This article first appeared in the Fall 2019 edition of VRM Intel.
What can vacation rental revenue managers learn from the hotel industry?
With more and more emphasis being placed on vacation rental revenue management, what do we stand to learn from the hotel industry? Seemingly, a lot. Most of what the vacation rental industry is currently experiencing and will experience in the future regarding revenue management has already happened in the hotel world. The data, systems and software tools, and processes are and will be fairly similar, and there is an opportunity to learn from the past to keep the vacation rental industry on an efficient pathway to success and innovation.
The importance of good, clean data is as important to vacation rentals as it is to hotels. There is quite a bit of overlap between the data points vacations rentals rely versus that of hotels: both industries use historical and booked occupancy, ADR, and revenue per available room (RevPAR) as key metrics for measuring performance.
For hotels and vacation rentals, internal and external data is stored in various places, but most commonly the PMS and RMS (Revenue Management System). Internal data commonly includes historical and booked occupancy, ADR, RevPAR, market segmentation, channel segmentation, and more. Older hotels have a lot of great stored data to use, and often this internal data is the most valuable to use when constructing a revenue strategy. External data in hotels points us to trends in the market and the competitive set, and isn’t as readily available as internal data. Third-party sources like STR Analytics and TravelClick provide paid reporting for hotels to gauge historical and future market performance, and can be very valuable in setting future strategies.
Within the vacation rental industry, there is one key external metric that is widely available that is not as available in the hotel world - forward looking market occupancy. Forward looking market occupancy is commonly used in vacation rental revenue management to gauge availability in the future. This data is harder to come by in the hotel world because many hotels do not disclose their future “on the books” occupancy data, and you can’t easily get this information by going on a hotel’s website and checking availability, as there can sometimes be just a few room types for hundreds of physical rooms.
In the vacation rental industry, we can use forward looking occupancy to our advantage by changing prices with regard to availability in the market on any given date. This allows vacation rentals to be more proactive than reactive when it comes to market supply in comparison to hotels.
Hotels also often compare their daily rates to their competitive set, and need to utilize a rate shop to pull at least 365 days of pricing data for each of their competitors. Competitor price shops are important for hotels because guest rooms between hotels often represent similar value to potential guests. Vacation rentals are obviously more unique, therefore, competitor rate shopping is not as necessary when determining strategy.
The importance of good, clean data is as important to vacation rentals as it is to hotels - having reliable sources as the groundwork for any and all decisions made matters. Understanding the importance and capabilities of different data sources is also key when utilizing advanced pricing and revenue management systems.
Systems & Software
Just like vacation rental managers, hotels use property management systems to keep track of bookings, guest information, and more. In that stack, revenue management systems (RMS) take on the role of dynamic pricing and yielding, and have inundated the industry in the past 5-10 years.
RMSs manage the net price point at which a room can be booked. This is a heavy lift - hotels can often have multiple room types available to be booked at hundreds of rates for any one night. These rates include corporate account rates negotiated by companies, discounted rates like AAA and AARP, package rates, OTA rates, and more, as well as their BAR rate (best available nightly rates).
Rates are managed and set by hotel revenue managers as either flat or dynamic (discounted off of rack), and ultimately produce different net rates after taking into account channel distribution costs, commissions, and other associated fees. For example, a net rate from a booking made on Expedia is very different from that made from a direct-booking guest.
Vacation rental managers have begun seeing this as well, with an enhanced focus on direct bookings and awareness of channel distribution costs in the industry. With the cost of distribution on the rise, hoteliers had to find a way to control distribution based on net rates. So, how do hotel revenue managers decide which rates to allow for a specific night? Yielding solved this problem. Hotel revenue managers now focus on their distribution strategy in addition to dynamic pricing.
One of the most common techniques for yielding is by using a “hurdle” price. By setting a hurdle hotel revenue managers are able to tell their revenue management system the lowest acceptable rate they want to take across all rate plans for a certain night. This is similar to a minimum price. The revenue management system works with the rack rate and hurdle rate set by the revenue manager to open and close inventory on certain channels.
