Having a solid vacation rental revenue management strategy is key to increasing your profits.
The most successful property management companies in the world are the ones that understand the delicate balance of setting prices, manipulating restrictions and making distribution and revenue management work together.
So, if you feel like your revenue management strategy needs a revamp, where should you start?
In this article, we’ll share insights from John deRoulet, revenue management expert and Director of Enterprise Sales at Wheelhouse on:
- The most relevant revenue management KPIs.
- How distribution impacts revenue management.
- Do you need an in-house revenue manager?
- How to talk to homeowners about revenue.
- How to transform your strategy in 2022.
Without further ado, let’s get into it!
What is vacation rental revenue management?
By definition, the primary aim of a vacation rental revenue management strategy is:
- Selling the right product,
- to the right customer,
- at the right time,
- for the right price,
- on the right channel.
To get a bit more technical, revenue management is “trying to balance your risk and reward by capturing the highest ADR while optimising your occupancy to get to the best possible RevPAR”, says John. You can do this by managing your pricing, restrictions and bottom line.
We will get to what those metrics mean in a minute. But first, let’s clear up one thing: revenue management is not synonymous with dynamic pricing.
While most people who are just getting into revenue management will start with adjusting their prices and their minimum length-of-stay restrictions, a revenue manager is responsible for all aspects of the revenue side of the business. And that means you also have to take into account:
- Distribution. Revenue management and distribution should always go hand in hand. You can have the right price at the right time, but if your listings on sales channels aren’t effective, your properties won’t get booked.
- Operations. Revenue managers also need to be in tune with the operational side of the business. For example, they need to communicate with homeowners to understand their priorities and educate them on revenue opportunities.
We’ll talk more about both of these later in this article.
What are the most important vacation rental revenue management metrics to track?
Revenue managers often work with the following KPIs:
- ADR (Average Daily Rate): Measures the average amount paid by a guest for a night sold in a given period. It’s calculated by dividing the total revenue earned by the number of nights sold.
- Occupancy Rate: The percentage of nights occupied in a given period. It’s calculated by dividing the number of nights sold by the total number of nights in a given period.
- RevPAR (Revenue Per Available Rental): A comprehensive metric that takes into account both revenue and occupancy. It’s calculated by multiplying the ADR by the Occupancy Rate, or by dividing the total revenue earned by the number of nights in a given period.
“The most important metric is RevPAR,” says John. “It’s a pretty solid way to understand how your property is performing, and it allows you to compare the performance of your property to other properties.”
Once you understand RevPAR, you can break it down into ADR and occupancy. These three metrics are all related to each other. “Usually, if you try to adjust one, you affect the other,” John says. “In most cases, there’s an inverse relationship between ADR and occupancy.”
For example, if you’re optimising ADR, you’ll get the highest rates on the most in-demand dates. However, you may end up with vacancies that you otherwise could have sold, which would have contributed to your RevPAR.
On the other hand, if you optimise for occupancy, you’re not giving up any room nights and you’re getting money every day, but you may be leaving money on the table. That’s why most revenue managers use a blend of these three metrics.
That’s why John recommends that you optimise RevPAR—but make sure you understand what that optimised RevPAR is for your business and also take ADR and occupancy into account.
“If you look at top-performing properties, ironically, they may have both the lowest prices and the highest prices in their cohort among their reservations. That’s because for dates that are low-demand, they’ve optimised occupancy, and for dates that are high-demand, they’ve optimised ADR. If you just do one or the other, you’re missing out on one half of the equation,” John says.
The relationship between revenue management and distribution
Distribution is absolutely integral to revenue management. In fact, in smaller organisations, there’s often no distinction between a revenue manager and a distribution specialist—they are the same person. That’s how significant the overlap is between the roles and the skill set required to fulfil them.
The most obvious way in which distribution affects revenue management is the health of the property listings. We talk about listing health extensively in our ebook Reinventing Revenue Management, so let’s sum up the basics here. A healthy listing is one that’s:
- Live and bookable on your sales channels.
- Displaying correctly (i.e. the front end matches the backend).
- Has the correct hero image, photos, description, amenities, etc.
- Has the correct pricing and availability.
- Has recent 5-star reviews.
All of the above impacts the likelihood of a guest booking your property. As a result, your distribution health directly impacts your revenue.
Let’s take reviews as an example. “You may have a really well-reviewed property, but if you get hit with a couple of bad reviews at the wrong time, that can really affect you for the next 30 days,” says John.
That’s why it’s crucial to be aware of the health of your listing before you hit the booking window for your most in-demand dates. If you’re proactive about it, you can make sure that by the time guests start shopping for dates in your high season, your listing is being presented in the best possible light and guests are willing to pay the highest price for it.
On the other hand, if you’re not proactive about it, by the time you realise that something is wrong, it could already be too late and you could have lost months of revenue.
