Revenue Management 101

Toby Babich
11/28/2019

From Issue 5 of Arrival 

The recent explosion of data providers within the vacation rental industry has afforded managers of all sizes the ability to utilize nuanced data to drive their reservation and marketing strategy. Within these strategies, the term “revenue management” has become a major focus of professional managers, and our owners. Though the hotel industry has been engaged in this practice for many years, the concept is being adopted rapidly by our growing industry as the new standard to drive revenue for our owners and our businesses. Just as responsive websites and content marketing changed the way we all managed our digital assets, revenue management will define our ability to compete and flourish in a growing travel industry.

To a certain extent, all of us in the industry practice revenue management currently, to varying degrees of complexity. For example, setting seasonal rates or weekday rates is the basis of revenue management, and can transform into a dynamic pricing model with the right technology. There are currently a multitude of easily accessible tools and paths to achieve a successful revenue management strategy for any size company. There is no right or wrong way to engage in the practice, but we must all become more engaged in this practice to stay competitive in a travel market where consumers are increasingly unable to distinguish “hotel” from “vacation rental.”

First, let’s take a shot at defining revenue management in somewhat simple terms, to strip the mystique of the process away and lay a simple foundation from which to build a strategy:

Revenue management is a strategic process of establishing and modifying rates and lengths of stay to capture the highest occupancy at the highest rate possible.

Why Should I Engage in the Practice of Managing my Revenue?

“Set it, and forget it” is a term made famous by one of my favorite “as seen on TV” sales people, Ron Popeil, when selling the fantastic RONCO showtime rotisserie. Many of us still operate on this premise with our rates and nightly minimums – establishing our seasons, rates and length of stay restrictions prior to our booking season. Then, we simply leave them languishing like a chicken on a rotisserie rack.

I believe one of the biggest myths within the VR industry is that higher rates will equal higher gross yearly revenue, and that lowering rates will cause less desirable guests to stay in the property. In fact, the exact opposite historically has held true for most of us in the industry, and this fact is the primary reason each of us should engage in some variation of revenue management. Essentially, we must apply the premise that a well-managed rate (NOTE – not “cheap” or “discount”) will drive occupancy higher, thereby increasing overall gross revenues. A property and owner will make exponentially more revenue on a four-night stay at $90 per night versus a three-night stay at $100, over the course of a year. We also must pay close attention to historic and trending high occupancy periods and capitalize on that demand by implementing a higher rate. Proper revenue management also will enable a business to capitalize on low occupancy periods by offering value rates or reducing nightly minimums to drive demand. If a business is not engaging actively in some variation of revenue management, and as consumers increasingly expect value in their accommodations, occupancy and gross revenues are bound to become depressed, and loss of rental properties will soon follow.

Not only is the continued growth of the vacation rental industry tied to our combined success in implementing proper revenue management technologies and strategies, but the professional VR businesses that will succeed within our industry must adopt these practices to flourish within our individual markets. When survival is at stake, action is critical. 

What Do You Need to Watch Out for when Engaging in Revenue Management?

In short, as professionals we must continually monitor every facet of our strategy. When self-implementation of a strategy occurs, daily monitoring is required to ensure efficacy of the plan and pacing against revenue targets. When outsourced to an automated product or a revenue management service, it is even more critical to monitor performance and keep a close eye on several other factors to ensure that revenue management does not turn into an expensive way to discount your properties.

Here are several fundamental processes and situations on which to keep a careful eye when engaging in an internal strategy, utilizing automation or employing a revenue management service:

1. Data is everywhere! “Feeling” that bookings are down or slow is not a phrase that should be uttered or something that should be considered as part of a successful strategy. Use your internal year over year (YOY) data to gauge pacing and results during the season. You are able to use any number of external data providers to compare yourself to your competitors within your market, regionally and nationally. The cornerstone of any successful strategy is data driven comparisons to a wide assortment of properties, companies and market conditions.
2. Use great care in identifying and implementing your competitive set. This represents the companies or properties that will define what comparative rates, minimums and occupancy your properties are measured against daily. Defining this group incorrectly can cause a dramatic drop in your revenues, occupancy and nightly rates. Your competitive set is the initial and fundamental building block of an effective strategy, so ensure the properties and companies you select to be measured against are not only similar in size, condition and location, but also represent similar business practices to your own. For instance, ensure competing companies/properties have a similar marketing reach, online distribution, photography and use great care in comparing to owner managed or “discount” service companies. Never allow an outside service or company to attempt to define your set, as they simply do not have the granular local market insight as you will.
3. Run a booking comparison report, at least every two weeks, measuring rates, occupancy and revenues against prior years and internal targets to ensure your revenue management plan is not turning into a costly or complicated way to discount your properties. The key to a successful strategy will be proven by both decreases and increases in rate, which should promote a notable increase in occupancy and overall revenue.
4. Ensure your owners understand the strategy, as they can tend to become concerned as they begin to see bookings on the calendar at a low rate or for less than the minimum night requirement. Communicate the plan to them before implementation, focus their attention on yearly gross revenues and demonstrate monthly to them the year over year results. Even if you have total control over rates and minimums, communication with your owners is requisite to the plan – and the relationship.
5. Of course, always ensure that within your distribution profile, your direct website will always carry the best pricing, and most current information. In particular, when using third-party internal automated pricing tools, you want to be certain you are not providing the best price/terms on a third-party site over your own direct channel.

What are the Options to Implement and Execute a Strategy?

Internal: The internal option will require the most time, care and attention by each company and their staff, but provides total control over the end product and results, without adding incremental cost for technology or servicing. Using the internal method also allows freedom to choose how involved each individual strategy is. Nightly rates and minimums can be changed in the property management system (PMS) manually, and many PMS systems come equipped with an onboard revenue management component that can be used to define criteria for partial automation. 

Automated: Though most PMS providers do offer onboard revenue management tools, many of these tools have significant deficiencies. There are a host of external and independent pricing tools available in the market that offer an assortment of solutions depending on your needs. Many are self-managed, and several only provide pricing recommendations that must be internally implemented by the manager. Others provide a fully managed automated and integrated process, inclusive of dashboards so you can review your production in real time. 

External revenue management service: These fully managed providers employ revenue management professionals that work directly with you to determine your revenue and occupancy targets, define your competitive set and ultimately implement a plan to achieve your goals. These services can be costly, taking a percentage of revenues, but also can be very effective and enable the manager to focus on other areas of their business outside of revenue management. 

Overall, as you can see, a successful revenue management strategy can take many forms and be implemented in a wide variety of ways. Ultimately the efficacy of your plan will be determined by how closely you are engaged and how much time or money you spend within the strategic and implementation process. Smaller companies may not benefit from an expensive fully managed service, and many larger companies do not have the time for granular internal monitoring and strategy. Some enterprise level companies actually have fully staffed departments that manage their revenue and may only need to utilize data and pricing tools to assist in building their strategy.

Although the options can seem overwhelming and daunting, the great news is that the vacation rental industry has never had such ease of access to so many options to maximize occupancy and revenue. “Set it, and forget it” is a thing of the past, and each of us has the ability to adopt a successful data driven revenue management strategy that fits our unique individual needs. This is one facet of the future of our industry, and each of us must fully accept and immerse ourselves in the options – and welcome the benefits. 

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