What is Vacation Rental Revenue Management? Detailed Guide

by | Oct 21, 2021 | Uncategorised | 0 comments

Most businesses in the travel industry, from airlines to hotels and even campsites, are using revenue management to increase the performances of their business—and vacation rentals are no exception to this rule.

Because the vacation rental industry is unique, it’s essential to build our own best practices to make revenue management really work. The approach to revenue management needs to be adapted to the specificities of different business models where two of the main costs—owner payment and OTA commission—are variable.

In other words, while it makes sense for a hotel to focus on revenue and occupancy metrics to increase its profitability, the same approach could be detrimental to a vacation rental business that lacks visibility on its costs and costs allocation.

This makes vacation rental revenue management far more complex and technical but nevertheless essential for vacation rental business owners to maximize the performance of their business and have a positive impact on their bottom line.

What is vacation rental revenue management?

Vacation rental revenue management is the practice consisting of adapting your price to the demand to convert bookings at the highest possible price point.

Originating from the hotel and airlines industry, the idea of selling to the right customer at the right time and the right price is starting to gain ground in the vacation rental industry.

As a way to improve the profitability of your business, vacation rental revenue management needs to consider some aspects differently from its sister industries to make this practice sustainable and deliver the expected outcome: more profits.

Benefits of vacation rental revenue management for business owners?

Vacation rental revenue management, if done right, will help business owners improve the performance of the inventory they manage on behalf of their clients.

This practice, although still in its infancy in the vacation rental industry, enables property managers to increase the yield of their portfolio of properties and convert bookings under the best possible conditions for their business.

Improve the financial performances of your business

Here it’s crucial to make a difference between top line metrics, such as gross booking revenue or occupancy rate, and the bottom line of your business.

As a property manager, you must ensure that your efforts to drive more revenue and increase occupancy are translating into an increase in the profitability of your business.

When executed correctly, a vacation rental revenue management strategy will contribute to more profits; if not this can become a loss-generating activity for your business.

Maximize the performance of your portfolio

By applying vacation rental revenue management strategies, you should improve the revenue generated by the properties in your portfolio.

Increasing revenue, as long as costs are controlled, will also improve the unit economics of your vacation rental inventory.

When most property managers have at least a low season and a high season price, proactive revenue management goes way beyond and enables vacation rental business owners to increase revenue beyond these static changes in price.

Enhance owner retention

The reason why property owners are working with property managers is, of course, to avoid the hassle of managing bookings and guests themselves and to drive the highest possible return from their property.

Thanks to revenue management, property managers can work on constantly improving the performance of each property.

This will prevent owners from considering working with your competition in the first place and will help you differentiate your services from competitors who don’t have a revenue management strategy in place.

Gain a competitive edge in your market

Having the ability to frequently adapt your prices to the demand and supply available in your market will enable you to convert more bookings than your competitors or sell better than them.

Indeed, those who are not adapting their price will either miss on bookings if they’re overpriced or miss on revenue potential in case they’re selling too cheap.

On the owner’s side, if you’re able to truly maximize the potential of properties this becomes a very strong argument to attract them to your business.

Support the growth of your vacation rental business

By increasing the profitability of your vacation rental business you’ll of course have access to more resources to support growth and build a stronger value proposition for new owners to work with your company.

Having clear visibility on the potential performance of new properties will also support you in selecting the right ones, so you have the proper clauses into your owner contracts while ensuring the investment in growth will positively contribute to your business’s performance.

How to make a vacation rental revenue management strategy?

Step 1 – Understand the cost drivers of your business

When speaking about revenue management for vacation rentals, we can’t dissociate this practice from the cost structure of your business.

Inherited from airline and hotel industries, where both businesses have a cost structure made of highly predictable fixed costs, revenue management for vacation rentals must integrate with the cost structure of a vacation rental business which is mostly made of variable costs.

Not understanding the cost drivers of your business will lead you to take the wrong decisions when executing your revenue management strategy and potentially create loss-making bookings.

Step 2 – Connect top line and bottom line to build your revenue management strategy

Understanding, analyzing, and allocating your costs correctly—and connecting this analysis to your revenue management strategy—will enable you to focus on the most profitable bookings for your business.

Once this understanding is built you can then ensure all your bookings are profitable. In other words, you won’t work to lose money.

This analysis also enables you to identify properties or groups of properties where you need to optimize your operating costs or even renegotiate the contract terms with the owner.

Step 3 – Understand the context behind the revenue 

If you focus on the wrong metrics to assess the efficiency and relevancy of your revenue management strategy, you’ll make the wrong decisions and impact your business negatively.

There’s no point in generating revenue for the pure sake of it: if 2000€ of revenue costs you 2500€, you’ll eventually take your business to bankruptcy.

In the example below, you see how Property Manager 1, not understanding their costs, tries to increase revenue by accepting shorter bookings that will all create a loss.

At the same time, Property Manager 2 is profitable although they’re selling at a lower price point.

Property Manager 2 in this example has understood how the cost of a booking impacts the profitability of the business and has opted for a competitive strategy that will still have a positive contribution to the business.

Property Manager 1Property Manager 2
Minimum Stay1 day3 days (with 10% discount)
Price of booking150405
Owner’s payment105283,5
Cost of Sales22.560.75
Booking Fixed costs2525
Profit-2.535,75

This example, although simplified to the extreme, shows clearly how much you need to understand the cost behind every booking to make the right decisions when it comes to your revenue management strategy.

From our experience working with vacation rental businesses on their revenue management strategy, few of them have enough visibility of their cost structure to make fully informed revenue management decisions.

Looking for an experienced and reputable vacation rental revenue management company? AJL Atelier is your go-to partner for revenue management in the short-term rental industry. Get in touch

Step 4 – Understand who your competition is

Vacation rentals are unique which makes looking into your competition slightly more complicated than with a standardized product.

