Instant Software Blog

Blog Debate over a Big Tool? Yield Management in Vacation Rentals

On April 23, Escapia’s John Suzuki posted a Blog entry that says,

For the pundits who say that Yield Management should never be used for vacation rentals, consider this: … .”

John.  I think I’m your huckleberry.  

Now I never said that YM should “never” be used for vacation rentals.  But my YM White Paper does challenge any suggestion that YM can provide to our industry the same level of benefit that made it a darling of the airline and hotel industries. 

 I deliver seminars on YM, as do you.  We both do blogs.  The industry hears two diverse YM messages from us.  Of course, both our jobs require objectivity and industry expertise in analysis and economics:  I’m in research, you’re in sales.   So I ask, why not give our readers a little “point-counterpoint,” or, you know, some “she-said, he-said?” 

I call shotgun on the “he said” role.  Your challenge reads:  

For the pundits who say that Yield Management should never be used for vacation rentals, consider this: Yield Management has been around for decades. In fact, every segment of travel has used yield management for years, including vacation rental managers through last minute deals and seasonal rates, which are simple forms of yield management. What is now different is that vacation rental managers now have the ability to intelligently automate the process so rates are managed dynamically based on ever changing business conditions, supply and demand, occupancy, time to arrival, or any other business rules that make sense to you.

I’ve considered this as you’ve requested.   Solemnly.  I swear.  I freely admit that:

• YM has been used in simple forms in vacation for rentals (see my White Paper on the topic);
• Some segments of travel have used YM for years, including airlines and hotels; and
• I admire the sincerity, zeal and conviction with which you always deliver your message.

But I and my readers (and I mean both of them) need clarification to better understand your main point:

What is the “change” you are talking about that now gives vacation rental managers “the ability to intelligently automate the process so rates are managed dynamically based on ever changing business conditions, supply and demand, occupancy, time to arrival… .”?  (Emphasis on your words “intelligently automate.”)

Are we talking about an intelligent automation tool?  Or are we really talking about a dumb tool that that could be dangerous without an intelligent manager?  (“Dumb” as in not inherently intelligent.)

Are you are saying that our industry now has managers whose intelligence is on a par with the computerized information systems that power YM in the airline industry? If so, I gotta meet these  super-human beings.

Or, John, were you pointing to the airline and hotel industries as proof of concept for a dynamic rate tool, i.e., a tool that automatically increases prices when occupancy or booking dates hit certain thresholds)?  If so, I’d like your thoughts about trends that have disrupted pricing in travel:

• Haven’t the recent low-price guarantees of the online travel agents largely taken the punch out of yield management?
• Are you recommending, in a world where renters shop prices every day on the Internet, that managers can rely on pre-set rules to automatically raise or lower rents without first checking competitors’ prices before any automated price changes take place?
• If your response is that managers should always check competitors’ rates before an automated change goes into effect, wouldn’t that pretty much vitiate the benefit of automation?

By the way, have you personally done any pricing for a vacation rental manager?  Maybe you have some recent pricing studies on point that you can share with us?

Well then, can you identity markets where managers allow automated tools to dynamically change rents without looking at competitive pricing?  I’d be excited about studying such markets myself, as would be many travel industry execs and economics professors.

I look forward to your clarifications and the kind of spirited debate that will enlighten and entertain all of my readers (“Sit tight mom and dad, we’ve got some good stuff coming”). 

George

Volsky's View: Why the VR Industry Responds Better Than Other Travel Segments

Why the Vacation Rental Industry Responds Better Than Other Travel Segments to Declines in U.S. Travel Spending

By George Volsky, Instant Software - Director of Research

During 2009, U.S. travel spending declined 9% over 2008. Many of our decisions can be influenced by trends in other segments. So it is helpful to review why other industries responded differently.

 
While this table’s metrics were not calculated the same way for each travel segment, they demonstrate how cuts in travel spending affect different travel segments.
  
When travelers reduced spending by 9%, airline revenue declined twice as fast (18%) and cruise line prices dropped 10 to 20%. Vacation rental revenues fell 24% less than U.S travel spending (6.8% vs. 9%). Why did vacation rentals survive drops in travel spending better than other travel segments? The reasons can be largely found in the unique structure of each industry, as summarized below.

