actually, you could make the case that scenario 2 is also better for guests and maximizes the use of your property which is better for the whole community- an empty property is a pity.😉

Of course, this has many implications on the way you set pricing goals, rate rules and policies, build your tech stack train your team.  Some are easy to guess, some much harder to think through and  implement in the context described above. I keep that for our consulting clients, but you see the direction…😉

 

How to upgrade to VRP- pricing for profit

 

5. Together, we could do great pricing for profit management

Let’s adopt a systemic perspective -looking at the whole VR industry including all stakeholders and see what could be, instead of what is.

Key players are already trying to improve

The OTA’s are trying to improve by adding rate rules and sharing data on performance and price vs. competition. Standardization would help. Overall, the diversity of PMSes and rules also costs them a lot of implementation, debugging, and costly mistakes that affect up to the guest. 

The PMSs are trying to improve and concentration will help. At least making sure LOS tables are built leveraging rules that optimize profitability will help. Direct connections to channels- like what https://www.getdirect.io/ favors-  will simplify flows. Reporting that will include better financial management KPI's than just occupancy and revenue to get into some contributions, margins and price quotes as illustrated in part 4 will help.

Pricing tools are improving. A lot of their features should actually be part of standard PMS offering (daily prices, direct price transmission into major channels, etc.). Benchmarking will also get easier and more meaningful as more and more short term rental companies share. 

One missing link is a common set of rate rules and standards so VR managers can manage these rules in one place. They do not have to be the only rules, but at least a core set of rules enabling good pricing for profit management and sharing of IT components. This would help reduce complexity for all stakeholders and get rid of costly bugs and reworks.

Another  missing link is in  data exchange, especially for price monitoring. Pricing tools help fill part of that gaps, but channels could share a lot of that in a structured way to save on scraping inefficiencies.  We could even benefit from sharing data with other travel industry players like Airlines etc, as https://adara.com/ facilitates. For example, knowing that planes and trains to your destination fill up quickly for a certain date will help you set prices from that date. 

This is why I propose to create a consortium (we might take inspiration from Consortiums that set standards in other industries.). It would define a set of recommended rules and formats. Companies would be able to add innovative rules and features, but would be encouraged to implement and propose at least that set of basic rules. 

In an agile spirit, this would have to be led by the 3 major OTA could join that effort at the beginning- Booking.com, VRBO and Airbnb.  Then 7 to 10 leading PMSes would join the effort.  Other channels and PMSes  could be associated/informed, but discussions would have to be led by a small number to be efficient.   Vacation rental companies will give their input- VRMA will be one of the good places to do that, I will propose it as a topic for VRMA Europe 2020 in Lisabon, together with vacation rental Softwares and technologies.

 

 

Join or follow the VRC - Vacation Rental Consortium

 

 

6. Conclusion:

You cannot do good yield management in vacation rentals today.
Neither can I.
Nor can anyone, in my opinion. Well, through workarounds and an optimized updated tech stacks and processes we can get pretty close with a lot of work, and that can already be great.

But together we could enable great pricing for profit management in vacation rentals, to the greater satisfaction of all stakeholders- vacation rental companies, OTAs, technology providers, and -last, but not least- our guests😊.

 

 

 

 

 

 

Topics: vacationrentals, data, yieldmanagement, shorttermrentals, revenuemanagement

Eric Bordier

Written by Eric Bordier