Far too often we see vacation rental managers failing to build an accurate competitive setup, comparing their performances with the wrong properties, and then taking the wrong decisions.

You need to use data to build this competitive setup, either from the OTA’s extranet directly or using a data provider such as Transparent or AirDNA to understand exactly who you’re up against in your market.

Location, property type, and capacity, average daily rate, and review score are all aspects you need to consider when looking at your competition.

As an example, if you manage a property for four guests with two double bedrooms each of them having a king size bed, is a property with the same capacity and a different beds distribution (such as one king size and 2 bunk beds) your direct competition?

The answer is no as one property can accommodate 2 couples while the other is geared towards a family of travelers, both typologies of guests having different budgets and booking behavior.

Properties catering to different types of guests and different budgets should not be bundled up into the same competitive setup.

Step 5 – Understand the average daily rate is only one piece of the puzzle

Quite often we see companies focusing on competitiveness based on the average daily rate.

This is, of course, a starting point but this shouldn’t be the full extent of the analysis. Indeed, a lot of other factors will enter into consideration and make the overall attractiveness of a property for a given prospective guest.

Aspects like cancelation policy, review score, and minimum length of stay should all be taken into account.

If all of your competitors have a strict cancelation policy and a 7-days minimum stay, you can adopt another strategy. For example, you can set a 5-day minimum stay with a moderate cancelation policy and a higher price as there will not be options for travelers looking for a shorter stay. You become the only supply for that demand and can therefore increase your price.

Step 6 – Make decisions based on data analysis, not on feelings

It can be difficult to always implement changes in your sales strategy based on a thorough analysis if you don’t have a revenue manager in-house who’s driving your revenue management strategy.

For example, a property owner just calls you complaining there are no bookings for a given period and you decide to lower your price to trigger a booking and put out that fire.

Or you get a last-minute cancelation during your high season and you decide to list back the property with an aggressive discount to rebook it as fast as possible.

These are only two examples but it’s almost certain you’ve faced situations like these.

It’s safe to bet you probably left some money on the table if you acted like this, in the first example: the angry owner, you could have taken another road, maybe changing the cancelation policy to a more lenient one, or perhaps conditioning a lower price to a non-refundable policy on some portals.

In the second case, opting for a discount to rebook as fast as possible without looking at supply and demand in your market will also lead to a loss of potential revenue. Perhaps you could have marked up your price by a hefty percentage because people are still looking to book in a market running low on supply.

Step 7 – Don’t automate the wrong strategy

In vacation rentals, dynamic pricing is quite often mistaken for revenue management when dynamic pricing is actually the automated output of a revenue management strategy.

If the strategy is not tailor-made to your business and fails to take into account your cost structure and how it impacts different types of bookings then you’ll automate the wrong strategy, miss on potential revenue, or even create losses in the worst cases.

Of course, dynamic pricing is useful operationally as it helps revenue managers to gain more time for the analysis and creation of the strategy for your inventory, but it’s the last step of revenue management for vacation rental, not the first.

This is even more relevant in 2022 as traveler behavior and accommodation preferences have undergone huge transformations.

Step 8 – Make full use of the toolkit available to you

One thing we’ve observed through working with property managers is that a lot of tools available (and already paid for) are underutilized.

All the bigger OTAs and Marketplaces have built tools able to provide you invaluable insights into your market. The pro dashboard of Airbnb, the extranet of Booking.com, Expedia Partner Central, and even the VRBO dashboard are full of insights into your specific market and properties. You should look into them as they provide a wealth of information about your competitive setup, the pace of your bookings, and even the properties to which you’ve lost conversion.

All these aspects can be leveraged by a revenue manager to build the best possible strategy for your properties.

Additionally, the pricing rules of your property management software can make your pricing more dynamic and automate changes when certain trigger events occur.

These tools can be used at no extra cost for your business and will enable you to draft a revenue management strategy with more accuracy.

Conclusion

The vacation rental industry must create its very own revenue management practices and avoid applying processes inherited from fundamentally different industries.

We’ve witnessed firsthand how much these mistakes can be costly to a vacation rental business and this is why we decided to create the first tool piecing together cost management with revenue management with AJL Profitability Solutions.

Beyond our own product, we encourage you to become more efficient in the way you manage your data, especially cost data, so it’s available to be analyzed in detail, in advance, and with precision.

Understanding the cost drivers of your business and the true cost of every booking will lay the ground to the creation of a profitable revenue management strategy which will then be fueled by additional analysis such as your competition and demand for your market and product.

Succeeding in managing both aspects together will be beneficial for your vacation rental business and prevent you from deploying resources that don’t contribute to your business the way you want them to.

We understand this approach might be new to many property managers, but in the same way, you’ll hire an accountant to review your finances. Experts can help you implement a tailor-made revenue management strategy for your business and implement the right changes to optimize the cost structure of your company and increase your profits.

Looking for an experienced and reputable vacation rental revenue management company? AJL Atelier is your go-to partner for revenue management in the short-term rental industry. Get in touch

Frequently asked questions about vacation rental revenue management 

What do vacation rental revenue management companies do?

Vacation rental revenue management companies will analyze your market, pricing, commercial conditions, and sometimes the cost structure of your business to define the best revenue management strategy.

They’ll also help you identify the right triggers to a price increase or decrease to make your business more profitable.

On what factors should you change your vacation rental pricing?

Demand factors, occupancy in your market, competitor’s pricing but most importantly the profitability of your vacation rental business.

Do I need vacation rental revenue management software? 

Yes, you need it to automate the analysis of your business data and the output of your revenue management strategy. As discussed in this article, you probably already have access to some tools that can greatly help you get started.

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