Airlines. At least 10 U.S. airlines were forced out of business in 2008 and 2009. The Air Transport Associaion of America said passenger revenue for the major U.S. carriers fell 18% in 2009, exceeding the 14% decline in 2001. Apart from rising fuel costs and low-priced competitors, airlines rely heavily on business travel, a component of U.S. travel spending. Business travelers pay more than leisure travelers, so airlines lose a bigger share of their revenue when business travel declines. Plus, leisure travelers often save money by foregoing air travel in favor of vacation drive-to destinations. During 2009, a year when consumers wanted to save money, 70% of survey respondents identified the car for domestic vacations, according to Mintel.

Cruise Lines. Cruise lines have grown faster than vacation rentals because they offer a good travel package for the price, at least if travelers don’t drink or gamble. But ships require massive capital investment, and a small decline in bookings can be disastrous. Unlike rental managers, cruise lines have to pay for ships whether rooms are filled or not. Unlike rental managers, destination ports often pay for each passenger delivered. Plus cruise ships generate “supplemental spend” from liquor sales and gambling. So when leisure travelers cut back, cruise lines have a financial incentive to drop prices as far as necessary to fill cabins. Cruise lines had a tough year in 2009 but are expecting to increase prices this year. The industry forecasts 6% passenger growth for 2010. 

Hotels. Like airlines, hotels depend on business travel, which generates more revenue per room than leisure travel. So hotels lose a bigger share of their annual revenue when business travel declines. Like cruise lines, hotels must recoup construction and operating expenses whether rooms are empty or full, and they often generate revenue from food sales, shopping, and spas. So hotels make this calculation before discounting to get “heads in beds”, a 35% discount of room rates often translates to a much smaller drop in hotel revenue. Hotels may drop prices to any level that exceeds the cost of making and servicing the reservation. This lowers average daily rate at a faster pace than for vacation rentals.

Vacation Rentals. Rental managers aren’t under the same pressure to fill empty bedrooms as hotels and cruise lines. Managers aren’t expected to cover mortgage payments through rental income, and empty homes don’t cost managers much. When supply exceeds demand (which it does 65% of the year during normal years), managers must only discount prices to maintain their historic share of rentals (to keep homeowners from changing management). The vacation rental industry is well structured to survive swings of the economy. The vacation rental industry also has a safety net in that financially stressed vacationers save money by substituting a vacation home for plans to fly to a hotel destination.

Hotels vs. Vacation Rentals: Different Monthly Occupancy Patterns.  At the end of any given year, revenue for both hotels and vacation rental companies tend to rise or fall in the same general direction.  But on a monthly basis, trends can very dramatically. Business travel occurs at different times than leisure travel, so swings in business travel will dramatically change hotel occupancy without affecting vacation rentals. Plus, hotels’ higher occupancy rates (50% for 2009 vs. 35% for vacation rentals) means that hotels are more heavily occupied during more weeks, so changes in travel spending  will affect monthly occupancy rates differently for the two lodging segments.

Different Forecasts: Hotels vs. Vacation Rentals. We expect vacation rental bookings, revenue and nights to improve in 2010 over 2009. At the end of Q1, vacation rental revenues were up 10% and arrivals were up 7% (Instant Software Research and Trends Reports). By contrast, the U.S. hotel industry posted negative trends for January and February and is projected to end 2010 with decreases in two of the three key performance measurements, according to Smith Travel Research’s monthly forecast update. Why is one lodging segment recovering when the other is still declining? The negative hotel projections are tied to that industry’s dependence on higher occupancy rates. PKF Hospitality Research says that national occupancy level below the 60% mark means that rate discounting will persist. Remember that hotel occupancy was 50% for 2009.  

Volsky’s View: The Industry is Changing With or Without Us

By George Volsky, Instant Software - Director of Research

Several years ago, I delivered VRMA’s first seminar on the potential impact of rent-by-owner and one of the first on the negative consequences of selling over the Internet (razor-thin profit margins). I’ve addressed these topics in almost 100 industry seminars since, as have numerous others, so I’m always tempted to feel that the there is not much more to say.

