Dynamic Pricing Doesn't Always Mean Discounting

By Steve Murch, Chairman

Two of Escapia's predictions are that (a) vacation rental pricing is likely to become more dynamic in the future, and (b) this will be a very good thing for the industry in terms of occupancy and overall revenue.

In other words, in the not-so-distant future, we think it is highly unlikely that the revenue-maximizing strategy will be to set just a few fixed rates for the year -- e.g., a high season and a low season, and perhaps special holiday rates -- and let them sit there, all year.

In fact, we don't believe that this is the best revenue-maximizing strategy today. 

Such fixed-pricing strategies evolved primarily from marketing channel necessity.  That is, until very recently, the most important marketing channels -- namely printed advertising and brochures -- required static rates.  But such long-lead marketing channels no longer rule the roost.  The Internet, which has rapidly become the most important channel for researching, browsing and reserving travel, requires no such rigid pricing.

And, as consumers, we have all come to expect dynamic pricing in all other areas of travel purchase, from the rental car, the gasoline that fuels it, the hotel room and airline seat.  Economic pressures and the desire to increase overall revenue and occupancy should continue to cause the industry to price more dynamically. 

For these and other reasons, it should come as no surprise that it's likely to come to our industry, as the tools to manage it improve.  Like the airlines and hotels, we predict dynamic pricing will take hold with a few thought-leaders at first.  They'll see significant upside in revenue in occupancy, ultimately bringing the rest of the market aboard in relatively short order.

Consider this: in Hawaii, the Visitors Bureau regularly reports average hotel occupancy about 80%-88% year-round, yet in the same market, the average vacation rental occupancy floats around 40%, and is much more seasonal. 

Certainly, hotels benefit from convention and conference traffic, which provides some measure of off-season smoothing, and it's certainly true that vacation rentals are harder to find, and undermarketed... but vacation rentals are usually a far better value, with more room, more ameneties, and have a lot to offer.  What accounts for such a large gap in occupancy levels?

We think part of the answer is that hotels (and airlines, and cruise lines, and rental car agencies) do a much better job employing revenue-management strategies than our industry does. 

Revenue management need not be overly complex to have a positive impact on the bottom line.  Take last-minute bookings, for instance.  Do you have a formalized last-minute booking program, to go over all "soon to be distressed" properties and proactively market them?  If a vacation rental is unbooked 21 days in from the stay-date, we believe it should generally be automatically discounted (assuming the owner agrees.)  We also believe it should be easy for consumers to find.

To compete with hotels for leisure travel dollars, we believe the vacation rental industry needs dramatically better, and more automated decision-making and management tools to properly price, showcase and distribute bookable inventory (which are at various levels of "distress") to the various channels (e.g., vacation packagers, online travel agents, online travel discounters, tourist boards, travel agents, group travel agents, destination marketing organizations, etc.) 

At Escapia, we think there's a tremendous untapped opportunity for our clients, and are working hard to enable it.  In the $18 billion US vacation rental industry, just a 10% lift in occupancy -- from 40% to 44% -- could yield an additional $1 and $2 billion in overall revenue.

Our first such dynamic pricing offering is described in our recent announcement of the First Fully Integrated Dynamic Pricing Engine for the Vacation Rental Market, which focuses initially on Last Minute pricing.  This is just the first phase of futue offerings. 

While Last Minute is perhaps easiest to discuss, it isn't the only area that revenue management makes sense.  Key booking windows like shoulder-seasons (i.e., the weeks that "bookend" the peak seasons), gap-fillers (e.g., when you have a checkout on a Wednesday but no one staying until Sunday -- why not try to fill that gap with nightly stays, bringing in more revenue and perhaps creating a lifetime guest, or real estate sale?), and much more. 

I sometimes picture what we're trying to build as an "Inbox Assistant" of sorts, rather like what you see in popular email programs, that lets you establish certain rules when certain conditions occur.  You might want to say "When this particular home is unbooked within 21 days of stay, discount it by 15%, and put it on the following marketing channels".

We see strong demand for the Last Minute area already.  The Last Minute Bookings area of ClearStay.com quickly became the second most visited area on the site, second only to the home page.  Are your rentals there?  If not, go into the Escapia dashboard, and join the last minute program at no extra up-front cost; it takes just a few minutes.  You pay nothing if your bookings aren't increased, and only a small transaction fee for each new booking.

Put simply, we believe that an unbooked vacation rental that could have gotten, say, $700 instead of $1,000 for a last-minute booking is $700 of immediate lost opportunity, plus an even more important opportunity to upsell add-on services, establish a future regular guest, perhaps even buyer in the region, and market your property management services.  In a world in which leisure travelers can save significantly by booking a cruise last-minute or a hotel as part of a vacation package, we believe it's inevitable that the vacation rental industry will head in this direction, and that it's ultimately good news for all of us.  To date, though, such revenue management strategies have been complex to manage on anything more than an ad-hoc basis; that's one of the key areas we're working hard to solve.

We also believe that Dynamic Pricing Does Not Always Equal Discounting.  For instance, consider the upcoming Winter Olympics in Vancouver, BC.  If you are the last available double-occupancy condominium in Whistler, should you be pricing it higher or lower?  There are many instances where more sophisticated revenue management strategies can and should be employed to recommend and set a new pricepoint.

We see a big opportunity in this area, and aim to be the best supplier of technology and marketing channels and solutions that helps you easily meet this new opportunity head-on.

There's much more we'll be discussing on revenue-management in future posts and product releases -- things like access to opaque pricing channels, vacation packaging and more.  In the meantime, I'll close this blog post with some specific recommendations for you to consider:

• Do a dynamic-pricing preparedness review, starting with your owner contracts.  Do they allow you to price dynamically, within a range at the very least?  In future owner contracts, make sure you're given the freedom to set price, since you'll want to be able to move your prices up and down as the market warrants.  Investigate your current owner contracts to ensure you can make these kind of pricing decisions; explain to your owners that such yield management is quite likely to boost their overall returns.
• If you're not yet taking advantage of the Last Minute program at Escapia, go to your dashboard, and opt-in.  There's no extra up-front charge.  You pay a small commission only if it's booked.
• Send us your thoughts and suggestions on other ways you'd like the software to help you price and yield-manage for you.  We're listening!

Comments

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[Hotel Management, North Carolina]

Dynamic pricing is definitely the key to any successful business. I think this is a great post.