Staying on top of your listing health could be as simple as setting up a quarterly meeting to health-check all your properties. You could even do it once a year, for example, three months before high season. Another option is to use a tool like Rentals United Data Studio to streamline the health-checking process and be in tune with your listing health all year round.
Rentals United Data Studio
We created Rentals United Data Studio to help property managers make revenue management decisions based on rich property and distribution data insights. This tool is all you need to pinpoint what adjustments you need to make to your listings to make them instantly more likely to convert.
With Rentals United Data Studio, you can:
- Evaluate your listings’ health at a glance with Property Health Cards.
- Check your listings quality score and track unsellable nights. More info.
- Efficiently manage your Booking.com and Airbnb reviews directly from RU. More info.
For a full guide to RU Data Studio, download our ebook Reinventing Revenue Management.
Do all property management companies need an in-house revenue manager?
As we’ve seen above, the revenue manager and the distribution specialist are often the same person. But what if you don’t have the resources to hire someone for these roles?
“It’s very hard for smaller companies to have a dedicated person initially, because you need to have a certain scale to support that,” John says.
In fact, in a lean property management team, it’s very likely that the most revenue-minded person—often the Founder or CEO—will take on all the revenue management responsibilities.
However, as you scale, you need to make sure whoever is in charge of revenue management documents their assumptions and strategy, so that later, these tasks can be handed off to a dedicated person.
“You want to tell the story of how a property operates during the year,” John says. For example, you should document what your best months are, what are those in-demand dates that you look out for, and what you see happening in the marketplace from a revenue management and distribution perspective.
“Those little guidelines are usually enough for people to start correlating the data to the assumptions.” John says.
On the other hand, if you don’t have the resources for a dedicated person, there are revenue management systems you can use to take most of the work off your shoulders.
Revenue management systems
The last few years have seen huge advancements in vacation rental revenue management. We now have sophisticated tools at our disposal to automate up to 80% of a revenue manager’s work.
Of course, no matter how advanced these machines become, they’ll most likely never completely replace humans. Just look at the most developed revenue management industries, like airlines and hotels: they still use revenue managers.
“You can use these systems to set it and forget it—they’ll do good enough for you. But if you have someone who can spend 10-15% of their time, or once a week, or once a month, making some optimisations, that’s really the difference between doing well and really getting into that top 5 or even top 1%. That’s where the creativity of an individual comes into play,” John says.
The biggest advantage of revenue management systems such as Wheelhouse is that they allow you to save time and free your team up for thinking. In addition, the algorithms are able to follow market trends in a way that’s impossible to do manually. And the more companies start using these systems, the more you’ll fall behind if you don’t.
Wheelhouse, for example, made it really easy to interact with the platform, particularly for portfolios at scale.
“We’ve also built a UI that really supports the concept of being in dialogue with your revenue management system. You have assumptions about your market and the system has its own assumptions, and the tension between the two is where the best decision to optimise your revenue comes from,” John says.
How to talk to homeowners about revenue management
A big part of a revenue manager’s job is convincing internal stakeholders of the effectiveness of their pricing strategies, the opportunities and risks they see and the changes they detect in the marketplace. And this extends to homeowners, too.
Talking to homeowners about revenue management starts with education.
“A lot of owners may not understand the complexities of seasonality or the trends that we see in the marketplace,” says John. “And, you also have to understand their intentions. Maybe they just want to make some extra money but they’re primarily using the home for themselves. Or, maybe they want to get the highest commercial potential out of the property.”
For example, if you see too many blackout dates in the calendar that are negatively impacting the property’s performance by limiting its availability and constraining its revenue potential—that’s a discussion you’ll need to have with the homeowner.
“If you tell your homeowners what the highest-value dates are, they may choose not to use the property on those dates. But they can’t make that decision if they don’t know,” John says. “So you should share with them the basic information that you’re going to be using to inform your pricing decisions, like seasonality and your expectations about upcoming trends.”
How to approach vacation rental revenue management in 2022
John’s biggest tip for approaching revenue management in 2022 is to be aware that historical data may not apply the same way as it did pre-Covid. He reiterates the same advice we gave in our revenue success webinar: “You should review what you think is going to happen for the upcoming seasons, at least on a quarterly basis, and build a contingency plan.”
Have assumptions, but make sure you question them. What if something else happens? Be sure to have a plan for alternative scenarios, too.
“In our industry, being surprised is very unforgiving,” says John. “If you make a mistake, your ability to correct that is very limited because the inventory is expiring.”
And finally, start investigating what pickup means in the hotel and airline world. According to John, this metric is going to become really important in our space in the coming years. In fact, Wheelhouse and Rentals United Data Studio already show pickup.
“It’s really useful for looking at groups of properties, which is important because you can’t go through a thousand listings and make decisions on them every day,” John says.
Editor’s note: This post was originally published in July 2018 and has been updated for accuracy, depth and comprehensiveness.