But change often sneaks up slowly, before we appreciate its implications or prepare for it. I’ve had two conversations with friends in the past couple of weeks that bring this to mind.

One was from a Colorado rental manager who is looking to change her business model because her high-end, traditional rental management business is less profitable and under pressure from rent-by-owners (RBO).  Another was with a friend who started out as a rent-by-owner -- and his Florida vacation rental business is growing like crazy and very profitable.

Underlying Trends:

• Increasing marketing costs in the face of declining revenues
• Tendencies of companies that started as RBOs to adopt mainstream systems
• Pressure on mainstream companies to charge less

RBOs are Children of New Internet Technology.

RBOs have always existed. But their numbers were restricted primarily to homeowners who lived near their rental homes and had time to provide property management services, or supervise them. The expansion of RBO coincided with the development of the Internet. Internet technology is driving change — RBO is simply the most visible negative consequence of this change.

The Internet has changed Other Industries. Why should ours be Immune? This is evident than in our own shopping patterns. 

• Amazon.com and EBay are prominent icons in a new world where consumers seek out lower prices for almost every product where delivery time is not critical to the customer. Are you a consumer who to needs to touch before you commit?  Many online merchants, such as Musician’s Friend, allow consumers to “try” the products and send them back for any reason.
• Traditional travel agencies have been supplanted by online travel agencies such as Expedia and Travelocity, who consumers rely upon to search out the best bargains.
• The early success of Southwest and other low-cost airlines forced mainstream airlines to vastly reduce the number of staff who answer phones, stroke keyboards and handle paper, so that today many low-cost airlines are disappearing and mainstream airlines are morphing into lower cost businesses that provide less service.

These Trends are Relevant.  Vacationers are also consumers. We need only look at their shopping patterns (or “our” shopping patterns) to get this picture. Consumers don’t always require full service.  Where they don’t, they are not shy about buying from someone who will give greater value or lower prices. Consumers are increasingly inclined to rely on Internet-supplied information, bypassing phone conversations, to select a rental home at a lower price point.

One More Thing to Say about Pressures Brought about by RBOs and the Internet

Change is upon us. Full-service vacation rental companies are feeling the impact of the Internet, and are often losing business to lower-cost businesses or those who allow consumers to pay for just the services they want. This is not true in every market or for every business, of course. But it is happening in key vacation rental markets. Managers have choices, however difficult, and can take control their destiny once they understand that the consumer is changing. No rental manager can feel secure if he ignores the changing buying patterns of consumers. Rental mangers are probably wise to follow the example of airlines and constantly re-evaluate how they can either specialize or cut back on services previously deemed to be indispensible. If they want to keep their historic market share.

Volsky’s View: When to Rely on Your Accountant...and When Not To

Knowing the Difference Between Accounting and Financial Management

By George Volsky, Instant Software - Director of Research

I was sitting in the office of a property manager who related this story.  The manager and the company owner had met with their accountant, who—perhaps defending his turf--chided the manager, “You don’t need to be putting so much attention on the accounting.”
  
The problem here is that the accountant was wrong, for reasons I summarize below.  He could have done some serious damage if the company owner had taken this seriously.

Accounting involves the recording and reporting of revenues and expenses. Its most visible role involves taxes. Accountants sort revenue and expenses into categories to create the tools you use to manage: Profit and Loss Statements, Balance Sheets, Cash Flow Statements, etc.

You’d think that it is a natural extension of an accountant’s job to give good advice on budgets, revenue prospects and expenses. But this is an unwarranted assumption.

Financial management is the use of accounting to set budgets and make business decisions essential to a company’s growth and profits. Managers use accountants’ reports to decide which expenses to cut, to set budgets, and to decide how to spend money.

The Problem. Unfortunately, most companies in our industry have not set up their books to meaningfully match expenses to revenues. Decision makers can’t accurately measure whether each expense is one that should continue or can be justified.

