Update Your Owner Agreements

By John Suzuki, Escapia VP Sales

Here's the whole ball game:  If your commission is 20 percent, and you have to offer a 30% discount to win a renter, does that mean you walk away since you'd otherwise be under water for that rental? If the answer is yes, you need to update your owner agreements.

If you believe as we do that, like hotels and airlines, dynamic rates based on supply, demand, and timing offers a big competitive advantage, your owner contracts need to be set up so that discounts and marketing fees you pay to various OTAs (Online Travel Agent) should be shared with your owners, and not solely paid out of your commissions.

Using the above example, let's say you have a $1,000 rental and are paid a 20% commission. If you have to discount the unit by 30%, your commission should not be minus $100 (i.e. $1,000 times your 20% commission less 30%). Rather, it should be $140 ($1,000 less 30%, times your 20% commission). In other words, because the world of vacation rentals is following the path of hotels and airlines with yield management pricing, you need to accommodate the fact that your rates are going to become as inconsistent as sunny days in Seattle. Here's why:

Yield management and dynamic rates enable you to maximize occupancy and minimize revenue leakage. While traditional rate structures offer different rates for various reasons (i.e. high/low/shoulder seasons, weekends, holidays, etc.), Escapia lets you take your rates to a whole new level with rate rules that are easy and automatic:

• Last minute deals
• Premiums/Discounts based on occupancy
• Holiday premiums and discounts based on time to arrival
• Weekday and mid-week discounts
• Promotions with free or discounted nights.
• Premiums and discounts based on source of booking.
• Legacy guest pricing
• Rollover pricing into next year
• Premium pricing based on "non-typical" stays.
• Guest-type premiums and discounts

In this new world of smart rate management, the entire financial burden of marketing your vacation rentals should not and cannot rest on you alone. After all, in today's economy, everyone is shopping for deals and if you can't give them what they want, they'll find someone else who will. So here's the question to your owners for 2009: Isn't a little bit of somethin' better than a whole lot of nuthin'?

Comments

[Steve]

Clearly you have never been in the owner relations role within a vacation rental company.
This type of thinking is exactly why there is so much disdain among owners towards our profession.

[John Suzuki]

The disdain among owners is more the result of professional managers not delivering the value that owners expect for the money they pay, than our efforts to deliver innovation and new ideas. While you are welcome to play the blame game, the fact remains that owners are looking for value from you, period. Ours is to help, and managers across the country have leveraged our ideas to their advantage. Thanks for your comments.

[Bill Furlong]

Great to have a dialog on this very important topic.

Of course, at first glance some owners are going to say "I don't want to have to pay any of the commissions." But would they rather hear their manager tell them that they will stop trying to get bookings for their units when the commission exceeds their management fee? In today's economy would an owner be relieved to hear a manager say "Joe, I could have gotten a booking for your home that is sitting empty this weekend and next and the one after for 80% of full price. But I didn't because I, your manager, would lose money on it. I know it would help you pay that mortgage bill, but there's nothing but higher cost in it for me."

We believe that the managers who are going to convince owners that they deliver value are the ones who drive the most revenue for their unit -- much more than the owner can do themselves. Managers will need to structure their business, including owner agreements, so they have the ability to deliver that value. If they don't, the trend identified by the PhoCusWright research of owners increasingly believing they could do as well themselves will continue.

Thanks for being part of the discussion.

[Steve]

"We believe that the managers who are going to convince owners that they deliver value are the ones who drive the most revenue for their unit -- much more than the owner can do themselves."

I completely agree with this statement and don't entirely disagree with the initial post in that we should get some of our marketing dollars from an owner. I just don't think it should be variable.
Asking for rental nights in your contract to be used for specials or marketing dollars is fair but removing the rate floor is a slippery slope.

I also don't believe heavy discounts are in order at this time. We need to continue to extol the value we offer over other types of lodging with out destroying rate integrity.

We can debate when this recession/depression will subside but it surely will. I have watched many a hotelier destroy their ADR in the name of revenue management.

"Isn't a little bit of somethin' better than a whole lot of nuthin'?"

No...not in every case.

With much respect.

[John Suzuki]

It's all about setting the right prices based on supply, demand, and prevailing market circumstances, all of which are constantly changing. While discounts may be one way to approach this when demand is low, it also stands to reason that there is also an opportunity to charge premiums for rentals when demand is high and supply is low.

Ours is to bring capabilities to the VR industry that the rest of travel is already doing. The best part of it is that you can make your services optional, so for those owners who DON'T believe that a little bit of something is better than a whole lot of nothing, they can stay right where they are. Some will, some won't...It's all about enabling options to respond to a rapidly changing marketplace.

[Bill Furlong]

Three thoughts on rate management.

First, it is important to note that the recent PhoCusWright study found that the #2 reason consumers didn't stay in a vacation home was that it was "more expensive". That was cited by 31% of consumers. If the goal is to have vacation rentals perceived as a premium experience at a premium price relative to a hotel, that might be OK. Then it is all about establishing value. But if the goal is for the "average" traveler to consider a vacation rental instead of a hotel, then that perception is a problem. We could fill another long blog post thinking through the reasons for this perception and ways to address it.

Second, if the perception that hotels are cheaper than vacation rentals was around when PhoCusWright did the study early last year, it is even more the case now that hotel rates are declining. According to Smith Travel Reports, hotel ADRs have dropped over 7% versus a year ago http://www.hotelnewsnow.com/articles.aspx?ArticleId=727.

Final thought. I agree that across the board rate cuts is not the way to go. Instead, I would look for opportunities to introduce targeted rate (and policy) management -- reduce mid-week rates, discount last minute bookings, reduce your minimum night stay if a unit isn't booked late in the game, provide an extra night for free or at a deep discount, etc.

It is totally appropriate to ask owners for the fleixbility to manage rates in order to maximize revenue and to structure the owner agreements so a manager can do that. The owner has to believe that the manager is more knowledgeable and capable of making pricing decisions to maximize revenue than the owner is him or herself -- and the manager has to demonstrate that in fact, they are more knowledgeable and capable.

The current economic environment gives managers more of an opportunity to demonstrate that and to ask owners for the flexibility to do that then ever.

Thanks again for the discussion.

Bill