A few CEOs got together last week in the Vacation Rentals Professionals Group in Linkedin and had a very engaging discussion about pricing models that vacation rentals websites use and which might be superior. Note that you’ll need Linkedin membership to read the discussion.
It’s quite long thread so I’m going to attempt to summarize the salient points here. So here goes:
Most agents these days work with one of 2 payment models: Pay per booking or pay per listing. Pay per booking is a percentage of the booking value whilst pay per listing is usually a yearly price for a property lisitng on a website like vrbo.com. Both these models have flaws:
Flaws with pay per booking:
- Because property owners only pay for a successful booking they have little incentive to keep their pricing and calendars up to date on sites which provide them little in the way of bookings. This leads to poor conversion for the website and hence wasted leads.
- For the same reason owners also have little incentive to respond quickly meaning there is a high probability the lead will be wasted.
- Pay per booking is most successful when combined with instant booking. When an owner gives poor response time, poorly filled calendars and inaccurate pricing, instant booking is not realistic.
- The customer may attempt direct contact with the property owner, bypassing the agency.
Flaws with pay per listing:
- The property owner is taking a risk paying a year up front when there is no guarantee of how his advertisement will be positioned, and hence there is no way to predict the number of bookings which will result.
- There is a lack of granularity. In other words the owner makes a relatively big bet and waits to see how it will play out.
- Owners generally don’t keep good calendars and pricing on pay per listing websites because once the ad is placed it doesn’t matter if they get an inquiry for busy dates.
- So long as there are enough leads flowing owners don’t have an immediate need to respond quickly to each lead, meaning leads get wasted and customers get frustrated.
Then came Flipkey with their revolutionary model: Pay-per lead.
At first it seemed odd to me. Acting in the capacity as a property owner I preferred to pay only for a booking because I knew exactly what I would pay and I could calculate if each booking would be profitable. However at the time I had not considered the following points:
- If I pay for a lead and I don’t convert I will start thinking about why I don’t convert. Although it’s uncomfortable for me as an owner it’s a good thing in the long run, because eventually I make improvements and conversion will improve.
- A lead for dates I am busy is a wasted lead. Therefore I will fill my calendar properly. This is good for the end user.
- A lead with an inaccurate price is also a wasted lead. I will improve my pricing accuracy.
- A lead asking me about things I don’t provide, parking for instance, is a wasted lead. Therefore I will attempt to give comprehensive information on the portal not only about what I do provide, but what I don’t.
The main arguments against pay per lead:
- Property owners won’t like the discipline it forces on them. It definitely won’t work for owners who are not always connected.
- Some property owners will not believe all the leads are real.
- Property owners won’t like having to track the cost of leads.
- If the communication with the customer takes place in a control panel the owner may feel controlled.
My personal opinion is that most of these flaws can be dealt with by education of owners and providing good tracking tools to provide comfort that nothing untoward is happening.
In the long run active owners in competitive locations who need to work hard to fill their properties will prefer pay per lead to pay per booking because pay per booking treats all owners equally and does not give the owner an edge on his competitors. Passive owners, especially those in uncompetitive locations will prefer pay per booking.
Note that in the case of instant booking if a property is not suitable for online booking it will not generate revenues. This is the case for villas and unusual properties requiring explanation and clarification.
Pay per listing will fall by the wayside as it is really just a very unsophisticated version of pay per lead. Pay per listing doesn’t provide guaranteed leads, nor does it provide good tracking to the owners, nor does it incentivise them to keep their listing accurate, meaning consumers will become frustrated and opt for a website where they get better service.
My own conclusion is that whilst it may be uncomfortable for owners, pay per lead will create the right incentives for owners to create superior listings and will eventually result in better conversion for the portals who use it, and that is good both for them and their active owners. Pay per booking will work in certain situations and may be superior to pay per lead in the case the customer is happy to book in real time without asking questions (for apartments and hotels). Pay per booking will be inferior to pay per lead in the case questions need to be asked because response time will be poor. Therefore a combination of pay per booking (for instant booking) and pay per lead (for more complex or larger sales) may be the optimal combination.
The interesting thing about this conclusion is that it means that market leader #Airbnb got it wrong….