Our industry does not have a standard system of accounts. Two competing vacation rental managers almost never calculate costs and allocate revenues the same way., i.e.:

a. Housekeeping and maintenance costs may or may not include the wages of front office staff that take and enter work orders or track whether a home has been cleaned and inspected.

b. Two competitors’ are likely to calculate marketing costs differently. Some will include brochure expenses such as pre-press; printing; postage; staff-time related to unit descriptions; staff time expended with homeowners over unit descriptions; pro-rated administrative expenses (telephone; office space); staff time expended on taking or selecting photos; web site expenses such as give-backs and welcome baskets. Some will omit many of these expenses.

It is a general principle of good financial management that every revenue stream should be matched against its underlying expenses. But in many companies, the general ledger accounts were haphazardly pieced together when the owner or book keeper decided to put a particular expense in a particular category, with little thought to consistency or financial management. The accountant simply makes sure the company complies with tax and escrow rules.

In situations like this, the company decision makers are working blind, without the kind of financial analysis they need to make decisions. It doesn’t have to be that way. You don’t need a consultant to fix this.

Who is Monitoring the Bookkeeping?  Generally, company decision makers understand that they should never delegate financial management to accountants. But they often don’t know when their accounting is not set up to help them make good business decisions. Example:

Add-on fees today often generate revenues that account for all profit and much expense. Yet our accounting often fails to allocate these fees to the services they subsidize.

Ask yourself, “Why is it that so many companies believe their maintenance department loses money, but never seem to fix the problem?” Are their managers inept?  Or do their gut instincts tell them that the accounting doesn’t tell the whole story:  when fees are considered, the rental manager is keeping a big enough share of the renter’s money to cover all expenses, plus earn a profit.

The Reality. In the case of my office visit, the manager who was criticized by the accountant had been reorganizing the company’s general ledger accounts to get a more accurate picture of the revenue and expenses associated with each of the company’s major services. The well intended, but incorrect admonition by the accountant arose when the manager and company owner consulted with him to make sure they were not violating generally accepted accounting principles.

His expertise is accounting. Theirs is the vacation rental business.

Now, my friends’ company accountant does the books for several rental managers.  He knows how other companies in the area are categorizing revenues and expenses. He prides himself on his work, and does have a better-than-average grasp of business management.

But in this case, better-than-average is not good enough. This translates to the fact that none of the competing companies have a good handle on their finances.

I am not knocking accountants (though this one didn’t understand financial accounting).  I’m pointing out that there is a difference between accounting (which accountants do well) finance, and business administration, which are AKK separate disciplines in all business schools. 

As an attorney who has worked side-by-side with accountants, economists, and MBAs for years, I can tell you simply, “Managers should never, never leave business decisions to lawyers or accountants.”  Neither group has the experience, industry expertise or skill set to foresee the changes your company must make to stay competitive. 

What You Can Do.  If you are a decision maker, reflect on the likelihood that your accountant is better at identifying an expense for tax reporting purposes than he is at organizing your general ledger in a way that will help you make important business decisions.

Casually browse through your general ledger accounts. If this reveals several instances where department costs appear misplaced, do what my friends did:  spend a few days (or a week) to come up with your thoughts for changing the accounts to give you a better view of each department’s revenue and matching expenses. Then ask your accountant for input, with his job being to tell you whether you’ve missed something, or whether your reorganization would contravene sound accounting practices.

In this changing market, the competitors who can best use their accounting to make business decisions will have an advantage.

Volsky’s View: Cutting Costs in Vacation Rentals By Modifying Your Business Model

By George Volsky, Instant Software - Director of Research

In a recent blog, I suggested that you look for ways to become more efficient in five categories. In this blog, I include my thoughts about the last of these: “Changing your business model.”

For years, I’ve joined the rest of you in following the role of rent-by-owner. RBOs are simply one facet of changes that are arising from the Internet, which is today responsible for many new expense categories and more pervasive discounting.  Among my conclusions is this:

The legacy of the Internet (and Rent-By-Owner) evolution will not ultimately be the eradication of mainstream rental managers but fundamental changes in what they do and how they do it.

Taking a Lesson from the Real Estate Industry

We have seen a trend similar to rent-by-owner in real estate sales, when FSBO’s (“For Sale By Owner”) came into prominence on the back of new consumer-friendly Internet technology.

In the early years, real estate agents worried that FSBO would put them out of business.  They saw FSBO as the enemy, and worked actively to oppose it.  In extreme examples, the government took action to prevent the industry from relegating FSBOs in the context of multiple listing services. 