For example, if a revenue manager sets a $100 rack rate with a $90 hurdle point, the net rate needs to come out above the hurdle point, or above $90, to be bookable on any platform. In this case, the hurdle rate restricts a guest from booking on an online travel agency website like Expedia in favor of the big-brand hotel’s direct website.
While property management systems are vital to a hotel’s operations, a revenue management system is key in implementing a successful revenue strategy. Because most vacation rental managers rely solely on third-party distribution channels, yielding with regards to channel distribution cost can and will be an effective strategy for minimizing cost and maximizing revenue.
Revenue Management Services
Who is responsible for revenue management? Lately, this question has come up in the vacation rental industry alongside more advanced discussion of the topic. Twenty years ago, hotels began to ask that same question too. Now, most hotels in the United States have some form of a dedicated revenue manager responsible for implementing a revenue strategy.
So, how did the hotel industry get there? There are three common ways that hotels designated a revenue manager: expanding the reservationist role, hiring a revenue manager through a brand (if franchising), or by hiring a third party revenue manager responsible for an entire portfolio.
The first option is also the easiest: just hire someone or promote a reservationist to expand the role. This happened at a lot of hotels over time, but only at larger, urban properties where it made financial sense to have at least one person in charge of revenue management for one hotel.
The second option fit better for smaller hotels, mostly midscale branded properties, that had a harder time finding the money to dedicate to revenue management. As the larger hotel brands began to understand the importance of revenue management, franchise agreements began to include the requirement of a dedicated revenue manager. Large hotel brands then began to offer an additional service to franchisees in the form of third-party revenue management. Hoteliers pay a flat fee to the brand and in return, have a revenue manager for their hotel that is managed directly by the brand. Think large call centers packed with revenue managers who have a portfolio of 10-20 franchise hotels.
The third option spawned after this, once hotel owners with multiple properties became reluctant to paying the big brands even more money for a revenue manager, and a dedicated revenue manager was financially out of the question. Third-party companies like Kriya RevGEN were formed to address this need. If a hotelier owns three hotels across Hilton, Marriott, and IHG, for example, they would have to pay each brand for a remote revenue manager and have multiple people handling their portfolio’s strategy. Third-party revenue management service companies offer one dedicated revenue manager who is responsible for an entire portfolio, making life easier for the hotel owner and also fitting the brand’s franchise requirements.
With that breakdown of how hotels determined responsibility of revenue management, we can apply the same logic to vacation rentals. Large management companies can afford a full-time revenue manager on the payroll, similar to those larger hotels. For smaller management companies and individual vacation rental managers, follow the evolution in the hotel world - outsourced revenue management responsibility to third-party revenue managers is both a simple and financially sound option.
Vacation Rental Industry - what’s next?
While we’re not able to predict the future, we do have the opportunity to learn from what hotel revenue managers have done over the past 20-25 years.
First, hotels use similar data points that vacation rental managers use to revenue manage hotels, which will help align strategic practices across both industries.
Second, hotels (and airlines) have evolved their technical tools to include the use of a complete revenue management software solution, similar to a PMS. These revenue management systems take care of dynamic pricing, yielding, channel management, and more in one place. Hotels have also been battling third-party channels over the cost of distribution for years, and yielding strategies in hotel revenue management have become as important as dynamic pricing. With OTA and third-party sources already prominent in the vacation rental industry, the cost of relying on such channels has already come about in revenue management discussions. Vacation rental revenue management is likely heading towards a combination of both dynamic pricing and yielding as more and more owners and managers opt-in to using dynamic pricing and more advanced revenue management becomes necessary.
Finally, hotels have realized the importance of having a dedicated revenue management team responsible for implementing strategy. The hotel industry also figured out, over time, how to efficiently ensure that dedicated revenue management is feasible for hotels of all sizes.
There are quite a few key differences between hotels and vacation rentals that make both industries unique. Revenue management practices are prevalent across the board in the travel world, but hotels have already recently worked through regulation, changing markets and economies, technological advances, and more. Insight into the history of hotel revenue management can help vacation rental managers anticipate similar hurdles and adapt their strategy to remain successful.