Before long, the National Association of Realtors was advising sales agents to find ways to work with FSBOs.  Their polls concluded that the vast majority of homeowners were reluctant to price their home on their own, market it properly, and do the related paperwork.  The FSBO trend peaked, and trailed off to occupy a fraction of the industry’s annual sales.

The FSBO trend changed the industry.  Many real estate agents began to offer services a la carte. They let FSBOs pay them to do almost any aspect of the sale:  provision of signs, marketing, MLS listings, and the like.  The industry also departed from its commission structures to become much more competitive.

Changes in Our Industry

Today, there are many new rental managers who began by renting their own homes.  They have leveraged the Internet to redefine the way they do business.  Many do not have central offices and don’t require renters to check in and check out.  Many are able to service far larger geographical areas.  Some rely primarily on the Internet for bookings and/or allow their reservations staff to work from home.

The net effect is a breed of vacation rental companies that have lower costs than mainstream competitors (and provide less service).  They can charge lower commissions, or spend more money on Internet marketing.  This new breed is growing, proving that mainstream rental managers have many homeowners and renters who would accept less service in order to get lower prices.  This new breed is steadily stealing inventory and market share from mainstream managers.

There will be many markets in which there is no discernable change from the Internet.  But you cannot afford to take this for granted.  Change can occur if one of your mainstream competitors is sold to a new-breed rental manager. Rental managers must always have a contingency plan .

1. Think about ways your company can profit by providing services to RBOs;
2. While you are at it, consider services to vacation home owners who do not rent;

Also consider whether it can be in your company’s interest:

• To specialize in a type of vacation rentals that is efficient (high-end luxury homes; or more basic “Motel-6” type properties, etc.)
• If you are large and secure in your market, to split your operations into two or more distinct businesses;
• To offer a la carte services so that the renter and homeowner need only pay for services they really want.

As farfetched as some of these ideas sound, we are seeing similar trends in industries where the business models were so perfected that such changes would have been considered unthinkable ten years ago.

I’ll cover some of these in future blogs.

Volsky’s View: Cutting Costs in Vacation Rentals by Trimming Fat

By George Volsky, Instant Software - Director of Research

In a recent blog, I suggested that you look for ways to become more efficient in 5 categories. I include my thoughts about the fourth of these:  trimming fat to become more lean and fit.

During prosperity, companies, like people, tend to buy things they don’t absolutely need. 

Sometimes, the purchase looked like it could produce great benefits, and the buyer gave it a chance because he could afford to experiment.  Sometimes, the purchase generates tools that the manager loves but fail--when the numbers are examined—to generate enough new bookings, homeowners or savings to justify the program’s cost.

When prosperity disappears, it can be difficult to re-evaluate the cost-effectiveness of expensive systems that we formerly celebrated as a generator of competitive advantage.  All programs benefit someone, and any effort to eliminate them generates pushback, especially if they have been integrated into the company culture.

No one can help you find the fat.  But I can offer this encouragement to do so:

As much as you might hate to reduce services, amenities, or staff, you have a duty to your company’s employees, renters, and homeowners to generate enough profit during slow times to meet your company’s cash flow needs and pay for new initiatives that may be needed to retain and attract homeowners and renters.  By becoming lean, you free up money that can be redirected to buy more service than your competitors (allowing you to offer customers a better value).  Conversely, you will lose renters and homeowners if you allow a competitor to become leaner (more efficient) than you are.

Failure to trim fat jeopardizes the major stakeholders in your business, all of whom depend on you.

• Unneeded “fat” translates to lower productivity for each dollar of expense;
• When customers think they can get better value elsewhere and start to leave, others start thinking about doing so;
• Once homeowners and renters feel that another company offers a better value, it takes years to turn that perception around.

Being a manager means making the hard decisions.   This is a time of change in our industry, which makes it the time to revisit all the assumptions behind major expenses.

Volsky’s View: Cut Costs in Vacation Rentals by Eliminating Unwanted Services

By George Volsky, Instant Software - Director of Research

In a recent blog, I suggested that you look for ways to become more efficient in 5 categories. In this blog, I include my thoughts about the second of these.

Elimination of Unwanted Services. Would even one of your renters or homeowners volunteer to accept fewer services in return for a price discount? 

If so, you are “over-serving” that customer.

This generally happens when rental managers build up their services over the years to attract and keep their best (most profitable) customers. 

If you only serve luxury homes or economy homes, you may be okay. 

But we can take a lesson from hotel executives, who have learned that you can’t be all things to all people.  Hotels create multiple “brands” that allow customers to pay for the services and level of luxury they want.   If your competitive position is secure, consider splitting your program into two branded operations, one focusing on your high-end properties.  This will allow both groups to be more profitable.

Or we can take a lesson from the airlines, which are lowering the base price of air travel by asking customers to pay extra for each accommodation they want.  I’ll cover this in a future blog titled, “This is a Good Time to Take a New Approach to Add-On Fees in Vacation Rentals.”

If your rental program includes homes that run the full range of price and quality, you probably “over-serve” a good number of guests and homeowners who feel they are forced to pay for services they don’t need. 

Your risk is that over-served renters and homeowners will leave your program to try rent-by-owner or a competitor who offers lower prices for less service.  So your best chance of protecting your existing customer base is to look for ways to appease renters or homeowners who will take less service in return for lower prices. 

Don’t overlook opportunities just because they weren’t viable in the past.  For example, revisit questions like the following after doing some research on the Internet to see how new or innovative competitors are reshaping their business models.

• Do you provide linens for all renters?  Or can they pay less money to rent a home that doesn’t have linens (or made beds)?  
• What about designating homes that offer lower rents because they are “cleaned but not inspected” (“call for immediate response if you are dissatisfied”).  Many renters take the same risk when the book rent-by-owner.  I know very good companies who have found ways to eliminate the cost of inspections.
• Do you provide a welcome basket or special products (coffee, cookies, wine) to renters who might be willing to go without? 
• If you print a brochure, are all the homes paying their fair share of the costs?  What about revising your processes to include only those that do?
• Do you require all guests to check in at your office?  “Express” check-in can free up staff time.

You get the idea.  During a time of change, you have to be flexible and innovative to protect your customer base.  Get the staff together and revisit old assumptions

Volsky’s View: Cut Costs in Vacation Rentals By Using Technology to Free Staff

By George Volsky, Instant Software - Director of Research

In a recent blog, I suggested that you look for ways to become more efficient in 5 categories.  In this blog, I include my thoughts about the first of these.

Using Technology to Free Staff or Reduce Expenses
Below, I list some ways that technology is being used for these purposes. I discuss some of these in more detail.  Let me know if you want my thoughts on others.

Some of you may not use any of these. Others may have considered them all. Either way, use this checklist to make sure you have investigated each area potential savings.

1. Downsizing or elimination of printed brochures;
2. Use of Voice Over Internet Protocol (VOIP) to employ reservations staff who work part time from home (saving 11% or more in benefit costs);
3. Electronic document signing;
4. Keyless entry;
5. Elimination of check-in offices;
6. Automated travel insurance processing (via your reservation software);
7. Web site sections that allow homeowners to get information and make bookings;
8. Third-party booking agents;
9. Call centers that answer phones after hours or when you are busy;
10. Automated email blasts;
11. Learn to use reports that free staff from doing manual calculations or lists;
12. Housekeeping tracking systems;
13. User-friendly web sites that automatically mirror changes in your reservation software and allow staff to modify content without paying 3rd parties.

A few deserve comment.

Downsizing or Elimination of Printed Brochures.  I believe that web sites are not a complete substitute for paper brochures.  Some renters like to read in bed or just prefer paper; consumers often keep brochures so they can contact you, and many homeowners feel that brochures are important.

The more important question is whether brochures remain cost effective.  I believe your profit and loss statement will improve if you print fewer copies, or replace them with mini-brochures, or eliminate them altogether, unless there are conditions unique to your market that prevent you from doing so.

We know that brochures are not an essential ingredient to vacation home rentals, because there are many internet-based companies who have never used brochures and compete very well against traditional managers who do use print media.  But many of your existing customers are used to brochures and need to be hand-held if you make a change.

Some key companies in competitive markets have eliminated brochures.  Most were anxious, but ended the year with no discernable loss of bookings or homeowners—just lower expenses.  Their competitors are starting to follow suit.  Brochures consume enormous chunks of staff time and money.

Some companies are easing into it by printing fewer copies and mailing brochures to fewer customers (but keeping brochures around for visitors).  Some now just mail out postcards or Mini-brochures.  These do not include all homes in a rental program, but they try to:

• Drive renters to the company’s websites;
• Sell the area or vacation experience;
• Promote the managers brand; and
• Include pictures for each type of home or area.

Mini-brochures can have a “featured home” section for homeowners who feel that they can get more rentals by paying to be in the brochure.  But you’d have to make sure your best homes are shown even if the homeowner does not pay.  You’d also need to carefully present this change to homeowners:  “Renters rely primarily on the Internet to book homes, so our strategy is to use a mini-brochure to drive renters to our website—but if you feel strongly that your home might attract extra bookings by being featured in the brochure, we have a few slots that can be purchased for a fee on a first-come, first served basis.”

Electronic Document Signing.  I know innovative companies that say, “Hands-down, electronic documents allow reservations to be booked faster and eliminate tons of staff time and expense.”  If you are skeptical about doing way with paper copies or are worried about legalities, you are not alone.  But please don’t let those fears stop you from looking seriously at electronic document signing.  The vendors who offer them have addressed virtually all natural concerns.

Keyless Entry and/or Elimination of Offices.  I realize that the development of strong client relationships can depend from the check-in process.  But it is very expensive to touch every renter on check-in.  Unless you are small or base your brand on personal relationships, consider eliminating check-in offices, at least in new remote offices (use them as a test bed).  Renters like the idea of “express check-in.”  Use lock boxes or mail the keys (the maid can bring them back).  Worried about early arrivals?  One company got buy-in from housekeepers who realized that they increased their tips when they introduced themselves to the guests.  Or use keyless entry to activate the locks at a specific time.

I will address the rest in my next blog. Stay tuned!

Volsky's View: Cost-Cutting in Vacation Rentals -- Protecting Profits in a Slow Economy

By George Volsky, Instant Software - Director of Research

The lead story in Wall Street Journal’s November 16 Money & Investing section on was captioned “Earnings are Strong, Sales are Another Story.”  Eighty percent of companies in the Standard & Poor’s 500 stock index beat analysts’ expectations during a period when revenue is on pace to fall 10%.

“Cost-cutting” drove profits for these major companies.  Cost cutting is similarly a priority for many vacation rental managers, which leads to the point of this blog:

The most direct paths to cost-cutting in vacation rentals can lead to a reduction in a company’s long-term profits and competitive stature.  The paths that best protect profits are often counter-intuitive.  So pick your path cautiously.

• “Knee-jerk” cost cutting often jeopardizes future profit and growth;
• It generally costs money to properly find and implement cost cuts;
• The best cost-cutting opportunities arise from industry changes.

What to Expect from Cost-Cutting.

• As pointed out by the referenced WSJ article, cost cutting can only boost profits so long, but companies that learn to run lean in bad times can expect to see profits surge when sales do improve.
• In my view, Cost-cutting is “reckless” when it is the goal; it is “safe” when it is the byproduct (intended) of a goal to make your company more efficient. 
• Your goal must be to become more efficient pursuant to a plan that all players understand and buy into.

When Does It Cost Money to Cut Costs Properly?  When you are trying to become more efficient:

• Time.  Generating plans and buy-in is expensive because staff must stop doing something they may not want to stop doing--making their jobs harder--and devote time, money and energy to developing a new plan, acquiring any required resources, testing the plan, and implementing it.
   E.g., the woodsman who responds to the well-meaning passerby’s suggestion that he might cut a lot more wood if he sharpened his ax:  “I can’t—I’m too busy.”
• Systems Development.  Often, the best efficiencies require your company to change the way it does business, requiring an investment in new systems design, technology, training, promotion and customer hand-holding.

Why Do You Need Staff “Buy-In?”   

• If a player doesn’t understand how your plan will work, he can’t execute well.  
• If he doesn’t buy in, he won’t execute well.  He’ll be happy to let it fail so he can return to the system he is used to. 

Trimming Fat.  Successful companies can get “fat” during good years because they can afford to hire people and buy services.  I know a company that trimmed several top managers without losing a beat.  But the most common pitfalls arise when you ask people to do more with less, without a plan they buy into.  

• This causes tension among employees, increases turnover (reducing your staff’s skills), reduces service quality, saps energy required to get new customers, and—ultimately—makes it difficult to keep and attract homeowners and renters. 

Look at Competitors Before Identifying Cost Cuts.   Difficult times are problems for some companies and opportunities for others who find ways to use them to leapfrog ahead of their nearest competitors.  You can’t decide which expenses to cut without knowing whether your competitors are redistributing their resources.  Are they:

• Going hard after your homeowners?
• Soliciting your renters?
• Trying to get extra bookings from their existing renters?
• Offering new services to existing renters and homeowners?
• Replacing expensive staff services with computer services?

Categories of Promising Cost Cuts.  Look carefully at the following: 

• Use of the technology to free staff to do other jobs;
• Elimination of services to renters or homeowners  who don’t need them;
• Downsizing of promotional activities that may no longer be cost effective;
• Trimming of fat to become more lean and fit.
• Changing your business model.

I’ll elaborate more about these categories in my next blog...

Growth of Vacation Rentals: What is the Future?

As I noted in my last blog, the current state of our economy prompts some concern over the future of our industry.  Will there be more or fewer vacation rental homes?

As my prior blogs suggest, I am not overly concerned that slow economic growth or a temporary decline in GDP, will deal a serious blow to vacation rentals.

• Rising unemployment and salary cuts/freezes will reduce vacation rental revenues (via price bargaining, fewer vacations, and possibly shorter stays), but any negative impact will be partially offset by first time renters who find vacation rental homes more appealing than the expensive hotel or resort based lodging they used to use;
• Financial stress (plus HomeAway-type promotional campaigns) will persuade some homeowners to abandon mainstream rental managers and try self-management, but self-management is more difficult and expensive than many homeowners believe, and most financially distressed homeowners will eventually sell vacation homes they can no longer afford. 
• Unemployment, plus reduced rental revenues, will combine to put many vacation rental homes on the market at lower prices.  But homeowners who rent are simply investors.  Depending on whether they behave like day traders or investors in for the long run, they will either hold tight or sell at a loss.  Either action will not likely affect the industry much. Sales will transfer rental homes to buyers at prices that allow new buyers to accept lower rental revenue

Long term, the growth rate of vacation rental inventory will depend upon the interaction of several dynamics, not all being related to the economy:

Dynamics that will increase vacation rental inventory:

• Pressure to Rent.  The majority of vacation homes that are not rented today through commercial channels.  Some owners of vacation homes will begin renting their homes for the first time because their income from pensions, investments or employment has declined; 
• Bargain Prices.  Lower home prices will induce some financially secure people to buy vacation homes; 
• More Renters.  The US Census Bureau projects that the US population will grow 44% from 2007 to 2050.  There will be more people.  These people will take vacations.  Vacation rental homes should continue to provide better value than hotel rooms.

Dynamics that will decrease vacation rental inventory:

• Less Demand.  People will have less money if the US economy does not generate the same growth and wealth that we have seen in past decades, so a smaller percentage of the population will own or rent vacation homes. 
• Non-Rentals.  Lower home prices will induce some financially secure people to buy vacation homes for their own (non-rental) use; 
• Retirement Homes.  An October 2006 survey by the National Association of Realtors concluded that four out of 10 respondents intend to convert their vacation home into a primary residence in retirement, and that baby boomers own 57% of all vacation/seasonal homes and 58% of rental property; 
• Generational Interests.  Some young people will view vacation homeownership—like Old Spice aftershave—to be a relic of their father’s generation. 
  Immigration.  New generations may have less interest in buying vacation homes for economic or cultural reasons:
   - New immigrants and their children and grandchildren born in the USA will account for 82% of the population increase from 2005 to 2050, according to recent projections by the Pew Research Center.

No one has a crystal ball.  My guess that the number of rental homes will grow modestly, at a lower rate than the US population.